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Merrill not seen repeating Q1 performance

If Merrill Lynch can keep cranking out earnings at the same pace as the first quarter, the investment bank could more than pay for itself within two years. The only problem is, it's not likely to repeat this quarter.

Merrill, which Bank of America Corp bought on January 1 for about $29.1 billion, contributed $3.7 billion to Bank of America's profit in the first quarter.

The investment bank and brokerage's outsized net income came mainly from fixed income trading, just as with Goldman Sachs Group and JPMorgan Chase & Co last week. Bond markets oscillated wildly in the first quarter, creating big potential profits.

But many will see the party soon ending for bond trading, as markets stabilize. And Merrill Lynch has other problems to wrestle with, including the exodus of clients, brokers, and Merrill executives. Add in credit losses for assets like mortgages, and the outlook for future quarters is not good, analysts said.

“This quarter is just not sustainable,” said Nancy Bush, analyst at NAB Research, noting the bank cannot rely on another record quarter for trading activity.

Merrill's wealth management unit, which Kenneth Lewis described in September as the “crown jewel” of the acquisition, lost 2,000 brokers during the quarter, leaving the firm with 16,000 advisers.

Assets under management at Bank of America declined to $697 billion, after clients pulled $43 billion from the firm and market declines eroded another $29 billion.

Client assets at the brokerage group totaled just over $1.29 trillion, representing about a $700 billion decline on the combined fourth-quarter client assets at Bank of America and Merrill Lynch, not including Bank of America's private wealth management unit US Trust.

“It's a good business and it's going to perform but it's not going to do enough to offset a lot of the other problems (at Bank of America),” said Ben Wallace, securities analyst at Grimes & Co.

A Bank of America spokesman did not immediately respond to questions regarding the combined wealth management business.

The loss of personnel at Merrill does not immediately appear to have affected Bank of America, in part because it takes time for departed staff to transfer their customers and revenue to new firms.

The global wealth management business, which includes Merrill Lynch's advisers, generated $510 million of net income in the quarter.

In time, staff departures could hurt, said NAB's Bush.

“The revenues don't immediately go away,” said Bush, adding, “My guess is that we see that in the second half of 2009.”

Meanwhile, there could still be losses lurking in Merrill's balance sheet. The bank has reported more than $60 billion in credit losses and writedowns on complex debt securities and mortgages since the financial crisis started in the second half of 2007. It sold most of its collateralized debt obligations to private equity firm Lone Star last year, but other assets could still suffer writedowns, analysts said.

Shareholders have sharply criticized Lewis for buying Merrill and taking a total of $45 billion in government funds. The stock has slid more than 70% since the acquisition was announced in September. Bank of America shares fell as much as 22% to $8.16 on the results on Monday.

“I would tell people to continue to focus on the balance sheet,” said Jonathan Finger, whose family owns 1.1 million shares and is campaigning against re-electing Lewis and two other directors to the board. (Reuters)