Merrill wealth unit shows signs of weakness

NEW YORK (Reuters) - Merrill Lynch & Co reported a worse-than-expected third-quarter net loss on Thursday, as even its wealth management business -- previously a cash cow for the struggling bank -- saw more money leave than come in.

The brokerage house, which last month accepted a $50 billion takeover bid from Bank of America Corp, posted a loss of $7.5 billion on write-downs and credit losses on complex debt securities.

It also said its wealth management business saw assets under management shrink to $1.5 trillion from $1.6 trillion last quarter.

When Bank of America Corp's Chief Executive Kenneth Lewis announced the plan to buy Merrill Lynch, he referred to its wealth management business as its "crown jewel" but now that is looking shaky.

"The results from the retail brokerage operations were disappointing -- Schwab was much stronger than Merrill was," said Brad Hintz, analyst at Sanford C. Bernstein, comparing Merrill's high-net-worth business with the discount model run by Charles Schwab Corp .

Schwab -- which reported results on Wednesday -- managed to increase assets under management even during a difficult quarter that saw many investors pulling money out of investment accounts.

"There's the snob factor -- (Merrill clients) don't want to be a part of Bank of America," added Ben Wallace, securities analyst at Grimes & Company in Westborough, Massachusetts.

On a call with analysts, Merrill executives took time to relieve concerns about the future of the wealth management business, noting that the number of advisors climbed by 160 over the quarter to 16,850.

"I don't think there's any deterioration in the franchise," said John Thain, chief executive of Merrill Lynch.

It remains the largest brokerage by assets under management and number of advisors, and Nelson Chai, chief financial officer, noted the number of advisors joining has accelerated relative to competitors since the announcement of the deal with Bank of America.

"I think that is affirmation both of the strategic value of the deal...as well as the health of the franchise," said Chai.

STRUGGLING TO SURVIVE

Merrill, like former peers Lehman Brothers and Bear Stearns Cos, has struggled to survive the credit crisis, which has crippled its large mortgage and complex debt businesses.

In July, Merrill sold a $30.6 billion portfolio of structured debt securities to private equity firm Lone Star Funds, taking a $5.7 billion write-down and raising capital in the process -- but this was not enough to solve its problems.

The company's share price continued to fall, and Chief Executive John Thain engineered the speedy sale to Bank of America on the same weekend that Lehman Brothers was forced into bankruptcy.

There had been doubts about the deal going through, and the difference between Merrill's share price and the price implied by the deal was initially wide. But the difference has been narrowing in recent weeks and on Thursday, Merrill shares closed at $18.35, 12 percent below the implied deal price.

The bank posted more than $9 billion in write-downs and credit losses in the third quarter, most of which occurred in September. The bank also said it will issue $10 billion of non-voting preferred stock and related warrants to the U.S. Treasury under the government program that gave Bank of America a $25 billion capital injection earlier this week.

Merrill said its third-quarter net loss applicable to common shareholders widened to $5.58 per share from $2.82 per share, or $2.3 billion, a year earlier.

The company posted a loss of $5.56 per share from continuing operations.

Analysts' average forecast was a loss of $5.18 per share, according to Reuters Estimates.

(Editing by Lisa Von Ahn, John Wallace and Bernard Orr)

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