Merrill lynch bank

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Merrill Lynch Bank

Introduction

Merrill Lynch is a division of the Bank of America that is well known as a broker of corporate and investment banking. It was an independent firm until 2009 when it was bought out from public owners by the Bank of America. The company was founded in 1914 when Charles E. Merrill opened Charles E Merrill & Co in New York. He was later joined by Edmund C. Lynch, in 1915 and the name changed to Merrill, Lynch & Co, and they opened an office in 7 Wall Street. In 1952, the bank opened its first office in Geneva, Europe, and since then it has continued with expansion to become a global bank. In 1956, it was ranked as the best with other seven managing firms that brought Ford Motors to the public. The company went public in 1971 when its shares were listed in the stock exchange and in 1984, the bank acquired American Fletcher Bank. Since then, until early 2000s, the bank has grown tremendously, rising to be among the leading investment banks in America and other countries. The bank engages in investment banking, advisory, and trading services for corporate customers globally, as well as providing financial planning and advisory services to retailers, individuals, and small to medium size businesses. Its global market and investment banking brought in the biggest revenue in 2006, but experienced losses in 2007. Now the bank has been acquired by the Bank of America in a buyout since 2009.

 

Z-score of 4 years

The company had been doing well until 2007 when it started incurring losses, with its net profit going down. For the past four years before 2008, the company’s Z-score trend indicated increased possibility of insolvency. Using the formula Z-score = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 0.999T5, where T1 is working capital/ total assets, T2 is retained earnings/total assets, T3 is PBIT/total assets, T4 is market value of equity/total liabilities, and T5 is sales/total assets. After using this formula to calculate the Z-score, in 2006, the company had a Z-score of 1.9, indicating that the company was faced with a stiff financial crisis, and paying its debts was becoming a problem. In the following year, the company had a Z-score of 1.8, slightly lower than 2006, causing the company to experience even tougher times in the year ending 2008. In 2008, the company’s Z-score remained 1.8, which indicated that the company was at a high risk of not meeting its debts and financial risks were higher. After 2007, the company failed, resulting to its buyout that was completed at the start of 2009. In 2009, the Z-score was 2.0, indicating that the company was improving, and this is seen in the financial statements, where profits improved, and reduced its working capital, as opposed to the previous year when it had incurred losses. The Z-score matches the consequences that followed the bank during these four years, explaining its failure.

Financial statement                                                

Merrill lynch international Bank Limited

Consolidated Profit and loss Account as at 31 December 2009

                                                                                                   2010                                  2009

$ ‘000’                             $ ‘000’

Interest income

-interest receivable and similar income                                     534,814                      1037,277

-interest payable and similar charges                                      (309,278)                     (519,844)

Fees and commissions:

-receivables                                                                               520,307                        498,911

-payable                                                                                   (490,099)                     (521,691)

Dealing profits                                                                          360,044                        935,208

Other operating income                                                              35,739                         297,746

TOTOAL OPERATING INCOME                                           651,527                     1,727,607

Administrative expenses                                                            606,235                       622,433

Depreciation                                                                                16,605                          17,331

Other operating charges                                                             723,929                       728,117

Provision for bad and doubtful debts                                          (43,548)                      295,592

TOTOAL OPERATING EXPENSES                                       1,303,120                  1,663,473

(LOSS) / PROFIT ON ORDINARY ACTIVITIES BEFORE

TAXATION                                                                               (651,593)                   (64,134)

Tax on profit/ (loss) on ordinary activities                                       4,031                      28,173

(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER

TAXATION                                                                               (647,562)                    92,307  

The problem in the company  

In 2007, according to Clark, the bank had lost $8 billion after the failure of the strategy laid on mortgages in America. The bank was doing well before it got into the mortgage investment, when it began investing its own assets as a strategy that aided its growth in earnings. The risk associated with this strategy was not well managed, and Merrill Lynch continued investing heavily on collateralized debt obligations, CDO, that was based on mortgages. Merrill did this directly and through other institutions such as First Franklin Mortgage Loan Trust, which was sponsored by the Merrill Lynch mortgage lending Inc. The housing market started doing poorly, caused uncertainty in the industry, and affected other financial institutions as well. In 2007, Merrill had to incur almost $8 billion in underwriting its assets, which caused them a major setback and the company reported a $4.9 billion loss attributed to mortgage in 2008, and in the last quarter of the year, it had lost almost $20 billion since 2007. By the end of 2008, the bank had lost a lot from mortgage securities, though it was due to the mortgage crisis in the industry.

This problem had been caused by sub-prime lending, where the bank could extend credits to customers who did not qualify for credit viability through charging a security commission. When the housing industry or the mortgage interest rates change, such customers who are very sensitive on the issue will not be in a position to pay for their loans comfortably. Sub-prime lending led to the bank having to incur many liabilities, and they could not manage to maintain it thus causing a huge setback.

Current situation of the bank

After its buyout, it was able to raise capital that would enable it to continue in business, under its parent company. Currently, the bank is now owned by Bank of America as mentioned since 2009, and it is planning to expand its business more in Brazil, after it was offered the license allowing it to offer global treasury solutions to multinational clients in Brazil. In this market, the bank plans to offer services to the available opportunities, such as deposit accounts, payments for clients, reporting and liquidity solutions to its clients. With this license, the bank will be in a position to offer its services of corporate investment and investment-banking services in a comprehensive way, as it does in other countries where it is well established. This strategy is aimed at strengthening its competitive advantage in Brazil, and exploiting international markets and opportunity. Merrill was able to rise back due to the stable funding it got after the buyout, helping it to recover, though it was not immediate, but currently it is pulling back to what it was, and according to The Economist, the merger of the two is beginning to bear fruits, and the past months have indicated signs of stabilization. In addition, after the company was acquired, about 61% of the financial advisers thought they would stay, but now it has increased to 75%, indicating that it is pulling back (the Economist)..

Conclusion

The bank had been doing well before it entered the mortgage business, and use of sub prime lending contributed to its failure, and there was not much to do to prevent the resulting problem because the whole mortgage industry faced the crisis. Other banks too were affected.

In conclusion, it is evident that the company failed around 2007-2008, when the company had invested heavily on mortgage lending in the previous years. The Z-score indicates a trend of going down in these years, illustrating the risk the bank was in during this period. Currently, the bank is stabilizing, thanks to the Bank of America, which has aided it since the buyout, while were it not so, the company could have been declared bankrupt.

 

Works Cited

Merrill Lynch International Bank Limited. Report and consolidated financial statements. ir.ml.com, 2010. Web. 24 May 2011.

Clark, Andrew. “Merrill Lynch, the firm lost $8bn and the chief executive had to go – with $159m.” the Guardian 30 October 2007. Print.

The Economist. “Might the most controversial deal of the crisis pay off after all?” the Economist 15 April 2010. Print.