business analysis of Merrill Lynch
...s to control its liquidity. • Maintain an appropriate mix of short- and long-term capital: Merrill Lynch regularly maintain sufficient alternative funding sources • Diversify unsecured funding sources • Adhere to prudent governance processes: 3. Profitability Ratios: (Refer to Table 3-3 Table 3-4) Table 3-3 and Table 3-4 shows the net revenues of ML in last 5 years are a bit fluctuant. It is probably because the macro economical environment is quite hard for investment banks so that most of them experienced a drop in there total revenues. And ML did quite well on Costing Cutting since they successfully brought down the non-interest expenses steadily from 2001 to 2003. Due to this, the return on average stock was showing a very exciting trend. Part 4: off-balance sheet activities As a part of its normal operations, Merrill Lynch enters into various off balance sheet arrangements that may require future payments. The table below outlines the significant off balance sheet arrangements, as well as the future expiration as of December 26, 2003: (Refer to Table 4-1) ML provides guarantees to Special Purpose Entities ("SPEs") in the form of liquidity facilities, credit default protection and residual value guarantees for equipment leasing entities. Merrill Lynch also acts as liquidity provider to municipal bond securitization SPEs. To protect against declines in value of the assets held by the SPEs for which Merrill Lynch provides either liquidity facilities or default protection, Merrill Lynch economically hedges its exposure through derivative positions that principally offset the risk of loss of these guarantees. The residual value guarantees are related to leasing SPEs where either Merrill Lynch or a third party is the lessee and reimbursement agreements issued in conjunction with sales of loans originated under its Mortgage 100SM program. Merrill Lynch also makes guarantees to counterparties in the form of standby letters of credit. In conjunction with certain principal-protected mutual funds and managed mutual funds, Merrill Lynch guarantees the return of the initial principal investment at the termination date of the fund. Moreover, Merrill Lynch enters into derivative contracts. Contracts with counterparties that are in a net mark-to-market loss position at December 26, 2003 are recorded as liabilities. The amounts in the preceding table do not necessarily represent expected future cash flow requirements. Refer to Note 8 and Note 13 to the Consolidated Financial Statements for a further discussion of these arrangements. Contractual Obligations Merrill Lynch enters into various contractual obligations that may require future cash payments. The accompanying table summarizes Merrill Lynch contractual obligations by remaining maturity at December 26, 2003. (Refer to Table 4-2) Merrill Lynch issues U.S. and non-U.S. dollar-denominated long-term borrowings with both variable and fixed interest rates as part of its overall funding strategy. In the normal course of business, Merrill Lynch enters into various noncancellable long-term operating lease agreements, various purchasing commitments, commitments to extend credit and other commitments. Part 5 assessment on the business plan We will give brief introduction and comments on the business plan on each segment of business in Merrill Lynch. As there is no official document about the business plans, we gathered information about what the business segment direction is from the company’s executive speeches. Global Private Client (GPC) According to James P. Gorman, President of Global Private Client segment, there are four ways to keep growth of business. They are: 1) Expand the sales forces by 5% per year: its aim for keeping the percentage growth of sales force is to lower the turnover rate. It is because it can concentrate one hiring high quality trainees which in turn have higher productivity. Therefore, it’s reasonable for it to hire a optimal number of sale forces to balance between quantity growth and quality of employees. 2) Drive greater financial advisors’ (FA) productivity: Merrill Lynch will keep enhancing the productivity of it’s FAs. For example, provide training, world class workshop and tools, increasing qualification required as well as giving advisory support. That’s a good way to enhance competitiveness. The higher the FAs’ productivity, the higher return on company will be. 3) Add new sources of revenues: There are different ways proposed by GPC segment to diversify revenue such as credit card, new business financial services etc. It’s important to keep pace with the changing trend on customers’ needs. Diversifying products and services would be a good way to diversify revenue source. 4) Continue disciplined expense management: For example, renegotiable contracts with vendors, improve governance process across major expenditure. All this would help achieve cost efficiency. Global Markets and Investment Banking (GMI) According to Greg Fleming and Dow Kim, Presidents of Global Markets and Investment Banking segment, there are quite a lots of plans on global equity markets, global debt markets and investment banking. Here, we will only discuss some of them. As for market, they plan to grow hedge fund client base as well as investing in emerging markets such as China. As we can see the growing trend of hedge fund, growing hedge fund client base would be a right track on capturing the market trend. Regarding entering China market, we believe it is a right and an inevitable way to go through. It is because The Chinese government is developing a regulatory framework for the financial services industry and the Chinese market is likely to see demand for insurance, retirement and discretionary investment products in the future. As to product, they focus on product innovation. It is an important step to capture market share and maintaining competitive advantages. Just like the changing tread on defined benefit investment to defined contribution investment. It’s important for them to keep pace with the trend and put forward new financial products to capture market share. Therefore, we believe putting effort on product innovation is a must. Merrill Lynch Investment Managers (MLIM) According to Seiichi Fukuyama, the regional managing director, the focus of the segment business will be on developing market in China. It will most probably to go joint venture with the company in China like the Bank of China. We think that it is a right way to go as the need of investment is growing in China. The long-term fund management potential of China is demonstrated by the fact that total personal savings have nearly doubled between 1995 and 2002. The per capita annual income of China's urban population has increased from 5,000 renminbi in 1996 to over 7,000 renminbi in 2002. Part 6 Analysis & Recommendations Profitability The annual profitability of one company are wholly affected the Management Strategy that the company adopted in the year. Over the Past few years, Merrill Lynch has experienced a remarkable increase in the profits. Its earnings for 2003 even reached a record $4 million. Not only diid the recovering economy and improving market deserve some of the credit; ML has also adopted a “Global Cost-Cutting” Strategy in which it has already cut 24,000 jobs and closed more than 300 field offices. The company has successfully create its competitive advantage by decreasing the operating cost. That’s why Merrill has brought in more money per broker than any of its competitors like Goldman Sachs and Citigroup However, with the expansion towards Asia, it is better to relax this policy in order to retain the capable leaders and promote a generation of younger and more aggressive executives Liquidity Capital Adequacy Risk Management Part 7 Executive Summary In analyzing the market trend of investment bank, three current market trends has been spotted out Firstly, there is limited scope of direct selling between individual investors and fund house. Instead, Commercial Bank acts as middleman between them. The advantage is that it can lower the leverage cost and hence being more cost-effective for the fund house. However, holding greater bargaining power, the banks would adopt the policy of “Profit-Margin Squeeze” when cooperating with fund house. This makes the fund house’s profitability less desirable. Secondly, there is a trend in the rise of Defi...