Merrill Lynch Q4 2006 Earnings Call Transcript

Jan.18.07 | About: Merrill Lynch (MER)
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Merrill Lynch & Co., Inc. (MER)

Q4 2006 Earnings Call

January 18, 2007 10:00 am ET

Executives

Jonathan Blum - Investor Relations

Jeffrey N. Edwards - Chief Financial Officer, Senior Vice President

Analysts

Glenn Schorr - UBS

Daniel Goldberg - Bear Stearns

Michael Hecht - Banc of America Securities

Mike Mayo - Prudential Equity Group

Prashant Bhatia - Citigroup

Presentation

Operator

Good morning and welcome to the Merrill Lynch fourth quarter 2006 and year-end financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Jonathan Blum, Head of Investor Relations. Please go ahead, sir.

Jonathan Blum

Good morning and welcome to Merrill Lynch's conference call to review 2006 fourth quarter and full-year results. The following live broadcast by Jeff Edwards, Chief Financial Officer, is copyrighted to Merrill Lynch. Statements made today may contain forward-looking information about management’s expectations, strategic objectives, growth opportunities, business prospects, investment banking backlogs, anticipated expense levels and financial results, anticipated results of litigation and regulatory proceedings, and other similar matters. Such forward-looking statements are not statements of historical facts and represent only Merrill Lynch's beliefs regarding future performance, which is inherently uncertain.

Investors are cautioned not to place undue reliance on forward-looking statements, which speak only to the date on which they are made and which may be impacted by a variety of factors that are beyond Merrill Lynch's control.

Merrill Lynch does not undertake to update these statements to reflect the impact of subsequent circumstances or events. Investors should consult Merrill Lynch's reports filed with the SEC for any additional information.

Investors should also read the information on the calculation of non-GAAP financial measures that is posted on Merrill Lynch's investor relations website, www.ir.ml.com, where an online rebroadcast of this conference call will be available today at approximately 1:00 p.m. Eastern time.

Now I will turn the call over to Jeff.

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Jeffrey N. Edwards

Thank you, Jonathon. First, let me also welcome everyone on this morning’s call. I wish you all a Happy New Year and thank you for your interest in Merrill Lynch.

Throughout this call, unless I indicate otherwise, I will discuss only our operating performance. That is, I will exclude the impacts of both the one-time net gain from the closing of the MLIM-BlackRock combination in the third quarter, as well as the one-time compensation expenses related to adopting FAS-123R in the first quarter. Full GAAP financials which include these items are available in the attachments to our earnings release, as are schedules reconciling the GAAP data to the numbers I will discuss.

This morning I am delighted to report the strongest quarter and year ever for Merrill Lynch. Highlights for both the fourth quarter and full year include:

  • Record revenues, earnings, and earnings per share;
  • Significant [investment] and return on equities while continuing to [grow book] value per share;
  • Record results in global markets and investment banking, or GMI, driven by best-ever performances in investment banking and fixed income currency and commodities, or FICC; and a full-year record in equity markets as well.
  • Substantial growth in our newly formed global wealth management, to be known as GWM; and
  • Continued out-performance by our operations outside the United States, with both Europe and Asia setting new full-year records for both revenues and pre-tax earnings.

All these results demonstrate the breadth and depth we continue to add to our capabilities and positioning across business segments and regions, putting Merrill Lynch on its strongest competitive footing ever as we enter 2007.

In the fourth quarter:

  • We generated our highest ever quarterly operating revenues at $8.6 billion, up 27% from the fourth quarter of 2005 and 8% from the third quarter of 2006;
  • With strong expense control, particularly over compensation costs, pre-tax earnings of $3.4 billion were up 65% year on year and 42% sequentially;
  • Record net earnings of $2.3 billion were up 68% year on year and 21% sequentially, and earnings per share increased 71% and 21% over the comparable periods to a new high of $2.41;
  • The pre-tax operating profit margin of 39% was the highest quarterly margin we have ever reported, up about nine points over both prior periods and a return on equity of 25.6% was the highest since the first quarter of 2000.

This strong fourth quarter performance topped off the record results for the full year:

  • 2006 full-year revenues of $32.7 billion were up 26% over 2005 and significantly exceeded our previous revenue record set in 2000;
  • Pre-tax earnings of $10.4 billion increased 44%;
  • Net earnings of $7.6 billion were up 48%;
  • Earnings per share of $7.68 grew 49%;
  • The pre-tax margin of 31.9% for the full year is up more than four points over 2005 and is the highest we have ever achieved;
  • The full year 2006 return on equity of 21.6% is 5.6 points higher than the 2005 level and represents the first time this important measure has exceeded 20% for a full year since 2000;
  • Estimated book value per share at the end of the year was $41.37, up 15% from the end of last year. That figure, of course, includes the net impact of the one-time items.

This strong performance in 2006 is a direct result of the successful execution of our strategy to invest in multiple growth initiatives across all businesses and regions, which enabled us to capitalize on the favorable market conditions we saw in the fourth quarter and throughout much of the year.

We also continued to maintain tight discipline around expenses and managing our equity capital.

Let me highlight six key achievements in both the fourth quarter and full year 2006 which will pave the way for further growth in 2007 and beyond.

First, the execution and integration of strategic initiatives were both active and on schedule this quarter. The fourth quarter is of course the first full quarter that we are reporting results from our investment in BlackRock on the income statement.

We remain very pleased with BlackRock’s progress in integrating the former MLIM business, that is Merrill Lynch Investment Managers, with BlackRock. Nonetheless, the true benefits of the combination have only begun to be realized and we look forward to this industry-leading platform making substantial further progress in the quarter and years ahead. As you probably know, BlackRock is planning to release its results on Tuesday.

Since the fourth quarter began, we have closed two previously announced acquisitions. In December, Petrie Parkman, a specialized investment banking platform focused on the energy sector, and on the first day of the new fiscal year, First Franklin, a non-prime mortgage origination and servicing franchise. So both of these operations will contribute to our business in 2007.

Second, our investment banking business continued to make great strides, ranking number one for the quarter in global equity and equity linked underwriting lead tables, and number one in 2006 in CDO issuance for the third year in a row, as we continue to be an innovator in that space.

For the year, we also ranked in the top five in global high yield origination for the first time since 1998, and this is the first year since 2003 that any non-commercial bank player has cracked the top five in this crucially important product category. This reflects the strides we have made with the financial sponsors client segment, as well as our role in M&A and private equity transactions.

We have added substantially to our headcount of high-quality investment bankers over the past several years and have dramatically improved the breadth and depth of our client franchise. We fully expect this group to deliver more growth in the years ahead, both in traditional and increasingly in non-traditional products, such as private equity, derivatives, and commodities.

Third, our strategy of adding to our global markets trading businesses through both organic and inorganic activity continued to drive growth. While virtually all major fixed income and equity businesses showed growth year on year, some of our strongest results came from focused investment areas, including credit trading, commodities, and foreign exchange within the FICC platform, and strategic trading, equity linked trading, and financing and services in equities.

Despite the significant growth in many of these businesses, most remain less than full-scale at this point and we will continue to invest in them in 2007 to expand our product offerings and client base.

Fourth, our private equity business experienced two important events; the completion of the acquisition of HCA, which was announced during the third quarter, and the IPO of Hertz, although I should tell you that the majority of our revenues to date from the Hertz investment were recognized in prior quarters. While revenues from private equity will continue to be variable, we believe we can continue to grow this business over the long term, particularly as we engage our growing force of investment bankers and sourcing opportunities.

Our private equity group is already off to a strong start in 2007 with the announcement two weeks ago of our investment in [Eliss], a Bermuda based reinsurer.

Fifth, our private client business saw client flows accelerate, particularly in annuitized revenue products, enabling client assets to reach an all-time high, reflecting our continued investments in technology and products and our disciplined efforts to retain and attract exceptional financial advisors.

In 2006, Merrill Lynch's FAs continued to deliver superior service and quality investment performance for our clients, driving industry leading per capita productivity. We will continue to invest further in both our people and our platform to enhance our wealth management offering in 2007.

Last, but perhaps most important for our future positioning, is the substantially higher growth we continue to generate from our rapidly expanding international operations. For the full year, both GMI and GWM saw significant revenue and earnings growth from outside the U.S.

In the case of GMI, non-U.S. revenues grew at almost double the rate of the domestic revenues. For the firm as a whole, non-U.S. revenues reached 37% of the global total in 2006, the highest proportion in our history. We expect this important theme to continue as capital markets liberalize around the world and as we continue to make investments to further the expansion of our non-U.S. activities.

Our results in 2006 certainly benefited from the investments we had made over the last few years. However, it is important to note that many of our more recent investments, particularly those that we have made in the past year, have not yet fully matured and we expect them to drive future growth over and above what market trends may dictate.

Let me now review our financial performance for the fourth quarter and full year by segment, starting with GMI.

GMI had nothing short of an outstanding quarter across nearly all businesses and regions. With $5.4 billion in revenues, GMI set a new quarterly record, up 21% sequentially and 55% year on year. Pre-tax earnings for the quarter of $2.6 billion, up 76% sequentially and 73% from the year-ago quarter. GMI’s pre-tax margin of 48.4% was an all-time high, driven both by strong revenue growth and operating leverage achieved through discipline over compensation costs.

This record fourth quarter completed a record full year for GMI. Net revenues of $18.9 billion were the highest ever, up 37% from 2005, with double-digit percentage increases coming from each division and each region.

Pre-tax earnings growth was even stronger at 43% to $7.1 billion, as GMI achieved solid operating leverage even as significant investments continued to be made across the business. The full year pre-tax margin was 37.6%.

Looking at the revenue detail within GMI, fourth quarter FICC net revenues set another new record at $2.3 billion, up 11% from the third quarter and 70% from last year’s fourth quarter, as business activity remained strong across virtually every business.

Commodities, credit trading and foreign exchange all set new quarterly revenue records on the strength of very strong client flows and solid proprietary results, while interest rate trading also generated strong revenue growth over both periods.

FICC also set a record for the full year, with $8.1 billion in net revenues, up 31% from 2005, achieving positive comparisons across every major line of business. Several businesses achieved full-year records, including commodities, credit, foreign exchange and structured finance.

Equity markets net revenues of $1.8 billion for the fourth quarter were up 16% sequentially and a strong 49% year on year. Compared to the 2006 third quarter, increases from private equity, which had its second-best quarter ever, and the strategic risk group, which had its best, more than offset seasonal declines in equity-linked trading.

Relative to the fourth quarter of 2005, revenues from all equity businesses were up, with the exception of equity-linked trading, which faced lower volatility during the quarter.

For the full year 2006, equity markets net revenues were up 54% to a record $6.7 billion, with positive comparisons across every major line of business. Private equity, the strategic risk group, and equity financing and services all set revenue records.

Investment banking also set a revenue record in the fourth quarter, with $1.3 billion in net revenues, up 59% sequentially and 41% year on year. Advisory revenues of $286 million were up 10% from the third quarter but down 18% from the particularly strong fourth quarter of 2005. However, revenues from both debt and equity origination set new quarterly records.

Debt origination revenues of $540 million were up 48% sequentially and 79% year on year, while equity origination revenues of $475 million were up 146% and 77% respectively, and finally eclipsed the previous quarterly record set back in 1999.

For the full year 2006, investment banking revenues also set a new record at $4.1 billion, up 24% from 2005. Debt origination revenues set a new record at $1.7 billion, up 20%. Advisory revenues of $1.1 billion were up 25%, and equity origination revenues of $1.2 billion were up 28%. In both cases, the strongest results since 2001.

As we head into 2007, our dialog with investment banking clients remains active and the pipeline strong. At the end of 2006, our pipeline stood at an all-time period end record, up meaningfully from the end of both the third quarter and the end of last year.

Moving on to global wealth management, the new GWM segment more explicitly delineates how we manage our private client and investment management businesses following the merger of MLIM with BlackRock. Under the GWM configuration, GPC net revenues reflect the preponderance of our traditional private client distribution activities, with the exception of the group that creates and manages hedge fund, fund of funds, and other alternative investment products for private clients.

That group is now included together with our other investments in BlackRock and other investment management companies to form Global Investment Management, for which we provide a distinct revenue line.

Revenues from GIM’s constituent businesses are similar, since they all arise from manufacturing activities within a broader wealth management context, and we expect the contribution of this group of businesses to GWM to grow over time.

You will recall that our investment in BlackRock is accounted for under the equity method, with our share of their after-tax earnings reported in revenues. We also record a small amount of expenses which are associated with carrying and managing the investment. Since the investment in BlackRock was not completed until the end of the third quarter, there are no results from that investment in prior periods.

Revenues from MLIM for prior periods are still reflected under the MLIM segment, which was discontinued at the time of the combination with BlackRock. For comparability, we have made the small adjustments among the segments to conform results for prior periods to this methodology.

I should note that GIM’s revenues from ownership stakes in other investment management companies were previously reported in GMI.

Overall, GWM had a very strong quarter, generating net revenues of $3.3 billion, up 17% from the third quarter of 2006 and 13% from the fourth quarter of 2005, reflecting growth in both GPC and the hedge fund business, as well the inclusion of revenues from the BlackRock investment.

Pre-tax earnings of $759 million were up 27% sequentially and 19% from the prior year quarter, driven by those higher revenues, which were partially offset by increased compensation and litigation costs. The pre-tax margin of 23.1%, reflecting continued expense discipline with GPC, and the very low expenses associated with the BlackRock investment.

For the full year, GWM’s revenues, which largely reflect GPC, were $12.1 billion, a robust 12% increase over 2005. Pre-tax earnings of $2.7 billion were up 23%, and the pre-tax margin was 22.5%.

Turning to the revenue detail in GWM, GPC generated fourth quarter revenues of $3.1 billion, up 13% sequentially and 10% year on year, with revenue gains across every major revenue category. Record fee-based revenues were driven by both increased asset values and continued strong net flows of client assets into annuitized products.

Net interest income also increased. Transaction and origination revenue rebounded significantly from the third quarter, and origination revenues were also up strongly, relative to last year’s fourth quarter.

For the full year, GPC revenues of $11.6 billion were up 11% from 2005, as revenues increased in every major revenue category.

GIM had fourth quarter revenues of $211 million, up 143% from the third quarter of 2006 and 80% from the fourth quarter of 2005. As I noted earlier, this quarter represents the first time that revenues include an estimate of our share of the GAAP after-tax earnings of BlackRock. GIM revenue growth was driven primarily by the initial contribution from BlackRock, but revenues from the alternative investment business and other ownership stakes also increased.

For the full year, GIM revenues of $541 million were up 32% from 2005.

For GWM as a whole, fourth quarter client asset flows accelerated. Fourth quarter net flows into products that generate annuitized revenues were a record $18 billion, bringing the full year total to a record $48 billion, up 19% from 2005.

Assets in annuitized revenue products finished the year at $613 billion, up 16% from 2005, driven by both market appreciation and those in-flows.

Total net new money was also strong in the fourth quarter, reaching $22 billion. Full year net new money was $61 billion, up 15% from 2005, and total client assets ended the year at a record $1.6 trillion.

You should note that GWM net flows and client assets reflect only Merrill Lynch client accounts and activity. That is, they do not include BlackRock data for distribution channels other than Merrill Lynch.

For the full year 2006, GPC added a net of 720 financial advisors, driven by continued low turnover of current FAs and recruitment of new FAs. We improved our FA recruiting performance relative to nearly all major competitors in 2006, adding FAs at a faster pace outside the U.S. than in the U.S.

Global Wealth Management’s growth prospects are bright. We are committed to being an essential partner to our clients by providing them with outstanding service, superior products, world-class investment advice, and cutting edge technology. We continue to invest in our business, our people and our platform with a strong belief that it will allow us to attract new clients who will understand the benefits of having a relationship with a Merrill Lynch financial advisor.

That concludes my discussion of segment results. Since MLIM was discontinued on the last day of the third quarter, there are no fourth quarter results for that segment, and its full year results are identical to the year-to-date results I discussed on the third quarter call.

I will now return to the income statement for the firm as a whole, beginning with expenses.

First, compensation. The ratio of compensation expenses to net revenues ended the year at 46.2%, about 1.6 points lower than in 2005 despite compensation expenses increasing 21%. We believe these results demonstrate our success in striking a balance among three important goals: rewarding high performing personnel with highly competitive pay; hiring talented individuals in key areas of investment to drive future growth; and delivering operating leverage to our shareholders as we grow revenues.

Looking ahead to 2007, we will continue to invest in people to further grow the business, which could produce a modestly higher full-year ratio. That ratio of course will continue to depend on the business environment, the competitive compensation and hiring trends, and the ultimate level of investment in personnel.

Turning to non-compensation costs, which in the fourth quarter totaled just under $2 billion, up 9% sequentially and 6% from the fourth quarter of 2005. The ratio of non-comp expenses to revenues increased marginally on a sequential basis, as is typical in a fiscal fourth quarter, to 22.4%, but was down a substantial 4.5 points from last year’s fourth quarter, demonstrating our strong operating leverage and continued discipline over fixed costs.

For the full year, non-comp expenses totaled $7.2 billion, up 13% from 2005. However, the ratio of non-comp expenses to revenues fell 2.5 points to 21.9%, the lowest full-year ratio we have ever recorded.

In 2007, we will remain diligent in maintaining our discipline over non-comp expenses, although we expect that on an absolute basis, these expenses will rise as we continue to spend selectively and in a targeted manner to support our growth initiatives.

However, we will maintain our focus on striking the right balance between investment spending and earnings growth.

Now, our effective tax rate. The effective tax rate for the full year 2006 was 27.3%, down 1.9 points from 2005. That decrease primarily resulted from the tax benefit from carry-back claims we reported in the third quarter of this year. Preliminarily, we expect the effective tax rate for 2007 to rise somewhat from the 30.1% we recorded in the fourth quarter. I will add the usual caveat that both the rate for individual quarters, as well as the full-year rate, can be impacted by various factors, including tax settlements and the mix of business.

Lastly, capital management. We have previously articulated that we strive to balance a number of financial goals in delivering value to our shareholders, including increasing earnings and EPS, improving ROE, growing book value per share and increasing dividend.

In 2006, we demonstrated strong progress on all these measures. I am going to start with ROE, because improving this crucial metric has been of particular importance to Merrill Lynch's management team over the past several quarters and the results are clear.

To reiterate, return on equity for the fourth quarter reached 25.6%, our highest quarterly ROE since 2000, and up 3.1 points sequentially and 8.7 points year on year. For the full year, ROE was 21.6%, up 5.6 points from 2005, and again was our best full year performance since 2000.

We are pleased with our absolute and relative improvements in ROE, but we acknowledge that we have more work to do going forward. Importantly, our higher ROE did not come at the expense of growing book value per share. As I noted, we ended 2006 with book value per share of $41.37, up over $5 from 2005.

While we continue to invest capital in support of our growth initiatives, we have actively managed excess capital through share repurchases and dividends. In the fourth quarter, we repurchased 31 million shares for $2.8 billion, a meaningful acceleration from both the third quarter of 2006 and the fourth quarter of 2005. For the full year, we repurchased 117 million shares for just over $9 billion.

As a direct result of these repurchases, our period end share count declined again to 868 million shares, down 2% sequentially and 6% from the end of last year. For the fourth quarter, average diluted shares were 952 million, down 2% from the prior year but up 1% sequentially, due primarily to the impact of our significantly higher average stock price on employee stock option exercise activity and the calculation under the treasury stock method of accounting for unexercised options and convertible bonds. For the full year, however, our average diluted share count of 963 million was 2% lower than 2005.

As our stock-based compensation today is almost entirely comprised of actual restricted shares and units as opposed to options, we anticipate the diluted impact of options to diminish over time as more and more of the legacy options are converted into actual shares.

We expect 2007 to be another active year in terms of repurchasing our stock, although at this point we expect the pace to be somewhat slower than 2006. As you know, we grant our annual stock awards in January, so the first quarter period end share counts will reflect that increase.

On the dividend front, I am pleased to report that the Board of Directors has approved a 40% increase in the quarterly dividend of our common stock to $0.35 per share, which represents our largest percentage increase in the absence of a share split in more than a decade. We have more than doubled our dividends in just under three years time and dividends will remain an important focus for us on a periodic basis, as we evaluate opportunities to continue to return excess capital to shareholders.

A few final comments before opening this call up to questions. We look back at 2006 as a year of exceptional growth and strategic progress at Merrill Lynch. Financial performance was very strong, and that is our primary scorecard. At the same time, we are also very encouraged by:

  • The repositioning of our asset management franchise, which is now much better poised to deliver strong long-term growth;
  • The accelerated pace of our investments, particularly outside the U.S., in markets that we expect to grow faster in the coming years; and
  • The increasing recognition of our firm as a preferred platform for top quality professionals across all of our businesses.

2006 is now in the rearview mirror and we are firmly focused on the future. We enter 2007 with strong momentum and great confidence in our ability to capitalize on opportunities around the world to serve both individual and institutional clients. The long-term, secular growth story of our businesses remains powerful and most importantly, we have the enhanced breadth and depth of talent across our global enterprise to both execute on our growth initiatives and deliver on our strategy.

Now I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Glenn Schorr with UBS.

Glenn Schorr - UBS

Thanks. Okay, so can’t deny how great GMI results were, so looking for modeling purposes solely, is there anything lumpy that you can help us with, like ICBC, inside debt and equity underwriting on a go-forward basis? In other words, is there lumpy stuff in the quarter that would stand out in your mind?

Jeffrey N. Edwards

It was a very strong quarter, certainly in both debt and equity underwriting, driven across a number of different regions and businesses. There were certainly some significant transactions which contributed to that, as there generally are in most quarters. As you pointed out, Glenn, ICBC was a significant contributor within the equity world, but certainly not the only one, as we saw a good breadth across our businesses in order to achieve that quarterly record. On the debt side, there was activity across both the leverage finance and high-grade markets, I would say, that contributed.

So yes, there were big transactions but I do not think that is any different really from any quarter in the investment banking business.

Glenn Schorr - UBS

Yours just went up 146%.

Jeffrey N. Edwards

We had strong market share, as I pointed out as well.

Glenn Schorr - UBS

Yes, no doubt. Same concept in private equity. You gave us a hint towards it of second-best ever, and we know what the first-best was. Any further help in getting closer between -- you know, there is still a wide spread between your first- and third-best quarters ever.

Jeffrey N. Edwards

Well, as you know, our best quarter ever was in the second quarter. This quarter was somewhere between the second and third quarter in terms of equity revenues -- excuse me, in terms of private equity revenues, somewhere towards the middle.

Glenn Schorr - UBS

Okay, good enough. My gut is it is just a function of timing and pre-funding, but it is interesting to see the big pick-up in commercial paper and long-term debt with equity staying relatively constant, given the buy-backs. Is that a function of timing or is there anything else to think about?

Jeffrey N. Edwards

Actually, commercial paper itself was relatively flat in the quarter. What you are really seeing there is really a change in how we fund certain assets that previously we had financed under a master repo agreement that are now being financed under a master note program, so it is just a slight change in how they are classified.

In our view, it adds to the breadth of our investor base and it is just simply a better structure, but commercial paper itself did not really change.

Glenn Schorr - UBS

Okay, but either way we look at it, the pick-up in $20 billion long-term and $10 billion in short-term with flat equity, is that a change in how you are thinking about leverage of the balance sheet, or is it we have a lot of debt rolling off in ’07?

Jeffrey N. Edwards

Well, the businesses have been growing significantly and we are looking to appropriately capitalize them. We did increase the average length of maturity in our long-term debt over the course of the year.

The equity side is really being driven by the aggressive buy-backs that you saw in the fourth quarter. That really accounts for that.

Glenn Schorr - UBS

Okay, I appreciate it. Thanks.

Operator

Your next question comes from Daniel Goldberg with Bear Stearns.

Daniel Goldberg - Bear Stearns

Good morning, Jeff. On the FICC business, you said record revenues in credit, commodities, and FX, and strong on the interest rates. Could you give us a sense of maybe magnitude of increases, maybe either quarter over quarter or year on year?

Jeffrey N. Edwards

Well, I would say the largest -- we probably got it sequenced appropriately in terms of where the largest increases were. Just to go through some of the different businesses and what were driving some of them in a little bit more detail, I would say on the credit side, certainly a good spread environment. We saw a significant client activity as clients were looking for yield.

It was a good quarter in structured and distressed credits in emerging markets. Commodities was strong again in the gas and power business, especially in Europe. Structured activity was strong again.

On the rate side, really strong performance in derivatives, particularly in Europe and the Americas, and annuity business had a strong performance there as well.

FX I would say is really, they were good trending markets, which was good for both client activity and for trading, and there were some good deal activity, transaction activity there as well.

Daniel Goldberg - Bear Stearns

Okay, that is helpful. In terms of the BlackRock business, can you talk a little bit about how the integration is going, and if you are seeing any or have seen any surprises, either good or bad, since the deal closed?

Jeffrey N. Edwards

From our perspective, it is absolutely on track. We have been working to that effect really since the announcement back in the first quarter, and I think it has gone extremely smoothly. As I said, we remain very pleased with the progress there.

Daniel Goldberg - Bear Stearns

Okay, and then just lastly, you mention a couple of recent small deals that you have done. Maybe just refresh our memory in terms of what the acquisition strategy is going forward and what areas you might be active in terms of doing some additional bulk on?

Jeffrey N. Edwards

Maybe I will start just by reiterating that the primary focus again is deploying capital and growth strategies organically, but as you point out, we have been successful and we think it is a core part of our capabilities now to use bolt-ons to accelerate some of those growth initiatives where applicable.

Execution is key and discipline around selection and pricing is key as well, but one of the hallmarks has been the ability to identify these targets really across a broad range of businesses, and I think it is a part of really all of our businesses’ focus now, and that will continue to be the case.

I do not know that I would highlight any particular areas at this point that we are more focused on than others. We will continue to look for places where the acquisition or bolt-on can accelerate a growth opportunity, but we will remain very disciplined in how we look at them.

Daniel Goldberg - Bear Stearns

Is there any preference between U.S. or non-U.S.?

Jeffrey N. Edwards

As a general matter, we think there are more opportunities to grow outside the U.S. than in the U.S., but we have also found good bolt-on activity in the U.S. as well. From an acquisition standpoint, I think we will continue to look really in both places.

Daniel Goldberg - Bear Stearns

Okay, thanks a lot.

Operator

Your next question comes from Michael Hecht with Banc of America.

Michael Hecht - Banc of America Securities

Good morning. Just to follow-up on the results in FICC and I guess also equity markets. Just curious, any impact that may be risk appetite or use of leverage may have had on the results in the quarter. Any thoughts on outlook there heading into ’07?

Jeffrey N. Edwards

Well, as a general matter, I think we have been very explicit in our strategy on risk. Our goal has been to add resources, both people and technology, to allow us to take more risk. As a general matter, our risk profile has increased over time. That certainly has contributed to growth in revenues.

For this quarter itself, we will publish our VAR statistics as part of our K, but I do not think you will see a dramatic move in the VAR statistics one way or another, particularly.

On the leverage front, we have been growing our assets and that has been a contributor as well to our growth. You will see the continuation of that trend in the fourth quarter.

Michael Hecht - Banc of America Securities

Okay, that’s helpful. Thanks. On the equity market side, could you touch a little bit more on the contribution that prime brokerage had on the quarter, and maybe how you feel you are doing from a new client win perspective for the quarter? Even 2006, if you like, how you guys feel about your competitive position there overall and whether you see yourselves kind of closing the gap to some of your larger peers out there.

Jeffrey N. Edwards

I think our equity, finance and service business has been one of our most important initiatives, both from a strategic and a financial standpoint, within equities. We have continued to make progress in developing the platform, adding talent and growing the client base.

The performance of that group was strong year on year. It was down slightly sequentially, and that really is driven by some seasonal factors in the business, particularly in Europe. But that business in Europe which was down seasonally was up strongly year on year, so we expect to continue to invest in that business in 2007. We believe we will continue to close the gap there and that clients will continue to see the advantages of having a financing relationship with us as we deliver improved platforms and people.

Michael Hecht - Banc of America Securities

Okay, great. Maybe shift it over to just the retail business quickly. The net new money that you guys saw of $22 billion for the quarter was I thought just an awesome result. Could you give us any more color on the drivers you are seeing there? I would guess it was prominently U.S., but maybe talk a little bit about any contribution that the international businesses are having there?

Jeffrey N. Edwards

It was certainly a strong performance in our view by the global private client segment. It was our second-highest revenues ever, topped only by the first quarter of 2000. The flows, as you point out, were strong, certainly for the quarter but in our view for the year as well.

It really traces back in our view to our basic strategy of being able to attract financial advisers and retain top financial advisors by putting in place the preeminent platform, the best support, the best technology and that has required investment. But as we attract financial advisors, we believe that we can drive client growth and as we drive client growth, we drive money flows. That is really what has taken place.

As I mentioned on the call, in the earlier part of the call, the growth in financial advisors outside the U.S. continued to be stronger than inside the U.S., and we believe over time that will continue to drive the money flows as well.

Michael Hecht - Banc of America Securities

Okay, and then just a last question. I know that the $6 billion increase in deposits this quarter, as well as the 10% quarter growth in net interest profit in GPC, I mean, could you just talk a little bit about that? I mean, are you guys having to pay more competitively to attract deposits, or shifting any funds away from what used to be MLIM, money markets into deposits or anything like that, or -- and in the release, you note the favorable rate environment. I guess I always thought about GPC net interest profit as being kind of asset sensitive. I am just curious what is helping you in the environment.

Jeffrey N. Edwards

Deposits did show good growth, and it was true both in the U.S. and in our international banking activities, growing from $78 billion in the third quarter, just under $78 billion to just over $84 billion in aggregate. Some of that is a year-end phenomenon. You tend to see deposits have a strong quarter in the fourth quarter, as there tends to be a lot of year-end trading activity. But it also I think reflects the growth in our platform, our banking platform, and we believe that will continue to be an important source of growth in the private client business going forward.

Michael Hecht - Banc of America Securities

Okay, thanks.

Operator

Your next question comes from Mike Mayo with Prudential Equity.

Mike Mayo - Prudential Equity Group

Good morning. For GPC, how much did putting the investment in BlackRock within GPC help the GPC margin?

Jeffrey N. Edwards

I will just rephrase the question a little bit, since we do not show the GPC margin at this point, but if you look at the GWM margin, perhaps what you are referring to. If BlackRock was excluded from the results of GWM, the margin would be relatively comparable to the margin you saw reported in that segment in the third quarter.

Mike Mayo - Prudential Equity Group

All right, so on an apples-to-apples basis, third quarter to fourth quarter, you had about a 150 basis point increase?

Jeffrey N. Edwards

Sorry, on an apples-to-apples --

Mike Mayo - Prudential Equity Group

In other words, if we had the same treatment in the third quarter as you now have in the fourth quarter, you would have the 150 basis point increase that is reflected. In other words, the core profit margin --

Jeffrey N. Edwards

It has been relatively consistent.

Mike Mayo - Prudential Equity Group

Okay, but it actually improved from the third quarter to the fourth quarter?

Jeffrey N. Edwards

The improvement in margin from the third quarter to the fourth quarter as reported is primarily driven by the inclusion of BlackRock.

Mike Mayo - Prudential Equity Group

Okay. Separately, on private equity, what are your total investments from private equity and how has that changed over the past year or two?

Jeffrey N. Edwards

Well, we do not disclose the total but it has been growing over the last couple of years, as we’ve identified opportunities to put capital to work. One of the things that we have seen as we have become active in that business, it has been a period where the velocity has been significant. Transactions have tended to come to public markets, for example, or other dispositions at a faster pace than perhaps will be the case at all times. But in general, that business has grown. We think it will continue to grow as we identify more opportunities and source more opportunities to invest in private equity.

Mike Mayo - Prudential Equity Group

A half or double? The reason I ask is because if you had a gain of say $400 million, $500 million this quarter, you would expect these numbers to go up over time. It would give some perspective as to how much they might be going up.

Jeffrey N. Edwards

Well, it has gone up from essentially a zero number just a few years ago, so it has increased the net in a very significant way, obviously, over the last two to three years.

Mike Mayo - Prudential Equity Group

And what percent of your mergers and equity underwriting is somehow related to private equity?

Jeffrey N. Edwards

I do not have an exact percentage but it’s still a relatively small amount. The overwhelming amount of our activity in traditional investment banking business on both the advisory and the underwriting side is driven by external client business. Of course, a significant part of that does include third party sponsors, so private equity as a general matter is an increasing part of the investment banking pie, as it relates to third party clients.

Mike Mayo - Prudential Equity Group

And you said that the pipeline is up meaningfully from the third quarter, which is a bit stronger than the outlook from some of the other pure plays. Is that timing or are you doing something different than everybody else?

Jeffrey N. Edwards

Well, I do not really know how to characterize other people’s, but I would say from our perspective, it is a continuation of the results of the build-out of the footprint. If you look at the businesses, we have seen good growth year on year in the pipeline across all three of the products. On a sequential basis, we are down a little bit in equity just because of the strong quarter we just had, but up in both advisory and debt and on an overall basis.

In our view, this is really the result of the investments we have made to build the investment banking force. It just takes time for new investment bankers when they come on the platform to fully integrate and to fully develop the business with their client base, and that is what we are now seeing driven into the pipeline.

Mike Mayo - Prudential Equity Group

All right. Thank you.

Operator

Your next question comes from Prashant Bhatia with Citigroup.

Prashant Bhatia - Citigroup

Good morning. Just trying to get a feel for where you are in the investment cycle. You have talked about adding several hundred new people in GMI and I think 700 new brokers in ’06, so when you look out into ’07, do you think the pace of investment in terms of new talent would accelerate or decelerate versus ’06?

Jeffrey N. Edwards

I do not think it will accelerate. I think whether it decelerates or not will really depend on opportunities that we can identify during the course of the year. As you point out, we have made a number of investments in hires over the last few years, and that has both driven the growth that we saw in 2006 but also positions us for growth in 2007.

That said, there are still some gaps. There are opportunities for further expansion and upgrading, so we do expect it to be another active year in hiring.

Prashant Bhatia - Citigroup

Okay, but most of the heavy lifting seems to be behind you now in terms of the investment.

Jeffrey N. Edwards

I think that is true in certain areas, and you even began to see that in the last year. For example, in investment banking, I would say our largest set of senior hires was really in the previous two years. Last year was more about hiring more junior people to provide appropriate support, although there are always opportunities selectively to make senior hires there as well. I think that is more indicative of where we are.

Prashant Bhatia - Citigroup

You also talked about the banking pipeline being at a record in aggregate. Is that true for all three components as well?

Jeffrey N. Edwards

I do not have that specifically. The one thing that I point out again and that I just mentioned is equity is down a little bit sequentially, reflecting just the extraordinary quarter that equity had. But that and advisory are both up.

Prashant Bhatia - Citigroup

Okay, and --

Jeffrey N. Edwards

Excuse me, just to be clear. Equity is also up on a full-year basis.

Prashant Bhatia - Citigroup

Okay, great. Then, in terms of the net new money, again that was great. I’m just wondering, is there anything that you have done to the incentive plans there to encourage advisors to bring in net new assets? I know that is something that the peers have done, and something that I think you stayed away from in the past.

Jeffrey N. Edwards

Yes, it is not a big component. We have not significantly changed the way we compensate our financial advisors. We have made some minor tweaks, and the tweaks are designed to be more, to orient people more towards revenue growth going forward, but they are not directly tied to asset flows.

Prashant Bhatia - Citigroup

Okay, and then finally, I know it has only been a quarter, but are you seeing that the brokerage force is more willing to distribute some of the rebranded BlackRock product versus when it was a MLIM product?

Jeffrey N. Edwards

Well, what I would say is that the financial advisors have clearly embraced the BlackRock brand, and they are very enthusiastic about the product, as has our client base directly. So we are very pleased with how that has been accepted and believe that we are off to a very good start there.

Prashant Bhatia - Citigroup

Okay, great. Thank you.

Jeffrey N. Edwards

Thank you.

Operator

Ladies and gentlemen, let me now turn the call back over to Jonathan Blum for the final remarks.

Jonathan Blum

Thank you. This concludes our earnings call. If you have further questions, please call investor relations at 212-449-7119. Fixed income investors should call 866-607-1234. Thanks for joining us today. We appreciate your interest in Merrill Lynch.

Operator

This concludes today’s conference call. You may now disconnect.

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