Moody’s Investors Service is maintaining its negative outlook for the long-term ratings of Merrill Lynch & Co. and its subsidiaries. This is primarily a function of Merrill Lynch’s lower profitability and higher earnings volatility, relative to its peers, says Moody’s.

Moody’s says that Merrill is taking action to narrow the gap in profitability. “In Q1, the firm’s pre-tax margin expanded nearly five percentage points to 20%. Margin improvement progress has been particularly strong in the firm’s asset management and private client operations. At Merrill Lynch Investment Management, margins improved nearly 8 percentage points to 24% from the year earlier period. In private clients the margin actually improved from the year earlier period, despite a 15% drop in revenues.”

But, says Moody’s, Merrill Lynch may be dependent on revenue increases in a challenging market environment, as well as a recovery in private client activities, to reach its firm-wide pre-tax margin target of 24% by the end
of 2003,” it says.

Moody’s also notes that the investigations by the New York Attorney General and
the SEC into possible abuses of the research process “may result in increased litigation and settlement costs for Merrill Lynch. Also, these inquiries may further delay the recovery of private client activity. If Merrill Lynch were criminally indicted, this would prompt a one-notch downgrade of the long-term debt ratings.”