BlackRock net disappoints on outflows, shares slide

BOSTON Tue Oct 21, 2008 10:17pm IST

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BOSTON (Reuters) - BlackRock Inc (BLK.N) posted a worse-than-expected 14.7 percent drop in third-quarter profit on Tuesday as slumping markets and the worsening credit crisis sparked outflows from its money-market funds and slashed its hedge fund fees.

BlackRock's shares, among the best performers in the industry this year, fell 7.9 percent to a two-year low after the results. The numbers from the largest publicly traded U.S. asset manager's earnings signaled a tough quarter for the rest of the industry, one analyst said.

"It looks like all of them are going to have bad quarters as well. For most of the firms, earnings will probably have to be revised lower," said Roger Smith, an analyst at Fox-Pitt, Kelton.

BlackRock, a winner from the year-and-a-half-long credit crisis because of its fixed income expertise and conservative investment style, could not escape the whiplash from falling stock and bond markets and chaos in the money market as the credit markets seized in September.

Third-quarter net income fell to $217.7 million, or $1.62 a share, from $255.2 million, or $1.94 a share, a year earlier. After adjusting for compensation plan costs partially funded by its two main shareholders, Merrill Lynch and PNC Financial Services, earnings were $1.71.

Analysts on average had expected earnings of $1.88 a share, according to Reuters Estimates.

The latest results included a nonoperating loss of 58 cents a share from adverse market effects on co-investments and seed capital investments. In the year-earlier quarter, BlackRock had a nonoperating gain of 23 cents a share on such investments.

'AWFUL, PAINFUL NUMBER'

Assets under management, the main driver of revenue and profit at money managers, fell to $1.26 trillion at the end of September from $1.3 trillion a year ago, and $1.43 trillion at the end of June.

This was mainly due to $69.1 billion in market losses due to the plunge in equity markets and $41.6 billion of net outflows from BlackRock's money-market funds.

Investors exited money-market funds in the last two weeks of September after the Reserve Primary Fund "broke the buck," or saw its net asset value fall below $1 a share.

The strengthening of the U.S. dollar also led to a $20.7 billion drop in assets, BlackRock said.

"We fell by $169 billion (in assets), which is an awful, painful number," Laurence Fink, chairman and chief executive of BlackRock, said on the company's earnings conference call.

"We lost assets as investors have withdrawn and in money-market funds there has been a flight to quality to bills," Fink, who co-founded the firm 20 years ago, added.

Performance fees earned mostly on hedge funds dropped to $55 million in the third quarter from $149 million in the year-earlier quarter. That led to a 3 percent drop in total investment advisory fees earned of $1.14 billion.

Standard & Poor's, in a report, cut its earnings-per- share projections on the firm, adjusted for some costs, to $7.73 from $8.65 for 2008 and to $8.55 from $9.87 for 2009 due to asset declines. It kept its "buy" rating on the stock.

"We expect inflows on money-market funds to return in Q4, but outflows from equities may continue," S&P said.

BlackRock CEO Fink saw some encouraging signs for the firm.

Its new business pipeline was strong and stood at $62.3 billion as of October 19 and its money-market funds have had net inflows of $13.8 billion in the fourth quarter, he said.

The BlackRock CEO also welcomed the U.S. Federal Reserve's move on Tuesday to start a facility to fund purchases of commercial paper from money-market funds.

"This is a very big event. This is the first thawing that I really see in terms of helping the commercial paper market unravel itself," Fink said.

He also saw business opportunities for the firm, like the U.S. government's Troubled Asset Relief Program (TARP), for which BlackRock has bid.

BlackRock is owned 49 percent by Merrill Lynch & Co MER.N and 34 percent by PNC Financial Services Group (PNC.N). Merrill agreed to sell itself to Bank of America (BAC.N) in September following a worsening of the credit crisis.

Franklin Resources (BEN.N), Legg Mason (LM.N) AllianceBernstein Holding (AB.N), T. Rowe Price (TROW.O), Janus Capital (JNS.N), Federated Investors (FII.N) and Invesco (IVZ.N) and others, are to release their quarterly earnings over the next two weeks.

BlackRock shares were down 7.9 percent at $131.90 by late morning. The shares are down 39.2 percent so far in 2008, outperforming the 44 percent drop in the S&P asset managers and custody banks index .15GSPAMCB.

(Editing by Lisa Von Ahn, Maureen Bavdek, Leslie Gevirtz)