The warning lopped 12 per cent off Warburg's share price, down from 670p to 589p and wiping pounds 175m off its market worth. Other merchant banks fell in sympathy, Kleinwort Benson down 11p to 440p and Schroders off 43p to 1335p. American banks are about to announce dreadful quarterly figures.Warburg said pre-tax profits for the six months to 30 September 1994 would come in at pounds 55m- pounds 65m. Within the Warburg group, the 75 per cent-owned fund management subsidiary, Mercury Asset Management, is expected to increase its profits ahead of the same period last year.Since MAM made pounds 50.4m in the same period last year this implies investment banking will make no more than pounds 15m.The warning caught analysts on the hop, despite cautious statements at Warburg's June annual general meeting. Analysts' forecasts for Warburg's whole-year pre-tax profits were slashed from pounds 230m- pounds 300m to pounds 160m- pounds 180m.One analyst said: 'It really is unbelievably disappointing that Warburg is making virtually no profits from investment banking when its corporate finance division is doing well.'Thin equity and bond markets in the past three months were to blame, Warburg said, with trading and market-making volumes down. Losses were 'across the board', according to the chief executive, Lord Cairns, although concentrated more in Europe than the Far East.There were no big losses due to trading on the bank's own account, Lord Cairns said.

'I'm sure there were some losses on our own account trading, as in every year, but no major items of loss. Overall the contribution was positive.'Fees and commissions from takeover and new issue work have held up well, Warburg said. Volatile bond and equity markets have, however, delayed a number of deals on the advisory side.Lord Cairns said that the management structure would be flattened but that no senior management would be leaving. The size of executive committees would be reduced, as the overall committee structure had got 'a bit unwieldy'. Asked whether this meant heads would roll, Lord Cairns replied: 'No.

This is the result of changes we had in mind in any event.'While some investment banking revenues, and in particular fees and commissions, have held up well and the group as a whole has remained profitable, the conditions in the world's securities markets have had a severe impact on our equity and fixed interest trading.'Lord Cairns added: 'I sense that everyone involved in the trading field is finding it difficult. Goldman Sachs said recently that it had expanded its cost base too quickly.'He denied that the profits warning showed that the integrated securities house approach was suffering in comparison to merchant bank rivals that had steered clear of securities trading, such as Schroders.Warburg was Europe's leading merchant bank in 1993. It is currently advising Reckitt & Colman on its dollars 1.55bn purchase of Eastman Kodak's L&F Household unit.(Photographs omitted)View from City Road, page 27. THERE were opposing views in the City yesterday about the Warburg profits warning.

One was to shrug it off as typical of the volatility to be expected from a firm that does corporate finance and securities market dealing inside one business. Warburg is an integrated company on the American investment banking model and was deliberately constructed that way in a series of mergers to prepare for Big Bang in 1986. With Salomon and Lehman both reporting poor second-quarter earnings and this year expected to be a much rougher ride than 1993 for all the US investment banks, Warburg is simply following the same pattern. Next year will probably show a bounce, says Martin Cross, of UBS.At the other extreme, last year's highly profitable boom in the markets was seen to hide growing pressures on Warburg which are reemerging again now the good days are over. If this view - held for example by Alex Robinson, of Smith New Court - is right, Warburg will have to think fast about its strategy for the future or risk losing its independence.On its own home ground of UK corporate finance, where Warburg has long been market leader, Schroders has been mounting a convincing challenge and has done it without being an integrated securities firm.Schroders' share price has grown sevenfold over the eight years since Big Bang, compared with 1.7 times for Warburg.Even Kleinwort Benson, long regarded as too weak to stay both independent and integrated, has been picking up new business lately. And in securities Smith New Court has been a resounding success without owning a merchant bank.These diverging trends have confused what used to be a simple argument about whether specialisation or integration is the way forward.Firms such as SNC, Cazenove and Schroders still have a choice, though there are renewed rumours about a second stage realignment in the London markets that could amount to Big Bang, Part 2.