Bank earnings: Haves and have-nots

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Diversification and macro trading gave Goldman Sachs the edge over the credit and mortgage focused organizations in the first quarter.

So is it back to the old days for investment banks? For some yes, but for other banks that survived the downturn, it is becoming obvious they have only been hanging on by a thread.

It was a case of the haves and have-nots in the first quarter earnings, with those with a focus on credit and mortgages trading taking a revenue hit, while those with more diversified and macro trading capabilities seeing revenues boosted.

Goldman Sachs’ CFO Harvey Schwartz said in his firm’s earnings call that diversification had benefited the businesses. Its FICC trading revenues were up 10% year-on-year while Citi’s dropped 11% and Bank of America’s dropped 7% – both Citi and Bank of America are focused on credit and mortgage trading.

Strongest survivor

After the downturn, most banks looked at their business lines and picked which ones they would focus on. Now it looks like being all things to all people is once more back on the agenda and those who aren’t able to play in the game are going to suffer.

Goldman is the strongest survivor by far, followed by JPMorgan Chase and Wells Fargo. Goldman is the only large US bank to have seen a stock price increase year-to April 25. (JPMorgan’s is flat). That means greater compensation for Goldman’s employees.

Compensation expenses were up 11% from a year ago to nearly $4.46 billion – still behind 2007 comp levels, but clearly starting the creep up. It puts Goldman in a leading position over its peers who are still in the mode of cutting heads and costs.

Morgan Stanley, reinvigorated by its wealth management franchise, is hot on Goldman’s heels, enjoying its best quarter since 2007.

Neither Citigroup nor Bank of America however seem to be able to shake off the credit crisis in the way that their peers have, with revenues down. It’s too early to say that the universal banking model is looking jaded again. But the wind might just be in the investment banks’ sails.