Buoyant Wall Street earnings lift cloud of crisis

Two of Wall Street’s largest banks have recorded one of their strongest quarters since the financial crisis, in a sign that the industry may be escaping the malaise that has gripped it for more than five years.

Goldman Sachs achieved a return on equity of 14.7 per cent — the best in 18 quarters. Its quarterly profits were the highest in four years and it saw the biggest investment banking revenues since 2007.

Citigroup, whose chronic difficulties since the financial crisis have put pressure on chief executive Mike Corbat, also recorded its highest quarterly profit in more than 7 years, with net income up more than a fifth at $4.8bn. The bank is also approaching year-end targets for efficiency and profitability that until recently it had looked likely to miss.

Improved trading revenues powered the results at Goldman, much as they did at JPMorgan Chase earlier in the week. The smallest first quarter bonus pool since Goldman went public in 1999 also boosted its profits.

Since the crisis, banks, analysts and investors have debated whether depressed returns are a cyclical phenomenon — owing more to weak economies and low volatility — or a structural one, with tougher regulation permanently damaging the industry’s ability to make money.

Goldman has always been at one extreme of that debate, insisting that revenues and returns would improve even after the crisis and the ensuing tide of regulation that has damped risk-taking and constrained leverage.

It aimed to be “last man standing” while numerous rivals, including Morgan Stanley, UBS and Barclays, pared trading operations in the belief that they could not produce returns that would satisfy shareholders.

“While you were beating us up, we were spending a lot of time focused on the clients and staying very, very committed to the businesses and we’re seeing it translate through,” Harvey Schwartz, chief financial officer, told analysts.

Shares in Goldman pared recent gains, down 0.5 per cent at $200.00, but remain close to their highest level since 2008. A recent rally in the sector has also taken JPMorgan Chase stock to its highest level in 15 years.

Goldman recorded a 40 per cent year-on-year increase in net income at $2.8bn, powered by a commanding share of advisory work and better trading results.

Overall trading revenues were 23 per cent higher at $5.5bn, the biggest quarter since the start of 2012 and the first time in six years that Goldman’s trading revenues rose in the first quarter. Pay as a share of revenue fell to 42 per cent, from 43 per cent in the same period last year.

Goldman’s investment banking revenues rose 7 per cent to $1.9bn, including a $961m contribution from advising companies on mergers and acquisitions — 41 per cent higher than the same period last year. All the US banks are benefiting from stronger financial advisory revenues, but Goldman is leading the pack on M&A.

Citi is aiming for a group-wide return on assets in the range of 0.9 per cent to 1.1 per cent, and an efficiency ratio in the mid-50s in Citicorp, the core bank, each by 2015. Citi said on Thursday that it had achieved an ROA of 1.05 per cent in its first quarter, rising from 0.89 per cent in the fourth, and an efficiency ratio — operating expenses as a percentage of revenues — of 54 per cent in Citicorp.