Banking on more than loans pays off

Services make up for profit-eating low interest rates

Call it a tale of two banks. The banking industry, which lives on loans, is being squeezed as low long-term interest rates eat into profits. But big banks like Goldman Sachs, JPMorgan Chase and Citigroup are offsetting the pain with gains from other banking services, such as investment banking, brokerage, and — for the lucky few — trading for large clients.

Consider Goldman Sachs’ firstquarter earnings, released on Thursday. The $87 billion bank reported a 17% drop in revenue from loans, minus loan expenses, in the three months ended in March. Yet, the bank was still able to overcome the drag with its best quarterly revenue in four years and a profit of nearly $6 a share.

Wall Street had been expecting Goldman to earn $4.26 a share.

How did Goldman CEO LLoyd Blankfein do it? With help from Goldman’s market makers, who helped the bank earn $3.9 billion — a 49% increase over last year’s first quarter trading stocks, bonds and currencies.

Goldman’s investment bankers also contributed to the betterthan-expected quarter with revenue of $1.9 billion, up 7% from last year.

Investment banking, which includes advising on mergers and underwriting initial public offers, proved a boon to many banks last quarter, thanks to heated mergers activity. Indeed, the first three months of 2015 saw $902.2 billion in announced M&A — the highest first-quarter total since 2007, according to research firm Dealogic. Consider:

JPMorgan said investment banking fees jumped 22% over last year, to $1.8 billion.

Citigroup also saw a 14% rise in investment banking fees, to $1.2 billion.

Even Wells Fargo, which has just started growing its invest- ment banking business, said fees from investment banking jumped 36% over last year’s first quarter, to $445 million.

Bank of America was alone in reporting a decline in its investment banking division due to lower debt issuance, but its advisory fees rose 50%, to $400 million.

Brokerage services also help stymie loan troubles at some banks.

Wells Fargo, for example, reported that the spread between what a bank earns on a loan and what it pays in interest was up a mere $396 million over last year’s fourth quarter despite the fact that this business makes up 52% of its overall income. Its brokerage business, on the other hand, generated $2.38 billion in revenue, up 6% from last year’s first quarter.

The problem with non-traditional banking businesses is that they can be volatile.

Goldman Sach’s shareholders sent the stock down Thursday on concerns that the eye-popping trading results may not be so easily repeated. Goldman CFO Harvey Schwartz said it’s too early to know whether trends that helped pushed the bank’s market making business up last quarter will continue.

“All these things are going to be driven by the environment,” Schwartz said in a conference call with analysts. “The environment was good everywhere” for trading in the first three months, he said. “That doesn’t mean it can’t get better, and doesn’t mean it can’t decline.”