Goldman Sachs regains a little of the swagger of bygone era

Lloyd Blankfein told Goldman Sachs' managing directors at a private "town hall" meeting on Thursday that its first-quarter earnings, the best in four years, were more than a one-off success but the fruits of six years hard labour.

Under Mr Blankfein, who has been chief executive since 2006, Goldman has hunkered down. It has certainly cut costs, but while rivals were being lauded for taking more radical action the investment bank essentially kept its shape.

"Maybe some of the reduced capacity in the industry is helping you, and so your long-term strategy that we all beat you up for - for the last five years - might be working," conceded Glenn Schorr, analyst at Evercore, on a conference call with Goldman's chief financial officer Harvey Schwartz.

Wall Street has changed significantly in that time but in Goldman's results there was something of the old swagger. Take the bottom line: Goldman's return on equity was 14.7 per cent for the first three months of the year, the most profitable performance in 18 long quarters.

Regulators have forced banks to operate with much greater levels of loss-absorbent equity. That has the side-effect of depressing returns. As a result, Morgan Stanley scaled back its capital-intensive trading business and bet big on wealth management; in the last two years its stock has risen more than 73 per cent, twice the increase at Goldman.

But the fact that Goldman can still earn ROE comfortably ahead of its cost of capital - reckoned to be about 10 or 11 per cent - has fuelled confidence that investment banks can navigate this new world and give shareholders a reasonable return. JPMorgan's results on Tuesday, which also benefited from an upswing in trading, added to the evidence.

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But there was a range of results - there was no bonanza at Bank of America, where trading revenues fell 7 per cent year-on-year, or at Citigroup, where they fell 9 per cent.

Executives across the industry agree that not every bank can make money from identical strategies. Morgan Stanley and JPMorgan Chase have scrambled to reduce their commodities trading businesses in the face of regulatory pressure; Goldman has stayed the course. "We're really seeing the absence of competitors on the field," noted Mr Schwartz.

Quantitative easing in Europe helped Goldman's rates desks as investors rushed to reposition their portfolio. Not every US banks has such as big presence in London.

But even the laggards were accentuating the positive. John Gerspach, Citi's chief financial officer, argued that the headline drop was misleading, noting that the year-ago period was an unusually active one for so-called "spread products" such as distressed credit, collateralised debt obligations and municipal bonds, pushing their contribution to fixed income revenues well above the long-run average of about 40 per cent.

This year they fell below that level, meaning that despite a "strong" quarter for rates and currencies - where revenues would have been up about 20 per cent, excluding losses associated with the sharp swing in the Swiss franc in January - the overall pot was smaller. "These are normal fluctuations you'd expect," said Mr Gerspach.

Similarly, Bank of America made a case on Wednesday that its 7 per cent year-on-year fall in sales and trading revenue, to $3.9bn, was caused by shifts within the mix. But CFO Bruce Thompson said that while January was a little slow - despite making "a few bucks" on the spike in the Swiss franc - activity and momentum built up throughout the quarter, continuing into April.

What is true for each bank, including among the Goldman managing directors listening to the positive spin from their leader, is that shareholder returns are better because pay is more disciplined.

Goldman set aside 42 per cent of revenues for remuneration in the first quarter, the smallest share at the start of the year on record.

It is being seen as a signal that Mr Blankfein intends to maintain discipline even with the return of better times. The pat on the back from Mr Blankfein does not mean a return to pre-crisis fat cheques.

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