Investment banks work to sustain Q1 bonanza

By Steve Slater - Analysis

LONDON (Reuters) - A bonanza for most investment banks in the first quarter will be hard to sustain as margins compress, but the winners from the crisis reckon profits will stay strong as they grab business from troubled rivals.

HSBC, Europe's biggest bank, this week joined a raft of firms reporting record investment banking profits during the first quarter, on the back of buoyant fixed income and currency trading.

With bad debts rising fast, the investment banking recovery arrived just in time to protect fragile balance sheets and revive confidence among investors, helping send U.S. and European bank shares soaring.

"We'd rather own wholesale banks than commercial banks because we think the revenue environment is more supportive for wholesale banks," said Jon Peace, analyst at Nomura.

"The commercial banks are starting to see the acceleration in non-performing loans, and that's going to be more of a drag."

The banks taking most advantage have included JPMorgan Chase and Goldman Sachs in the United States and Barclays, BNP Paribas and Credit Suisse in Europe.

All say they won a bigger slice of a bigger pie. And even if volumes ease back and attractively wide bid/offer spreads narrow to more normal levels, as is widely expected, those banks expect to outperform.

One reason is they are moving into abandoned territory. Bear Stearns has gone for good. Lehman's business has been taken over. Others, notably Bank of America/Merrill Lynch, Citigroup and Royal Bank of Scotland, are pulling back as they restructure and cut risk.

Switzerland's UBS and Morgan Stanley were among the few banks to fall short of expectations for their investment bank profits. UBS followed up its miss by ditching the head of the business as it strives to get back on track.

GO WITH THE FLOW...

The banks winning business have warned not to expect this year's run rate to be four times the first quarter, however.

"It (the strong Q1) was based on a mix of things and some are more sustainable than others. For the 'winner' banks we've assumed that the full-year run rate may be about three times the first quarter," Peace said.

"The reality is it's a unique period of time with interest rates having come down so significantly and that will work through the system," HSBC CEO Michael Geoghegan said. "After that it will be the players who have the market share capability," he said, citing capital strength as a key factor.

The Q1 growth was spearheaded by strong fixed income, currencies and commodities (FICC) business.

Banks may have been battered in the first quarter to leave many in need of taxpayer help, but capital markets activity recovered from the worst of the turmoil in the previous quarter.