What's going on?
Goldman Sachs and Citigroup reported first quarter results yesterday that beat analyst expectations. Goldman reported particularly strong numbers, with its highest quarterly profit and return on equity in four years, due primarily to its trading and corporate advisory businesses.
What does this mean?
Citigroup and Goldman Sachs, despite both being labeled banks, are actually quite different entities. Citigroup is a ‘universal’ bank, meaning it accepts deposits, generates a large proportion of its income from traditional lending activities and also has an investment bank. Goldman is much more of a pure investment bank. Citigroup’s good results were largely a result of cost cutting initiatives, while Goldman’s significantly better than expected results speak more to its trading ability in financial markets and its large corporate advisory business (especially its focus on mergers and acquisitions). Behind these results and results from other banks this week is evidence that banks most exposed to trading and advisory businesses have performed the best.
Why should I care?
Most of the major US banks have reported this week and while there was nothing earth shatteringly positive, the underlying picture was good. Banks, like Goldman Sachs and JP Morgan, that have maintained significant exposure to trading and investment banking did well, while those who have retrenched more from investment banking activities performed relatively poorly (for example, Bank of America). With major mergers and acquisitions already announced in the second quarter, it might warrant investment in banks like Goldman that retain significant exposure to traditional investment banking activities. There are, however, risks that in a market downturn the banks most exposed to the financial markets will underperform those, like Citigroup and Bank of America, that have shifted their business models to, theoretically, produce lower but less volatile returns.
Originally posted as part of the Finimize daily email.
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