Investment banking rapidly regaining its lustre

NEW YORK - When Wells Fargo, the North Carolina-based bank whose logo of a horse-drawn carriage speaks to its traditional conservatism, leapt in to buy the collapsing giant Wachovia last October, it hinted that Wachovia's investment banking business would be scaled back.

What Wells Fargo really wanted was the national retail banking network, and much of the raciest Wall St business conducted by Wachovia was out of step with Wells Fargo's "values", its chief executive John Stumpf suggested at the time.

But it was the same Stumpf who promised yesterday to "grow and invest" in the inherited investment bank, which will be rebranded Wells Fargo Securities.

"Clearly one of the great benefits of the Wachovia merger was the strong investment banking and capital markets platform that we gained," Stumpf said.

"We have an enormous opportunity to become one of the top customer-focused investment banks in the country by focusing on the basics and on those businesses that directly serve our customers."

Investment banking looks rather marvellous right now, relative to retail banking. Loans to consumers and to businesses are still going bad at an alarming rate, as the effects of the recession continue to grind, so banks with large commercial banking operations are having to pile up reserves against those future losses.

On the investment banking side, renewed activity in the capital markets, creaking back to life after the crisis, is straight away fattening the bottom line.

"The major investment banks do not have to contend with a long tail of loan portfolio losses that will drag on earnings for the next two years and they should start showing normal returns later this year and by 2010 at the latest," Chris Kotowski, an analyst at Oppenheimer & Co, said.

He rated investment banking stocks as buys, saying: "If investment banks are likely to show good results in 2009 and 2010, why not own some?"

The resurrection of investment banking is likely to be confirmed by results from the big Wall St players in the coming weeks, beginning with Goldman Sachs a week from yesterday.

Business arranging the sale of bonds and equity is booming again, a dearth of competition is leading to enormous trading profits for the banks that remain, and the likes of Goldman, which had the financial strength to keep funding proprietary trading (that is, trading its own money, rather than just broking for clients) are likely to have done best of all.

- INDEPENDENT