Is Goldman Sachs the harbinger of sunny financial days?

Will the latest results of investment banking leader Goldman Sachs turn out to be the defining moment in the recovery of financial markets and banking stocks? Goldman's results were impressive. Its net revenue was 46 per cent higher at $13.8 billion (Dh50.68bn) with net earnings of $3.4bn for the second quarter of 2009. Its return on equity was 23 per cent for the second quarter and just over 18 per cent for the first half of 2009.

The bank's underlying business line results reveal which particular financial markets are undergoing a renaissance. Its trading and principle investment division achieved net revenue of $10.8bn, some 93 per cent higher than the first half of 2008 and up by more than one-half from the first quarter of this year. Product lines including fixed income, commodities and currencies are all experiencing strong demand. Credit products are expected to remain one of the market's favoured areas throughout the second half of the year and into next year.

Derivative activity and demand, including that linked to interest rate products, is also growing both for Goldman's and the market generally.

Reflecting the improvement in markets, the investment bank's equity business achieved record results.

Equity underwriting is increasing on the back of strong client activity and debt underwriting, particularly linked to investment grade activity, is also growing.

Despite the improving trading business division, the pure investment banking activities are still facing difficult, and weak, conditions. Mergers and acquisitions activity remains low. Asset management results at Goldman's were weak and this is also reflective of the wider market.

In parallel with higher revenue, operating expenses at Goldman's advanced by 33 per cent. Much of this was staff compensation and benefits. It would also seem that large salaries and big bonuses have quickly re-emerged, and less than a year after the bank was rescued by the tax payers.

Market conditions remain very challenging but growth and demand is re-emerging for many wholesale and investment banking areas. For those financial institutions that have a strong intermediary focus and able to link buyers and sellers through a deep client base, the profitability outlook appears to be brighter.

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