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(Bloomberg) — Goldman Sachs Group Inc. and Blackstone Group LP were the toast of Wall Street in 2007 as they raised record-setting funds and earned returns of more than 30 percent. Eight years later, they captured some of that dominance again in the first quarter. Goldman Sachs rode a rare increase in trading and more than $1 billion of gains from equity investments made with its balance sheet to post the highest earnings per share in five years. Blackstone, the largest alternative-asset manager, doubled first-quarter profit to a record. Commercial banks’ margins remained squeezed by interest rates near record lows, leading to Wells Fargo & Co.’s first profit drop since the global credit crunch of 2008. Goldman Sachs’s return on equity, boosted by its highest post-crisis merger advisory revenue, topped Wells Fargo’s for the second time in the last four years.
“This quarter, they got some cyclical strength,” said Alison Williams, senior financials analyst with Bloomberg Intelligence. “The pick-up shows the opportunity still in these businesses, and supports the view that at the depths of last year, at least some of the weakness was cyclical.” JPMorgan Chase & Co., the biggest U.S. bank, saw both trends. The firm’s trading revenue jumped 9 percent, while the interest-rate spread between its assets and liabilities dropped to 1.97 percent from 3.24 percent five years ago.

Mixed Results

Not all banks benefited from increased trading in interest- rate and currency markets spurred by divergent central bank actions. The Fed is expected to begin raising rates later this year after the European Central Bank started a quantitative easing program and the Swiss National Bank surprised the market by abandoning its currency peg. Bank of America Corp. posted a 7 percent drop in fixed- income trading revenue, and Citigroup Inc. reported an 11 percent decline. Morgan Stanley will post results April 20. Goldman Sachs Chief Executive Officer Lloyd Blankfein, 60, who’s been preaching patience to investors while waiting for competitors to exit trading units, saw his strategy pay off for at least one quarter. With rivals pulling back in Europe, the bank encountered less competition in commodities and some equity derivatives, Chief Financial Officer Harvey Schwartz said on a conference call with analysts. “While it’s only one quarter, it was a very impressive quarter,” Keith Horowitz, a Citigroup bank analyst, wrote in a note to investors about Goldman Sachs’s results. He noted that revenue from trading, investment banking and principal investments all surpassed expectations.

‘Big Year’

After posting losses in multiple years in the wake of the financial crisis, Blackstone has made steady progress culminating in last quarter’s record profit. It has benefited from the increased regulation on banks, entering new businesses and buying assets from financial firms. Blackstone also gained from the rebound in the U.S. property market, as the real estate group reported a 99 percent jump in profit from a year earlier. Its real estate unit, already the biggest of its kind, has raised almost $15 billion in just four months for a new fund. “All signs point to 2015 being a very big year for us and our shareholders,” CEO Steve Schwarzman, 68, told analysts and investors on a conference call Thursday. “I do not believe Blackstone is in any way at a long-term peak.” Still, investors didn’t flock to the strong profit. Blackstone, which climbed 2.5 percent on Wednesday, rose 0.3 percent after releasing results. Goldman Sachs, which gained almost 3 percent this week before the earnings announcement, slipped 0.4 percent Thursday. Goldman Sachs faces a higher hurdle in many investors’ minds because it’s subject to more regulation and relies on market conditions to drive its trading business, said Ken Leon, an analyst who covers the financial industry for S&P Capital IQ. “In financials, there’s more attraction to business models or franchises that have high recurring revenue and cash flow to spur not only growth, but also stock buybacks and dividends,” said Leon. “Goldman is somewhat dependent on what the markets are. It’s a harder business model.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net David Scheer, Josh Friedman