Profitable return for banking's 'masters of the universe'

The "masters of the universe" of the investment banking world are behind the £6bn surplus posted by Barclays and HSBC today.

Unpalatable though it may be to a public suffering from a crisis which began with the unwinding of the sector's more disastrous forays in the boom years, investment banking business has surged this year.

The bonanza has offset the rising defaults on more 'traditional' banking business such as loans and mortgages, while ultra-low interest rates have squeezed deposit margins.

Investment banks trade everything from government and company bonds to currencies, shares, commodities and complex derivatives.

As well as advising on takeovers and mergers, they help clients raise funds through issuing debt in the form of bonds, or equity - through the issue of new shares in a rights issue for example - and promise to buy up any left over through a process known as underwriting.

But the huge push for financing by cash-strapped companies needing to trade through recession has led to a surge in commission fees for the banks - and there is less competition for the work.

Barclays - which doubled profits at its Barclays Capital investment banking and trading wing - saw income from advisory and underwriting work soar to more than £1bn in the first half of 2009.

Meanwhile the huge increase in activity in less volatile markets this year - as well as significant growth in emerging markets - also doubled Barclays' trading income to almost £7.9bn.

Credit spreads - the difference between buying and selling prices - widened, helping boost profits. Barclays also benefited from its acquisition of Lehman Brothers' US division, increasing income from areas such as 'prime' services to investors such as hedge funds.

HSBC's Global Banking and Markets operation was the only division or region of the bank in which pre-tax profit did not fall in the first half of the year.

GBM's $6.3bn (£3.75bn) record haul - compared with 5 billion dollars (£2.98 billion) for the group as a whole - also came through market share and margin gains in areas such as foreign exchange and financing.

HSBC said: "Record revenues... were boosted by improved margins and greater opportunities to trade debt issued by governments and corporations, as they sought to alleviate symptoms of a capital drought."

Meanwhile the bank also benefited from significantly lower write-downs on the "alphabet soup" of complex asset-backed securities which were hit hard last year - due to smaller decreases in their prices as well as changes in accounting treatment.

Royal Bank of Scotland is also likely to report strong investment banking results when it reports figures on Friday - although chief executive Stephen Hester has said this early boom in business could fade through the rest of the year.

BarCap president Bob Diamond is more bullish. He said that the number oDefaultf clients doing business with the division of more than £1m had increased 67 per cent in the period.

He added: "We are very pleased with the second quarter and it encourages us to comment that it is sustainable."