Good times roll on Wall Street as banks reveal profits boost

The telephones in the offices of investment banks are again red-hot with clients wanting to do business, it was confirmed yesterday, when two of Wall Street's largest institutions, Goldman Sachs and Morgan Stanley, announced bumper profits.

The telephones in the offices of investment banks are again red-hot with clients wanting to do business, it was confirmed yesterday, when two of Wall Street's largest institutions, Goldman Sachs and Morgan Stanley, announced bumper profits.

Goldman said net income in its second quarter rose to $1.19bn (£654m), up from $695m a year earlier, a time when investment banks were still struggling to find deals to do, amid tough equity markets and an unwillingness by companies to spend money on major deals.

The outlook has been very different in the past three months, according to Goldman, which notched up its second best-ever quarterly performance in the three months to May.

Its investment banking division reported its best result in three years, on the back of advising some of the major mergers to be announced since Christmas, including Royal Bank of Scotland's $11bn acquisition of Charter One in the US, and the hostile bid for Aventis by the drugs giant Sanofi. Meanwhile, at Morgan Stanley, second-quarter net income rose to $1.22bn, from $599m a year ago.

Goldman and Morgan said merger and acquisition advisory business and securities underwriting were relatively strong in the second quarter.

Morgan Stanley's total revenue for the second quarter rose one-third from the same period in 2003 and by 7 per cent from the first quarter of this year, to $6.7bn.

Revenue from advising companies on mergers and acquisitions, one of Morgan Stanley's most lucrative businesses, more than doubled to $324m.

However, both banks saw a slight dip in their profits compared with the start of this year, due to the volatile market conditions and a mounting perception that most major economies could be moving into a new, higher interest rate environment.

The change has made it difficult for investment banks to notch up the kind of hefty returns on bond trading that sustained them through the lean years of M&A and stockbroking since 2000. While bankers expect the major investment houses to shift back to making most of their money from equities and deals, Goldman nonetheless said its fixed-income department had their third best-ever quarterly result. Hank Paulson, the chairman and chief executive of Goldman, said: "Our outlook for the business environment in the coming months remains optimistic, but we are mindful of the effect of continuing interest rate and geopolitical concerns on market sentiment."

While investment banks have been sending out increasingly bullish statements in recent months, both results pleased the market, with shares in the banks trading higher than the previous day's close in New York.