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Lenders’ Reliance on Investment Banking May Drop, S&P Says

Investment banking may generate a smaller share of banks’ earnings as greater regulation erodes profitability and returns from commercial and consumer lending increase, Standard & Poor’s said.

Investment banks may shift capital to activities such as treasury services for companies and trade finance at the expense of sales and trading, the ratings company said in a report today. The growth of retail businesses in Asia and Latin America may also help fuel earnings, S&P said.

“We may be looking at the beginning of the end of investment banking’s pre-eminence in the world’s biggest global banks,” S&P said. “The opportunistic profits from the wide bid-ask spreads of the transition period of 2009 to 2010 appear to be gone.”

After reporting record investment-banking and trading revenue for 2009, Wall Street banks have had declines in those businesses for four straight quarters compared with year-earlier periods. A fall in fixed-income trading revenue, the biggest capital-markets business for the banks, largely spurred the decreases.

“In our opinion, investment banking has harvested the bumper crops of the transition period,” S&P wrote in its report. “Stable client-centered commercial businesses such as treasury services and trade finance may become the favored son.”

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