Fanfare over recent results from US investment banks belies the reality that Wall Street’s heyday has passed. 

Given all the hype about US investment banks’ second-quarter results, it would be easy to think that life has scarcely been better for them. Headlines gushed that Goldman Sachs’ net profits had doubled from the same period in 2012, easily beating the forecasts of most analysts. Morgan Stanley’s earnings were also significantly higher, while investment banking revenues increased at Bank of America-Merrill Lynch, Citi and JPMorgan. Some commentators were quick to conclude that tougher regulations were not holding back Wall Street in any way.

Yet a closer look at the numbers reveals that the outlook for investment banks is anything but rosy. First, the period from April to June last year was a particularly bad one for capital markets. The fact conditions improved this time around was hardly something to shout about.

And for all the revenue growth, profitability ratios remain grim. Goldman’s return on equity (ROE) in the first half of 2013 was a mere 11.5%; Morgan Stanley’s even lower at 6%. Both banks were outshone by Wells Fargo, which achieved an ROE of 14%. When Wells Fargo – a conservative institution focused more on serving Average Joe than trading derivatives and high-profile deal-making – is more profitable than those two firms, something is amiss on Wall Street.

Some investors might argue that all it will take for investment banks to regain their swagger is for the American economic recovery to continue. Should that happen, volumes of mergers and acquisitions are bound to pick up and equity markets should rise.

But while Goldman, Morgan Stanley and their rivals would benefit from such a scenario, it is far from certain they can replicate their success of yesteryear. To put into perspective how far they have to go, Goldman achieved an ROE of 33% in both 2006 and 2007. Those figures simply look beyond Wall Street’s reach these days.

The world has changed for bulge-bracket investment banks. Those in the US, not to mention elsewhere, have been hit hard by stricter capital requirements and rules cutting back their proprietary trading. Their business models are no longer as effective as they once were. Even with a far stronger global economy, they cannot expect a return to the heady days they experienced in the mid-2000s.

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