In the quest for rapid earnings growth, many banks forgot the importance of diversification. Rushing into the moment's hottest businesses, they abandoned activities that at the time seemed lackluster. The go-go businesses of the 1990s reflected the stock market's boom: investment banking, stock brokerage, wealth management and equity investment. On the other side, banks were dumping what seemed to be slow-growth activities: mortgage banking, auto-financing and credit cards.

These initiatives were taken perhaps more to please investors with short-sighted goals than to produce long-term earnings. Now that the market boom seems to have passed, it will be interesting to see how such strategies play out. Will the large investments in brokerage, insurance and wealth management pay off?

But in these uncertain times it is unclear which way to turn. It appears the best gamble is to spread your bets across a wide spectrum.

Citigroup is a case in point. The decline in the stock markets walloped the earnings of its investment banking activities, where income dropped $497 million in the first quarter. That, indeed was a severe blow that was primarily responsible for the 7% decline in Citi's year-over-year first-quarter earnings.

But as Sandy Weill, Citi's CEO, said in the company's earnings report: "This is precisely the kind of market that demonstrates the power of our franchise. The strength and diversity of our earnings by business, geography, and customer helped to deliver a strong bottom line in a period of market uncertainty."

Considering the plunge in investment banking income, things could have been a lot worse. Despite the drop in income from investment activities, Citi succeeded in getting a 22.5% return on equity. That's even better than its 22% return last year, and better than its average ROE of 19% for the three-year period 1998-2000.

As David S. Berry, head of research at Keefe, Bruyette & Woods, put it: "Citigroup again demonstrated in the quarter the benefits of diversification and leadership across its business lines."

Diversification also helped Bank of America's first-quarter results. Its return on equity dropped sharply, to 15.9% from 19.6% in the first quarter of 2000. But it, too, could have been worse. As expected, BofA's earnings were pulled down by substantial credit losses: Non-performing assets rose 8% over the fourth quarter of 2000 to $5.9 billion and net charge-offs amounted to $782 million.

But these factors were offset to a good degree by exceptional trading results, which more than doubled to $700 million. And with declining interest rates, its net interest margin rose by what KBW describes as a "healthy 18 basis points."

Now that banks no longer can count on quick profits from faddish businesses, they must go back to the fundamentals. And that's diversification, diversification, diversification.

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