Segment analysis may provide an insight into a financial institution’s profit balance by line of business, but it does not necessarily provide a complete picture of its profit diversification by product, geography, and customer, says a new from Standard & Poor’s Ratings Services.

“Standard & Poor’s believes that business diversification is an important risk mitigant, lessening both the possibility and the magnitude of an unexpected loss on a company’s bottom line and offering added protection to its creditors,” said Standard & Poor’s credit analyst Rodrigo Quintanilla. “All else being equal, ratings are typically higher for those banks with higher business diversity.”

It notes that traditional measures of business diversification that are based on assets or revenues may not adequately reflect a company’s business diversity; overlaying profit contribution by business segment should provide an additional insight into a company’s business diversification.

However, public disclosure of business segment operations is uneven, S&P says, and banks have a significant degree of discretion in how business segments are defined, what activities are included, and how much disclosure is provided.

“Wholesale banking profitability, which includes investment banking, is widely dispersed among banks because of differences in the scale and scope of these operations. Segment profit analysis confirms that the significant reduction in credit costs in the past two years has been concentrated in the wholesale businesses (commercial and investment banking) rather than in the consumer business,” it says.

“Profitability of fee-based business like asset management and transaction services has been mostly stable during the same period.”