DBRS: Goldman Sachs Ratings Unchanged After 3Q12 Earnings – Sr. at A (high), Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q12 results of The Goldman Sachs Group, Inc. (Goldman or the Company). The Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle) remain unchanged with a Stable trend. Goldman reported net earnings to common shareholders of $1.5 billion for the quarter, up from net earnings of $927 million in 2Q12.

The strong linked quarter earnings growth came despite still-difficult market conditions and subdued client activity, evidenced by lower market volumes and low M&A and IPO activity. Risk appetite remains low for both the Company and its clients in the current environment. Goldman’s average daily trading VaR was $81 million in the third quarter, down $11 million Quarter-over-Quarter (QoQ), and its lowest since 4Q05. That said, more constructive market conditions relative to the second quarter were the primary driver of the QoQ improvement, driving up valuations in Investing & Lending (I&L) and contributing to better trading results. In DBRS’s view, the Company continues to generate solid risk-adjusted results across its key business lines and, notably, Goldman’s advisory and equities (underwriting and trading) franchises remain market leading.

For the quarter, total net revenues were $8.4 billion, up 26% QoQ. Excluding DVA losses of $370 million, Institutional Client Services (ICS) net revenues of $4.6 billion increased approximately 17% from 2Q12. Fixed Income, Currency and Commodities Client Execution (FICC) net revenues (ex-DVA) of $2.45 billion in 3Q12 reflected strength in mortgages, credit and rates that was somewhat offset by weaker performances for currencies and commodities. Total Equities revenues (ex-DVA) rebounded from the difficult second quarter (up 26% to $2.1 billion), benefitting from the more benign market-making environment.

Goldman’s Investment Banking (IB) franchise continues to maintain strength in a weak market environment, though net revenues did decline 3% QoQ to $1.2 billion. Relative to 2Q12, advisory revenues increased 9% to $509 million, but underwriting revenues declined 11% to $655 million, driven by lower IPO activity in the quarter. Goldman reported that its IB backlog decreased slightly QoQ, but remains slightly above where it was at the end of 2011.

The Company’s I&L segment reported net revenues of $1.8 billion that were up sharply from net revenues of $203 million in 2Q12. All revenue lines increased QoQ, driven by higher equity markets and tighter spreads. Specifically, net gains from equity securities (mostly private equity investments) increased $936 million QoQ to $824 million and net revenues from debt securities and loans increased $336 million from 2Q12 to $558 million. In the third quarter, Goldman had a net gain of $99 million on its investment in ICBC shares, up from a net loss of $194 million in 2Q12. While the investments in I&L are generally longer-term and have generated significant positive mark-to-market revenues for the Company over time, DBRS views the revenue volatility in this business as having the potential to increase headline risk given the importance of quarterly profitability.

At the same time, DBRS considers positively the Company’s view of Investment Management (IM) as a growth segment, given the stable revenue generation of this business. Excluding a one-time boost in incentive fees from 2Q12, IM produced stable revenues in the third quarter of $1.2 billion. Reflecting higher valuations, Assets Under Management increased $20 billion from 2Q12 to $856 billion.

In the quarter, the Company maintained its compensation accrual at 44% of net revenues, in line with the first and second quarters. Non-compensation expenses were $2.4 billion in 3Q12, up sequentially, though DBRS notes that year-to-date non-compensation expenses are down 10% from 2011, highlighting progress with the Company’s costs savings initiatives.

Goldman continues to build its regulatory capital and maintain significant levels of liquidity. At quarter end, the Company’s estimated Basel I Tier 1 Common ratio stood at 13.1%, and its estimated Basel III Tier 1 Common ratio was approximately 8.5%, up from just below 8% at the end of 2Q12. The Company also announced that it anticipates maintaining a cushion of approximately 100 basis points on top of its final Basel III Tier 1 Common requirements, which are yet to be determined. The Company’s liquidity buffer, termed its Global Core Excess, averaged $175 billion in 3Q12, a substantial 18% of total assets.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: October 12, 2000
Most Recent Rating Update: November 11, 2011

For additional information on this rating, please refer to the linking document under Related Research.