DBRS Comments on 3Q13 Earnings of Goldman Sachs; Ratings Unchanged - Sr. at A (high), Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 of $1.4 billion for the quarter on total net revenues of $6.7 billion.

Highlights of the quarter include continued leadership in investment banking, strong net asset inflows in asset management supporting the franchise build, and the ability to adjust compensation to the weaker environment with lower accrual. Nonetheless, reduced client activity and an uncertain operating environment negatively impacted Institutional Client Services (ICS) revenues, notably within Fixed Income, Currency and Commodities Execution (FICC) which saw net revenues decline 49% QoQ. In particular, Goldman noted weaker revenues in currencies driven by a challenging operating environment combined with difficulties in managing inventory levels. An indicator of Goldman’s ability to manage down risk in this business over the quarter was the decline in Currency rates average VaR to $17 million in 3Q13 from $23 million in 2Q13.

While the Company’s reported FICC results were generally weaker than peers, DBRS views this as weak quarter. The Company’s longer-term track record of earnings generation across its businesses and geographies affirms Goldman’s overall franchise strength. In 3Q13, the Company generated net revenues of $1.2 billion (vs. 2Q13: $1.6 billion) in Investment Banking (IB). Goldman reported a significant increase in its IB transaction pipeline in 3Q13, as compared to the prior quarter. Within ICS, FICC generated net revenues of $1.2 billion (vs. 2Q13: $2.5 billion) and Total Equities generated net revenues of $1.6 billion (vs. 2Q13: $1.9 billion). In its Investing & Lending business, Goldman generated net revenues of $1.5 billion (vs. 2Q13: $1.4 billion) and $1.2 billion (vs. 2Q13: $1.3 billion) in Investment Management (IM). Notably in IM, Goldman reported a record level of assets under supervision of $991 billion with strong net asset inflows and market appreciation.

Goldman continues to maintain a strong liquidity profile and solid capitalization. The Company’s liquidity pool (Global Core Excess), which averaged $187 billion during 3Q13, remains appropriately sized to meet Goldman’s estimated liquidity needs. With regard to capital, Goldman maintains a comfortable cushion and ample loss absorption capacity. The Company reported an estimated Tier 1 common ratio of 14.2% at quarter end, under Basel 1 and reflecting the revised market risk regulatory capital requirements which became effective on January 1, 2013. The estimated Basel III Tier 1 Common ratio was 9.8% at 3Q13, up from 9.3% at 2Q13, on a “fully loaded” basis. Goldman estimates that this ratio would be 100 basis points higher on a “phased-in” basis. The Company also disclosed its supplementary leverage ratio of approximately 5% at the Company-level and 6% at the Bank-level at 3Q12 as compared to the proposed 5% requirement for the largest bank holding companies and 6% banking subsidiary requirement to be considered “well capitalized” that is phasing in to be fully effective on January 1, 2018.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]