DBRS: Goldman 4Q Earnings Back on Track After Difficult FICC 3Q; Business Diversity, Cost Control

Summary:

• 4Q13 net earnings (to common) of $2.2 billion, up 57% QoQ, as FICC recovered from difficult Q3; for 2013, the benefit of resilient diverse businesses showed with net revenues flat YoY and net earnings (to common) up 6%
• Strong net revenues of $8.8 billion demonstrated leadership in Investment Banking, solid Total Equities revenues, the recovery in FICC and key contributions from Investing & Lending and Investment Management
• DBRS rates Goldman’s Issuer & Senior Debt at A (high) with a Stable trend

From DBRS Inc.’s (DBRS) perspective, the 4Q13 results of The Goldman Sachs Group, Inc. (Goldman or the Company) demonstrate the strength of its global franchise, with its diverse business lines and product range that contribute to resilient underlying earnings. This resiliency is evident in the longer run quarterly trends and assessment of annual results. Importantly, Fixed Income, Currency and Commodities Execution (FICC) revenues improved from a particularly difficult 3Q13. DBRS views the diversity of FICC businesses as important when assessing results. Goldman saw a significant improvement in currencies and strength in credit products, offset by declines in interest rates and mortgages combined with still depressed commodities net revenues.

Continued leadership in Investment Banking (IB) was a highlight of 4Q with strong net revenues of $1.7 billion, reaching 2007 levels. Goldman continues to benefit from its leading position in financial advisory and strength in underwriting. Notably, equity underwriting had a particularly strong quarter with record net revenues. The Company also reported that its IB backlog improved sequentially from an already high level.

Generally, Goldman’s results in Institutional Client Services (ICS) were subdued, though this was not surprising in light of the current environment. Total ICS revenues in 2013 were down 13% year-over-year (YoY). DBRS acknowledges that lower trading volumes have pressured revenues for all market participants. This pressure is compounded by the industry-wide focus on generating revenues primarily from client flow businesses and the general lowering of risk profiles in capital markets businesses in response to the evolving regulatory environment, as well as to market conditions.

Adding stability to Goldman’s revenues, Investment Management (IM) delivered seasonally higher net revenues of $1.6 billion due to higher incentive fees. Assets under supervision increased to a record level with net asset inflows and market appreciation. While the Company’s Investing & Lending (I&L) segment adds volatility to quarterly revenues, over time, these generally longer-term investments have generated significant positive net revenues for Goldman.

Goldman continues to maintain significant liquidity levels with $184 billion in high quality liquid assets, or 20% of total assets. Capitalization was ample with an estimated Tier 1 Common ratio under Basel 3 advanced method of 9.8% and an estimated supplementary leverage ratio based on U.S. rules of 5% at the Company-level and 6% at the Bank level.

DBRS rates Goldman’s Issuer & Senior debt at A (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]