DBRS: GS’s Revenues Demonstrate Well-Positioned Global Businesses; Improved Leverage with BS Decline

Summary:
• Another solid quarter was evident in net revenues of $9.1 billion largely unchanged QoQ, with gains in Investing & Lending offsetting some weakness in the trading businesses.
• Goldman continued to demonstrate its ability to adjust to evolving regulatory requirements with notable culling of assets, reducing its balance sheet by $56 billion in the quarter to $860 billion.
• Highlights of 2Q14 include sustained leadership in Investment Banking, Equities holding up, strength in Investing & Lending and momentum in Investment Management, but still slow pace in FICC.
• DBRS, Inc. rates Goldman’s Issuer & Senior Debt at A (high) with a Stable trend.

The Goldman Sachs Group, Inc. (Goldman or the Company) reported net earnings (to common) of $1.95 billion on net revenues of $9.1 billion, largely unchanged quarter-on-quarter (QoQ), in yet another quarter characterized by an uneven global economic recovery, still evolving regulatory requirements and overall subdued client demand and risk appetite. DBRS sees the results for the quarter as continuing to demonstrate Goldman’s success with its relatively well positioned global businesses that are delivering resilient overall earnings. Evolving regulatory requirements remain a key issue, but Goldman also reported on its ongoing efforts to build the tools and incentives for its businesses to adjust as requirements become clearer. This adjustment was illustrated by its further culling of assets that were not generating required returns, primarily in its matched book and other secured financing, resulting in a $56 billion reduction in its assets to $860 billion.

Overall results in 2Q14 reflected generally solid contributions from most of the businesses, with declines in Fixed Income Currency and Commodities Client Execution (FICC) and Financial Advisory being the notable exceptions. Again this quarter, Investment Banking (IB) had a strong quarter as underwriting picked up, helping to offset weaker Advisory revenues after a strong 1Q14, but higher announced M&A and an increased backlog augur well for future IB net revenues. Goldman’s leading position in this cornerstone of its franchise is a continued strength and is generating follow-on business.

While results varied by business within FICC, overall FICC was generally weaker reflecting the environment, which may finally be showing signs of improvement. Total Equities has remained largely flat over the past four quarters. Investing & Lending is benefiting from the harvesting of investments, but also strength in equity markets. Net revenues in Investment Management (IM) were lower QoQ with lower incentive fees, but IM continues to show momentum in other metrics.

With revenues becoming more evenly distributed across Goldman’s business segments, the ups and downs of individual businesses largely balanced each other, resulting in only a modest decline in revenues QoQ. Compensation remains a key lever that Goldman can adjust, with compensation expense down QoQ. Importantly, the significant decline in Goldman’s comp ratio over recent years has been an important factor in delivering solid earnings during a period when growing revenues has been difficult.

Goldman’s financial profile remains strong with significant liquidity levels (average of $173 billion in 2Q14) and an estimated Basel III Common Equity Tier 1 (CET1) ratio of 11.4% on a transitional basis, and 9.8% on a fully phased in basis, under the advanced approach at quarter-end. The Company reported a supplementary leverage ratio of 4.5% at the parent holding company level, up marginally from 1Q14, reflecting the issuance of preference shares and asset reduction, while the ratio should increase further as Goldman sheds assets and adapts to comply with the Volcker rule. As regulatory rules are finalized, Goldman continues to adjust to facilitate its client businesses, make efficient use of its balance sheet and meet diverse capital requirements.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.