DBRS Confirms Ratings of Goldman Sachs – Senior at A (high), Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings for The Goldman Sachs Group, Inc. (Goldman or the Company) and related entities, including its Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all ratings remains Stable.

The current ratings consider the resiliency of Goldman’s diversified, global franchise, its solid performance across its various capital markets businesses despite a challenging environment and the strength of its earnings generation ability over an extended period of time. The ratings reflect Goldman’s strength in risk management, which is viewed internally as an important, core function to the overall strength of the franchise, as supporting its ability to appropriately evaluate risk/reward. In competing in the current environment, Goldman also benefits from the stability of its organization, well-developed operational capabilities, ability to generate growth organically with limited acquisitions and divestitures, persistent culture and consistent senior management. To strengthen its ability to weather stress in financial markets, Goldman also has focused on refining and enhancing its funding and liquidity profile. Additionally, Goldman has increased its capitalization, due partly to more demanding regulatory requirements.

DBRS sees upward pressure on the Company’s ratings as constrained by various factors including the still evolving regulatory environment and its potential impact on Goldman’s franchise. DBRS views the Company as having been successful in its efforts to modify its business model to cope with regulatory and legislative changes, with the current ratings incorporating the risks posed by stress scenarios and rapid regulatory changes that could pressure earnings. Goldman also remains exposed to wide ranging capital markets activities and diverse market risk, which supports the franchise value, but elevates risk levels. With a balance sheet that is largely mark to market (MTM), the Company is exposed to potential large market movements and market disruptions.

The current ratings level reflects Goldman’s top tier global capital markets banking franchise with trading businesses that are extensively diversified across products, markets and client segments. The Company maintains a top position in its Investment Banking (IB) franchise, a cornerstone of its business model, with a leading position in financial advisory and equity underwriting. Continuing a leading position in this space is important from a ratings perspective, as the well-entrenched IB franchise provides an entryway through which clients engage with other product and service offerings at Goldman. Goldman’s franchise benefits from its other business segments, which add further diversity. Momentum in Investment Management (IM) has been evident in recent quarters, which is important from a ratings perspective, as it contributes to the stability of overall earnings. The Investing & Lending (I&L) segment adds diversity and important competitive capabilities, but also risk and volatility to the Company’s earnings. Looking at longer-term trends, I&L has generated significant positive MTM revenues for the Company over time. The rating level also benefits from the growing international diversity of Goldman’s franchise, as it builds out its capabilities in growing markets and serves the expanding international needs of its clients.

The Stable trend indicates DBRS’s view that the rating is well-placed at its current level. While headwinds remain, Goldman’s franchise has proven resilient during an extended period of crises followed by uneven economic recovery. The Company continues to refine and strengthen its funding profile through the ongoing assessment of the characteristics of its diverse funding sources with those of the assets being funded. Goldman has focused its funding profile toward more stable, term funding sources, such as deposits, long-term debt, and equity. The Company also maintains a significant level of liquidity ($173 billion). As a bank holding company (BHC), Goldman has access to the Fed’s discount window, as well as other programs. This access gives the market an extra degree of confidence in Goldman’s ability to weather another severe liquidity crisis.

Other notable changes since the liquidity crisis of 2008 include changes in regulatory oversight (to the Fed from the SEC) and changing regulatory requirements (CCAR/DFAST, Basel III). The Company’s 2014 CCAR results received the Fed’s “non-objection to capital plan” based on the results of stress testing in a severely adverse scenario. Goldman’s estimated Basel III Common Equity Tier 1 (CET1) ratio stood at 11.4%, on a transitional basis, and 9.8%, on a fully phased in basis, under the advanced approach at 2Q14. Goldman’s estimated supplementary leverage ratio at the Company level was 4.5% as of 2Q14; including the capital impact associated with reduced fund investments to company with the Volcker rule, this ratio on a pro-forma basis was in excess of 5%. The Company expects to meet the 5% requirement by 2019, as it continues to adjust its balance sheet in response to regulatory requirements and its own objectives. Overall, the Company is better positioned to weather an extended economic crisis than it was going into the last downturn.

From a litigation/investigation perspective, the Company generally remains well-positioned as compared to its universal banking peers. Goldman recently announced a $3.15 billion settlement with the FHFA to repurchase certain MBS, reducing legacy litigation issues. The cost of the settlement is largely covered by reserves, limiting the impact to earnings in the coming quarter.

Negative rating pressure could arise, if investor confidence is adversely impacted in a Goldman-specific scenario, which could particularly affect the Company given its sizable reliance on wholesale funding. Indications of significant deficiencies in Goldman’s risk management, weakening in its franchise, or its earnings capacity could also negatively pressure ratings. While DBRS does not see any positive rating implications for Goldman as likely at this time, further strengthening of its underlying earnings, sustained success with its proficient risk management and further enhancement of its strong financial profile would bode well from a ratings perspective.

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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 27 January 2005
Most Recent Rating Update: 9 December 2013

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