DBRS: Goldman’s Earnings Demonstrate Benefits of Well-Diversified, Global Capital Markets Business

Summary:
• Solid net revenues of $8.4 billion supported by important contributions across all businesses, with sustained leadership in M&A and equity underwriting, an important contribution from trading businesses in a seasonally slow quarter and continued momentum in Investment Management (IM)
• Expense control also contributed to bottom line net earnings of $2.2 billion as compensation remains a focus; comp/net revenues ratio is now 40% YTD, down from a peak of around 50%
• DBRS, Inc. rates Goldman’s Issuer & Senior Debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) has today commented on the 3Q14 results of The Goldman Sachs Group, Inc. (Goldman or the Company). Highlights of the quarter include continued leadership in investment banking and strong customer activity, which drove solid trading revenues. Continued net asset inflows in IM support the franchise build and add to revenue stability. Earnings were also supported by a continued focus on expense control with further downward adjusting of the compensation accrual to 40% of net revenues year-to-date.

Institutional Client Services (ICS) revenues were solid, supported by net revenues of $2.2 billion in Fixed Income, Currency and Commodities Execution (FICC) and net revenues of $1.6 billion in Total Equities, both of which were largely in line with the prior quarter. A notable pickup in volumes and volatility from very low levels contributed to solid FICC revenues, with this quarter highlighting the advantages of having a global, diversified franchise despite the notable challenges facing these businesses. Goldman reported strength across currencies, interest rates and commodities, while mortgages declined sequentially and credit declined significantly. DBRS expects that the regulatory environment will continue to provoke adjustments, particularly to inventory levels across the sector with impacts to pricing and liquidity, among other factors. DBRS views Goldman as having the ability to adjust to changes in the regulatory and market environment, helped by its strong investment in technology, allowing the Company to allocate all costs down to the business unit level, including the costs of capital, funding and liquidity.

Momentum in IM continues to be a highlight, and success in this business is important from a ratings, perspective given its contribution to the stability of overall earnings. IM generated net revenues of $1.5 billion in 3Q14, maintaining a generally upward trajectory since early 2012. Contributing 17% to total net revenues, this business segment provides a comparable contribution to revenues as the Investment Banking and Total Equities business segments. Higher management and other fees reached a record level in the quarter, driven in part by the growth in assets under supervision (AuS), which also achieved record levels.

Goldman continues to maintain a strong liquidity profile and solid capitalization. The Company’s liquidity pool (Global Core Excess), which averaged $183 billion during 3Q14, remains appropriately sized to meet Goldman’s estimated liquidity needs. With regard to capital, Goldman reported an estimated Tier 1 common ratio of 10.6% at quarter end, under Basel 3 advanced approach, fully-applied. The Company also disclosed its supplementary leverage ratio of 4.9% at the parent holding company level, up from 4.5% at end-2Q14, reflecting the full impact of asset reduction in the prior quarter among other things.

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