DBRS: Goldman’s 4Q Earnings Strong Despite Challenging Environment

Summary:
• Strong net income of $2.0 billion, supported by significant revenue growth in advisory and equity trading, helping to offset weakness in FICC
• Equity trading was a standout in the quarter, with net revenues of $1.9 billion, contributing to 25% of total net revenues
• DBRS, Inc. rates Goldman’s Issuer & Senior Debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views The Goldman Sachs Group, Inc.’s (Goldman, GS or the Company) 4Q14 earnings as strong, supported by solid net revenues across businesses, products and regions, and a continued focus on expense control. Importantly, GS continues to deliver solid returns through the cycle, supported by the breadth and depth of its global franchise, despite increasing levels of required capital.

Net revenues of $7.7 billion were supported by notable strength in Financial Advisory, with record post-crisis net revenues, and Equities, which increased by a significant 21% QoQ. Goldman reported its strongest pipeline since 2007, a good indicator of future investment banking revenues. The continuing growth in net revenues in Investment Management also adds stability to Goldman’s revenues. These strengths helped to offset weakness in Fixed Income, Currency and Commodities Client Execution (FICC), where revenues plunged 44% QoQ with declines across most businesses; the exception was commodities where revenues increased with stronger client activity. While FX decreased from a very robust 3Q, revenues remained at strong levels with high volatility and solid client activity. Goldman’s success in 2014 in growing revenues in businesses where it is focused was important in helping offset reductions due to the sale or exit of businesses and kept revenues largely flat to 2013.

Expense control remains an important lever for sustaining overall returns, as Goldman, like peers, adjusts to the increasing regulatory and legislative changes, while continuing to invest in the franchise. DBRS views GS as having an advantage over some larger universal banking peers from an efficiency perspective, given its strong, scalable technology system, as well as its ability to adjust costs quickly with a high proportion of variable compensation. In 2014, compensation/net revenues stood at a relatively low 36.8% versus historical highs of close to 50%.

Regulatory requirements continue to be a focus, as the updated list of G-SIB capital buffers was announced in November 2014. With a 1.5% buffer requirement over the regulatory minimum, Goldman currently has a Basel 3 CET1 minimum requirement of 8.5% by January 1, 2019. While GS’s fully-loaded CET1 ratio under the advanced approach of 11.1% currently exceeds the requirement well in advance of the 2019 deadline, DBRS notes that the US interpretation of the rules is still being adjusted and the Company’s requirement could increase further. DBRS views Goldman as having the ability to adjust by generating capital organically, but generating targeted returns on capital have the potential to become a greater challenge and competitive disadvantage, if buffers are increased further on a selective basis.

The Company also disclosed its supplementary leverage ratio of 5.0% at-end 4Q14 at the parent holding company level, meeting the elevated leverage ratio requirement of 5% well in advance of the January 2018 deadline.

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