DBRS: Goldman’s 1Q Earnings Demonstrate Diversity Across All Businesses

Summary:
• Strong net income in 1Q15 of $2.7 billion reflected revenue diversity and expense control, along with another standout quarter in Financial Advisory
• Financial profile continues to improve with a fully-loaded CET1 ratio of 11.8% (advanced approach) / 10.6% (standardized approach) providing GS with a good-sized buffer over regulatory minimums
• 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) 1Q15 earnings as continuing to demonstrate the strength of its diverse franchise, with revenue improvement in all segments quarter-on-quarter (QoQ) and year-over-year (YoY). While expenses ticked up sequentially with higher revenues, the Company’s cost/income ratio declined 5 percentage points YoY to 63% reflecting the continued focus on cost savings initiatives and a lower compensation accrual. Positive operating leverage helped the bottom line with net earnings to common of $2.7 billion (up 41% YoY), on net revenues of $10.6 billion (up 14% YoY).

Quarterly trends show Goldman’s sustained strength in Financial Advisory and Equity underwriting, offsetting some weakness in Debt underwriting. Financial Advisory revenues of $961 million remain well above its peer group and demonstrate the Company’s well-entrenched, long-standing relationships with clients. Equities results were generally strong with higher client activity, particularly in derivatives. In Fixed Income, Currency and Commodities Execution (FICC), results YoY were mixed, though strength in macro businesses such as interest rates and currencies more than offset some weakness in credit products. While revenues ebb and flow among its trading businesses, Goldman has broadly demonstrated its success across these businesses, highlighting the depth and diversity of its franchise, and its ability to serve its clients across products and geographies.

Investing & Lending (I&L) continues to be an important source of revenues for Goldman, generating net revenues of $1.7 billion in the quarter, in line with longer-term historical trends despite the harvesting of investments in advance of Volcker rule restrictions. Of I&L’s approximately $80 billion in assets, the Company reported that only about $8 billion needs to roll off in order to be in compliance with the new rules in advance of the 2017 deadline.

Investment Management (IM) remains a strategic focus for the Company, which DBRS views positively from a ratings perspective, as it contributes to the diversity of the products and customers in Goldman’s franchise and enhances revenue stability. IM net revenues of $1.6 billion have shown slow improvement from 2012 levels, but still contributes to 15% of total consolidated net revenues.

DBRS notes Goldman’s willingness to deploy capital to seize risk-adjusted opportunities, underscoring the importance of a conservative capital buffer over regulatory minimums. Goldman’s financial profile improved further in the quarter, with an increase in its fully-loaded Common Equity Tier 1 (CET1) ratio under the advanced approach to 11.8% in the quarter, up from 11.1% in the prior quarter. The Company also disclosed a 30 bps increase in its supplementary leverage ratio to 5.3% at 1Q15.

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