DBRS: GS 2Q Underlying Earnings Solid; FI Trading Weakness Balanced by IB and IM Strength

Summary:
• Solid underlying net income in 2Q15 of $2.3 billion reflected weakness in fixed income trading businesses balanced by strength in Investment Banking and Investment Management.
• Reported net income of $916 million impacted by sizable litigation charge of $1.45 billion for mortgage-related matters.
• Balance sheet remains strong with phased-in CET1 ratio of 12.5% (advanced approach) and supplementary leverage ratio of 5.7%.
• 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) 2Q15 earnings as solid, backed by franchise diversity as weakness in fixed income trading businesses was balanced by strength in Investment Banking (IB) and Investment Management (IM). Underlying net income of $2.3 billion on net revenues of $9.1 billion remain substantial. Overall trends point to continued franchise strength across wide-ranging regions and products, supporting the current rating level. Furthermore, a strong balance sheet leaves Goldman well-positioned to cope with future regulatory change, including a potential increase to the G-SIFI buffer, as well as to seize opportunities and gain wallet share.

Within IB, quarterly trends demonstrate Goldman’s sustained strength in Financial Advisory; net revenues of $821 million remain well above the peer group. Underwriting revenues were also strong in the quarter, with linkages to the advisory business. Equity underwriting increased 12% sequentially due to an increase in IPOs, while debt underwriting net revenues were up a notable 47% driven by leveraged finance activity. Strength in IM was also evident with near-record revenues of $1.6 billion in the quarter. Trends in IM are positive with revenues continuing a generally upward trend since 2013. Increased assets under supervision (which reached a record $1.2 trillion) are contributing to the success in this business, particularly given the growth in long-term fee-based products.

As generally expected, 2Q15 trading results were weaker sequentially off a seasonally strong 1Q. Fixed Income, Currency and Commodities Client Execution (FICC) net revenues were notably weaker quarter-on-quarter (QoQ) and year-on-year (YoY) as the market-making environment remained challenging. Sequentially, FICC revenues were negatively impacted to a greater extent than peers, likely due to business mix. While Goldman maintains a diverse set of FICC businesses, certain universal banking peers more notably benefitted from strength in macro products given their scale in businesses such as FX and rates. While Equities net revenues also declined sequentially, this was off of a seasonally strong 1Q, as activity levels remained high but not as high as in the prior quarter. As a strong player in Equities, net revenues of $2.0 billion in 2Q15 remain at the high end of the peer range.

Goldman’s balance sheet remains strong with a phased-in Common Equity Tier 1 (CET1) ratio under the advanced approach of 12.5% and a supplementary leverage ratio to 5.7% at 2Q15.

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