DBRS: GS 3Q Results Down Reflecting the Challenging Environment; BS Remains Strong

Summary:
• GS reported net earnings of $1.43 billion on net revenues of $6.86 billion reflecting a more difficult macro environment that included interest rate uncertainty and global economic growth concerns, especially in China, that resulted in less customer activity and falling asset values.
• Investment Management and Financial Advisory performance remains strong.
• 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) 3Q15 earnings as sound considering the difficult operating environment during the quarter that included interest rate uncertainty and concerns over global economic growth, most notably in China. These concerns contributed to higher volatility and falling asset values, both of which reduced client activity negatively impacting quarterly results. Equity underwriting revenues fell sharply, as the difficult market conditions postponed IPOs and secondary offerings. Trading and Investing & Lending also experienced declines sequentially. Positively, Financial Advisory and Investment Management performance remain strong, and DBRS expects these businesses to continue to perform well. Moreover, the balance sheet strengthened during the quarter and remains supportive of the rating.

Financial Advisory results remain strong, albeit modestly lower than 2Q15. Evidencing its franchise strength, Goldman remains the leading global firm for both completed and announced M&A this year. Weaker issuance in both equities and debt contributed to lower overall Investment Banking (IB) results. Nonetheless, the overall IB pipeline strengthened during the quarter, which is expected to benefit future results. While down sequentially, net revenues in Investment Management for YTD15 are at record levels, as are assets under supervision. During the quarter, strong net inflows and an acquisition as Goldman continues to invest in this segment, more than offset market depreciation resulting in a modest increase in assets under supervision to $1.19 trillion.

In Institutional Client Services (ICS), Fixed Income, Currency and Commodities Client Execution (FICC) had a weak quarter with net revenues declining 9% sequentially and down 33% year-over year, reflecting the environment. Not all businesses were equally affected. Revenues were up quarter-on-quarter (QoQ) in Commodities, a business line to which Goldman remains committed. The Company noted that its exposure to trading houses is relatively limited at less than $200 million. Lower client conviction and activity also contributed to lower Equities results. Indicative of the evening out of quarterly revenue swings and diversity across Goldman’s businesses in ICS, revenues year to date were up 2% for ICS overall, as weakness in FICC was offset by strength in Equities. Lower asset values reduced Investing & Lending net revenues that were only partially offset by event-driven gains.

Expenses remain well managed with Goldman bringing down compensation and benefits to 40% of net revenues year-to-date. Following a large litigation-related expense in 2Q, Goldman incurred another $416 million in charges this quarter.

Goldman’s strong balance sheet modestly improved during the quarter with key capital metrics and global core liquid assets all trending upward. Specifically, the Company’s Common Equity Tier 1 (CET1) ratio under the Standardized approach was 12.4%, while the supplementary leverage ratio was 5.8%. Despite higher volatility, average daily VaR declined modestly during the quarter to $74 million.

DBRS, Inc. rates Goldman’s Issuer & Senior Debt at A (high) with a Stable trend.

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