DBRS Confirms Ratings of Goldman Sachs – Senior at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings for The Goldman Sachs Group Inc. (Goldman or the Company), including its Issuer & Senior Debt rating of A (high) and Short-Term Instruments rating of R-1 (middle). The trend on all long-term ratings remains Stable. These rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings confirmation reflects the resiliency of Goldman’s franchise, supported by its substantial scale and strong market positions across its diverse, global mix of businesses. This franchise strength is backed by its strong core earnings capacity that enables Goldman to generate above-peer average returns, its strong risk management and operational capabilities, its persistent culture and its consistent senior management. The current ratings level also considers the continued headwinds facing the Company, including a still challenging operating and regulatory environment, as well as Goldman’s exposure to wide ranging capital markets activities and a notable level of market risk, which support the franchise value, but elevate risk levels. With a balance sheet that is largely mark-to-market, the Company is exposed to potential large market movements and market disruptions. Goldman’s willingness to take risk where it sees commensurate reward is also factored into the current rating level.

Goldman’s franchise is supported by its top-tier positioning within the global capital markets, with trading businesses within Institutional Client Services (ICS) that are extensively diversified across products, markets and client segments. The Company maintains top positioning in its Investment Banking (IB) franchise, with a notable dominance in the Financial Advisory space that is a cornerstone of its business model. Continuing this leading position is important from a ratings perspective, as the well-entrenched IB franchise provides an entryway through which clients engage with other product and service offerings at Goldman. Goldman’s franchise also benefits from its other business segments, which add further diversity. Specifically, Investment Management (IM) contributes to the stability of overall earnings, while Investing & Lending (I&L) complements other business segments and adds important competitive capabilities, but also adds risk and volatility to the Company’s earnings.

In 2015, Goldman generated net income of $6 billion on net revenues of $34 billion, representing a return on average common equity (ROE) of 7.4%, or 11.2% excluding costs associated with the settlement with the RMBS Working Group. In the first half of 2016, the operating environment has been difficult, but still Goldman generated net income of $2.8 billion on net revenues of $14.3 billion, reflecting an above-global peer average performance.

Given its track record of adjusting to various market movements and economic cycles, DBRS views Goldman as having a strong ability to continually adjust to the evolving operating environment. Critical to Goldman’s success is its strong operational infrastructure, which supports risk management, compliance and control functions, as well as its cost-efficient execution capabilities. Also important is the Company’s persistent culture that permeates the organization, having been cultivated through Goldman’s organic growth with limited acquisitions. During a period when various market participants have been restructuring business lines, refocusing their organizations or replacing senior management, Goldman has been successful in making continuous adjustments that allow it to remain a nimble organization that is highly responsive to its client base, with a consistent senior management team.

Further underpinning the rating, Goldman has a sound financial profile. The Company continues to refine and strengthen its funding profile through the ongoing assessment of the characteristics of its diverse funding sources with those of the assets being funded. Goldman has focused its funding profile toward more stable, term funding sources, such as deposits, long-term debt, and equity. The Company also maintains a significant level of liquidity with Global Core Liquid Assets totaling $211 billion at June 30, 2016, or 24% of total assets. Goldman reported a solid level of capitalization, with a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach of 11.8%, and a Supplementary Leverage Ratio of 6.1% at 2Q16.

RATING DRIVERS
DBRS sees upward pressure on the Company’s ratings as being constrained by various factors, including the still evolving regulatory environment with its potential impact on Goldman’s franchise, as well as the Company’s business model, which generally runs with a higher level of risk than higher-rated institutions. While DBRS views Goldman as well-positioned to reap the benefits of a more substantial global economic recovery, it will remain challenged to manage a more complex, expanding organization in an evolving environment that is highlighted by regulatory change. Over the longer-term, upward ratings movement could potentially be driven by the growth of more stable, consistent revenues sources, such as Goldman’s Investment Management division, which also could enhance stability of funding through deposit growth.

Negative rating action could arise, if investor confidence is adversely impacted in a Goldman-specific scenario, which could particularly affect the Company given its sizable reliance on wholesale funding. Any indications of significant weakening in Goldman’s franchise, significant risk management deficiencies, or Goldman’s ability to generate sustainable earnings could also pressure ratings.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria - Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Roger Lister
Initial Rating Date: July 31, 1998
Most Recent Rating: June 19, 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.