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

DBRS, Inc. (DBRS) confirmed the ratings for The Goldman Sachs Group, Inc. (Goldman or the Company), including its Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable. Concurrently, DBRS upgraded Goldman’s Intrinsic Assessment (IA) to AA (low) from A (high), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating, which was previously positioned in line with its IA, is now positioned one notch below the IA, reflecting the structural subordination of the holding company (the Parent).

KEY RATING CONSIDERATIONS
The ratings confirmation reflects Goldman’s leading market positions across all its major businesses, as well as its preeminent risk management, global-peer-leading returns through the cycle and robust balance sheet fundamentals. The ratings also consider Goldman’s exposure to a wide range of capital markets activities that are integral to the value of its franchise, but also contribute a notable level of market risk that characterizes the Company’s risk profile.

In upgrading the IA to AA (low), DBRS considers the resiliency of Goldman’s fundamental strengths, including its competitive positioning and sustained earnings generation capacity, which are comparable to other AA (low)-rated financial institutions. At the same time, the ratings now incorporate a one notch differential between Goldman’s main operating entities reflected in its IA and its holding company. DBRS views this differential as appropriate, considering the significant progress made toward resolution planning, including Goldman’s newly established funding intermediate holding company, which further supports the likely outcome of Parent company debt obligations in the event of a wind-down. The differential also considers the continued growth of bank-level funding, which now represents a more meaningful portion of the Company’s funding stack.

RATING DRIVERS
DBRS views Goldman’s rating as well placed at the current level. Over the long term, the Company’s successful execution of its strategic initiatives, combined with further growth of more stable, recurring revenues, while also maintaining its strong balance sheet fundamentals, would have positive rating implications. Conversely, indications of a significant weakening in Goldman’s franchise or risk management or sustained lower-than-peer financial performance would likely pressure the ratings.

RATING RATIONALE
Goldman’s franchise is underpinned by its top-tier market positions globally within investment banking and sales & trading businesses. Specifically, the Company maintains a formidable Investment Banking (IB) franchise, which includes a dominant Financial Advisory business, which generates significantly higher fees than peers, as well as a global-leading Equity Underwriting platform and a significantly improved positioning within its Debt Underwriting businesses. Importantly, Goldman’s strong relationships with its investment banking clients provide recurring advisory and underwriting fees, as well as generating additional follow-on business throughout the rest of the firm.

Goldman has been a long-standing leading global player within Fixed Income, Currency and Commodities (FICC) and Equities. DBRS notes these businesses contribute a substantial amount of revenue even during adverse market conditions, although results can vary significantly at times.

Goldman’s franchise also benefits from its other business segments, which add further diversity. Specifically, Investment Management (IM) comprises a global asset management business that is the 10th largest globally, as well as a strong private wealth business, both of which contribute to the stability of the Company’s earnings. Goldman’s Investing & Lending (I&L) segment complements other businesses throughout the firm. It provides important competitive capabilities, but also adds risk and volatility to the Company’s bottom line.

For 2017, Goldman generated solid results, despite the challenging operating environment for the Company’s sales and trading businesses, particularly in FICC. Excluding the impact of recent U.S. tax changes, Goldman’s profitability metrics remained in the top tier of its global peer group (adjusted ROE of 10.8% in 2017), as strength in IB, I&L and IM more than offset weaker market making results. Additionally, continued disciplined expense control also contributed to these bottom line results, with the 2017 compensation accrual coming in at 37.0%, lower than the historical average and down from 38.1% for 2016.

More recently, Goldman generated $19.4 billion of net revenues during the first half of 2018, up 22% compared to the prior year period. Results were strong across its businesses, led by significantly improved trading results, which benefited from a more favorable, albeit still challenging, operating environment. Goldman continues to dominate in Financial Advisory, generating net revenues considerably above peers, while Underwriting revenues remained strong. Notably, Goldman’s investment banking backlog has reached record levels, portending continued strength during the back half of the year. However, non-compensation expenses were particularly elevated in 1H18 primarily due to higher litigation costs and technology-related investments, partially offset by a lower compensation accrual (39.0% of net revenues in 1H18 versus 41.0% in 1H17). Overall, Goldman reported its highest return on equity in nine years (14.1% in 1H18).

Goldman’s balance sheet fundamentals remain robust, providing key support to the rating. While the Company has a higher reliance on wholesale funding than its global peer group, Goldman dedicates significant time and resources to aligning the characteristics of its funding sources with those of the assets being funded. DBRS notes that funding sources for less liquid assets are focused on those that are stable and term, such as deposits, long-term debt and equity, while shorter-term assets are funded with committed lines and other secured borrowings for better alignment.

The Company also maintains a substantial amount of liquidity, with its global core liquid assets averaging $237 billion in 2Q18, representing roughly 25% of total assets. Further, Goldman continues to build its capital position, with its Advanced CET1 ratio improving by approximately 80 basis points during 1H18 to 11.5%, as Goldman rebuilds its capital back to levels prior to the decline due to the impact of U.S. tax changes at the end of 2017.

The Grid Summary Grades for Goldman are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalization – Strong.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (July 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents, SNL Financial, Dealogic and Coalition. 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: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 29 October 1999
Most Recent Rating Update: 2 August 2017

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 in connection with this rating action.

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