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

DBRS, Inc. (DBRS) confirmed the ratings of The Goldman Sachs Group, Inc. (Goldman or the Company), including the Company’s Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for Goldman is AA (low), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating is positioned one notch below the IA.

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 strong 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.

RATING DRIVERS
Successful execution of the Company’s strategic initiatives, while maintaining strong revenues and balance sheet fundamentals could have positive rating implications.

Sustained lower-than-peer financial performance or a sustained deterioration of credit fundamentals would likely pressure the ratings. Operational missteps related to the Company’s strategic initiatives that result in significant franchise weakening or risk management challenges could also pressure the ratings.

RATING RATIONALE
In 2018, Goldman generated $36.6 billion of net revenues and $10.5 billion of net income. Net revenues were up 12% as compared to 2017, with increases across all segments. In addition, Goldman’s 13.3% full year return on equity (ROE) was among the highest of the global systemically important banks (G-SIBs) and highest for Goldman since 2009. While bottom line results included a significant increase in litigation and regulatory expenses, primarily reflecting 1MDB-related matters, the Company easily absorbed these increased costs through its substantial earnings.

Goldman is cooperating with all governmental and regulatory bodies regarding the ongoing 1MDB investigations and is performing a thorough review of its compliance and control processes. While DBRS expects that any related monetary penalty would be absorbable through previous reserves or earnings, more concerning to DBRS is the impact on Goldman’s reputation and the potential for more severe consequences to its franchise.

More recently, Goldman reported a ROE of 11.1% in 1Q19. While this quarter’s profitability metrics trailed recent periods, DBRS considers the results solid given the mixed operating environment for capital markets businesses, as well as the significant amount of investments and strategic initiatives ongoing across the firm.

Goldman has historically been successful in adapting to evolving operating conditions and sees the Company’s strategic pivot to more traditional bank activities as a credit positive. While slower to embrace the bank business model, DBRS expects Goldman will achieve most of its strategic objectives given its strong operational infrastructure, top-notch talent and persistent culture that permeates the organization, having been cultivated through the Company’s organic growth with limited acquisitions. Nonetheless, DBRS also recognizes the considerable amount of operational risks associated with the execution of a large-scale strategic evolution.

Importantly, Goldman’s core franchises remain very strong, underpinned by its powerful Investment Banking (IB) franchise, which includes a dominant Financial Advisory business that is consistently top-ranked in worldwide completed M&A, a global-leading Equity Underwriting platform, as well as a significantly improved Debt Underwriting business. Notably, 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.

The Company remains one of the leading global players within Fixed Income, Currency and Commodities (FICC) and Equities. While these businesses are capital intensive and contribute a notable amount of market risk and revenue volatility, they can still generate a substantial amount of revenue even during adverse market conditions. Providing diversification, Goldman’s Investment Management (IM) segment comprises an asset management business that is the 10th largest globally and a strong and expanding private wealth business, both of which contribute stability to the bottom line.

Goldman’s sound financial profile further supports the rating. DBRS views favorably the Company’s efforts to further diversify its funding profile toward more stable sources, including continuing to grow its deposit base. Additionally, Goldman continues to maintain a highly liquid balance sheet, with global core liquid assets averaging $234 billion in 1Q19, representing roughly 25% of total assets. Goldman’s Advanced Common Equity Tier 1 (CET1) ratio of 13.4% at the end of 1Q19 was among the highest of the global peer group.

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 Organisations (June 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, while the “DBRS Criteria: Guarantees and Other Forms of Support” was used to rate the subsidiary guaranteed by the Issuer.

The last rating action on this issuer took place on August 6, 2018.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

For more information on this credit or on this industry, visit www.dbrs.com.

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