GOLDMAN SACHS GROUP INC quarterly report, Q3 FY2020

Goldman Sachs Group Inc. — Q3 2020 Form 10-Q Summary

Business context and reporting period

The unaudited filing covers the three and nine months ended September 30, 2020, compared primarily with the corresponding 2019 periods. Goldman Sachs operates through Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. Results reflected recovering markets and high client activity amid continuing COVID-19 uncertainty.

Financial performance and key metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Total net revenues	$10.781 billion	$8.323 billion	$32.819 billion	$26.591 billion
Pre-tax earnings	$4.299 billion	$2.416 billion	$6.938 billion	$8.262 billion
Net earnings	$3.367 billion	$1.877 billion	$4.953 billion	$6.549 billion
Net earnings applicable to common	$3.233 billion	$1.793 billion	$4.553 billion	$6.173 billion
Diluted EPS	$8.98	$4.79	$12.65	$16.32
Return on average common equity	16.2%	9.0%	7.6%	10.4%
Efficiency ratio	57.5%	67.5%	70.3%	66.2%

Q3 net revenues rose 30%, net earnings rose 79%, and diluted EPS rose 87% year over year. Q3 pre-tax and net margins were approximately 39.9% and 31.2%, respectively.
Nine-month net revenues increased 23%, but net earnings declined 24% and diluted EPS declined 22%, largely because of litigation and regulatory provisions and higher credit-loss provisions. Nine-month pre-tax and net margins were approximately 21.1% and 15.1%.
Q3 revenue strength was broad: Global Markets generated $4.553 billion, Asset Management $2.768 billion, Investment Banking $1.969 billion, and Consumer & Wealth Management $1.491 billion.
Q3 market-making revenue increased to $3.327 billion from $2.476 billion; nine-month market-making revenue increased to $12.796 billion from $7.678 billion.
Q3 provision for credit losses was $278 million, down from $291 million. Nine-month provision increased to $2.805 billion from $729 million. The allowance for loan losses rose to $3.714 billion from $1.441 billion at December 31, 2019.

Cash flow, balance sheet, debt and liquidity

Cash and cash equivalents were $153.201 billion at September 30, 2020, up from $133.546 billion at year-end 2019.
For the nine months, operating cash flow was negative $29.742 billion and investing cash flow was negative $25.433 billion; financing cash flow was positive $74.830 billion. The net increase in cash was $19.655 billion.
Total assets increased to $1.132 trillion from $992.968 billion. Total liabilities increased to $1.039 trillion from $902.703 billion, and shareholders’ equity increased to $92.650 billion from $90.265 billion.
Deposits increased to $261.234 billion from $190.019 billion. Unsecured short-term borrowings were $48.028 billion and unsecured long-term borrowings were $213.936 billion, for total unsecured borrowings of $261.964 billion.
The firm reported average global core liquid assets of $301.565 billion for Q3 and an average daily liquidity coverage ratio of 130%, above the 100% minimum.
September regulatory ratios included a 14.5% standardized CET1 ratio, a 12.9% advanced CET1 ratio, a 7.8% Tier 1 leverage ratio, and a 6.8% supplementary leverage ratio. The firm’s target standardized CET1 ratio over the medium term was 13.0% to 13.5%, including management buffers.

Material changes versus comparable periods

Global Markets benefited from strong client activity, elevated volatility, tighter credit spreads, and improved trading conditions. Nine-month segment net revenues rose 49% to $16.892 billion.
Investment Banking underwriting improved substantially, especially equity underwriting, while completed mergers and acquisitions activity declined. Nine-month segment net revenues increased 23% to $6.810 billion, but pre-tax earnings fell 89% to $258 million because of credit provisions and litigation costs.
Asset Management had a strong Q3, with net revenues up 71% to $2.768 billion, driven by public-equity gains and tighter credit spreads. For nine months, however, net revenues declined 20% to $4.773 billion because of losses and weaker results in debt and private-equity investments earlier in the year.
Consumer & Wealth Management Q3 net revenues increased 13% to $1.491 billion. Nine-month net revenues rose 14%, but pre-tax earnings fell 50% to $127 million as expenses and credit provisions increased.
Firmwide assets under supervision increased to $2.036 trillion from $1.762 trillion a year earlier, although Q3 Asset Management net flows were negative $72 billion, principally from liquidity products.
The firm adopted CECL in January 2020, reducing retained earnings by $638 million after tax and increasing the initial allowance for credit losses. The allowance reflected COVID-19 economic forecasts weighted most heavily toward baseline and adverse scenarios.

Guidance, outlook, commentary and unusual items

The filing does not provide formal earnings guidance. Management expected results to remain sensitive to COVID-19 developments, market volatility, client activity, underwriting and M&A volumes, asset prices, credit spreads, borrower credit quality, and the availability of fiscal support.
Management reported that the economic environment recovered during Q3, but warned that rising infections, renewed lockdowns, uncertain U.S. fiscal stimulus, weaker economic conditions, or declining market activity could reduce revenues and increase credit losses.
Stock repurchases were suspended through Q3 and extended through Q4 2020 under Federal Reserve requirements. The firm continued common and preferred dividends, subject to regulatory constraints.
Subsequent to the earnings release, the Form 10-Q recorded an additional $250 million Q3 provision for litigation and regulatory proceedings related to 1MDB. This reduced Q3 pre-tax earnings and net earnings applicable to common by $250 million and reduced basic and diluted EPS by $0.70, to $9.07 and $8.98, respectively.
On October 22, 2020, the firm announced additional 1MDB settlements involving approximately $2.6 billion of penalties after credits, in addition to the earlier $2.5 billion payment to Malaysia and a $1.4 billion asset-recovery guarantee. Total 1MDB-related payments were approximately $5.1 billion.
Management estimated the upper end of reasonably possible aggregate litigation losses at approximately $0.9 billion in excess of recorded reserves for matters where a range could be estimated. Many investigations and proceedings remained too uncertain to quantify.
COVID-19 relief programs covered approximately $960 million of corporate loans, $290 million of commercial real estate loans, and approximately $300 million of installment and credit card loans at September 30, 2020. Total loans under forbearance or relief programs represented approximately 1% of total loans.
Other ongoing considerations included Brexit, LIBOR and other IBOR replacement, cyber and operational risks, regulatory capital changes, and potential restrictions on transfers from regulated subsidiaries.

Most important facts for investors to verify

Whether the unusually strong Q3 Global Markets and public-equity results persist as volatility and government support normalize.
Future credit-loss trends, particularly in corporate, commercial real estate, consumer credit card, oil and gas, gaming and lodging, and airline exposures.
The ultimate financial, regulatory and reputational impact of the 1MDB settlements, asset-recovery guarantee, and related remediation requirements.
Whether litigation and regulatory provisions remain elevated and how they affect full-year earnings, margins, and capital distributions.
The sustainability and composition of the $2.036 trillion of assets under supervision, including the shift toward lower-fee liquidity products and Q3 Asset Management outflows.
The effect of the Federal Reserve’s capital-distribution restrictions, the stressed capital buffer, a potentially higher G-SIB surcharge, and the timing of share-repurchase resumption.
The company’s ability to maintain liquidity and funding if deposits decline, collateral requirements increase, credit ratings deteriorate, or market conditions worsen.