Goldman Sachs Group Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
The Goldman Sachs Group, Inc. is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and individuals. The filing covers the unaudited quarter ended March 31, 2018, with comparison to the quarter ended March 31, 2017 and balance-sheet comparison to December 31, 2017. The statements were prepared under U.S. GAAP and reviewed by PricewaterhouseCoopers LLP.
The firm reports four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $10.04 billion | $8.03 billion | Up 25% |
| Pre-tax earnings | $3.42 billion | $2.54 billion | Up 35% |
| Net earnings | $2.83 billion | $2.26 billion | Up 26% |
| Net earnings applicable to common shareholders | $2.74 billion | $2.16 billion | Up 27% |
| Diluted EPS | $6.95 | $5.15 | Up 35% |
| Annualized ROE | 15.4% | 11.4% | Up 4.0 points |
| Operating expenses | $6.62 billion | $5.49 billion | Up 21% |
| Compensation-to-revenue ratio | 41.0% | 41.0% | Unchanged |
| Dividends declared per common share | $0.75 | $0.65 | Up 15% |
Approximate margins were 34.1% pre-tax and 28.2% net earnings in Q1 2018, compared with approximately 31.6% and 28.1%, respectively, in Q1 2017.
Revenue and segment performance
| Segment | Q1 2018 net revenues | Q1 2017 | Q1 2018 pre-tax earnings |
|---|---|---|---|
| Investment Banking | $1.79 billion | $1.70 billion | $783 million |
| Institutional Client Services | $4.39 billion | $3.36 billion | $1.23 billion |
| Investing & Lending | $2.09 billion | $1.46 billion | $1.06 billion |
| Investment Management | $1.77 billion | $1.50 billion | $346 million |
- Market making revenue increased 33% to $3.20 billion, supported by stronger equities, commodities, interest-rate, currency and credit results, partly offset by lower mortgage revenue.
- Other principal transactions revenue increased 33% to $1.62 billion, primarily reflecting gains from private equity investments and company-specific events.
- Net interest income increased 78% to $918 million as higher rates, larger average loan balances and higher yields increased interest income; higher funding and deposit costs partially offset the benefit.
- Investment banking revenue rose 5%: underwriting increased 27%, while financial advisory declined 22% because of lower completed M&A activity.
- Investment management revenue rose 17%, reflecting higher average assets under supervision, incentive fees and transaction revenues. Assets under supervision were $1.50 trillion at quarter-end, including $1.16 trillion of long-term assets.
Cash flow, balance sheet, debt and liquidity
- Total assets were $973.54 billion at March 31, 2018, up $56.76 billion from year-end 2017. Total liabilities were $889.96 billion and shareholders’ equity was $83.58 billion.
- Cash and cash equivalents increased to $120.50 billion from $110.05 billion. Cash segregated for regulatory and other purposes was $24.96 billion.
- Operating cash flow was negative $964 million, compared with negative $3.39 billion in Q1 2017. Investing cash flow was negative $9.21 billion, primarily due to loan growth, investments and capital expenditures. Financing cash flow was positive $20.63 billion, primarily from long-term debt issuance and higher deposits.
- Loans receivable increased to $71.70 billion from $65.93 billion. The allowance for loan losses was $764 million; Marcus loans increased to $2.38 billion.
- Deposits increased to $150.94 billion from $138.60 billion, including $20.31 billion of Marcus deposits and $38.22 billion of brokered certificates of deposit.
- Unsecured short-term borrowings were $47.76 billion and unsecured long-term borrowings were $225.90 billion. Total long-term borrowings, including secured financings, were $236.67 billion.
- The firm’s average Global Core Liquid Assets were $229.03 billion. Average daily liquidity coverage ratio was 129%, above the 100% minimum.
- Basel III Advanced CET1, Tier 1 and total capital ratios were 11.1%, 12.8% and 15.1%, respectively. The supplementary leverage ratio was 5.7% versus a 5.0% minimum.
Material changes versus comparable periods
- Results benefited from higher market volatility and client engagement after a relatively low-volatility 2017, as well as rising interest rates and stronger equity and commodity activity.
- Operating expenses grew more slowly than revenue, improving pre-tax profitability, although compensation expense increased 25% to $4.12 billion and non-compensation expense increased 14% to $2.50 billion.
- Staff increased to 37,300 from 34,100 at the end of Q1 2017.
- Common shares outstanding declined year over year, contributing to EPS growth. The firm repurchased approximately 3.0 million common shares for $800 million during the quarter.
- Shareholders’ equity increased from $82.24 billion at year-end 2017, while the reported leverage ratio increased to 11.6x from 11.1x.
- The firm adopted ASC 606 in January 2018. Adoption reduced retained earnings by $53 million and increased both net revenues and non-compensation expenses by approximately $50 million in Q1 2018. Certain revenue and expense classifications also changed.
- The firm recorded a $270 million after-tax debt valuation adjustment gain in other comprehensive income, compared with a $139 million loss in Q1 2017. This non-cash item materially affected comprehensive income.
Guidance, outlook, commentary and risks
- Management stated that future revenue remains sensitive to market-making activity, volatility, liquidity, asset prices, investment banking volumes and assets under supervision.
- Investment banking backlog increased from December 2017, primarily due to potential advisory transactions, but management cautioned that transactions may be delayed, modified or cancelled.
- Management did not expect to execute common-share repurchases in Q2 2018, primarily because of the Tax Legislation’s effect on capital. Subject to Federal Reserve non-objection and capital conditions, repurchases were expected to resume in Q3, with approximately $5 billion to $6 billion targeted per annual CCAR cycle.
- On April 16, 2018, the board increased the quarterly common dividend to $0.80 per share from $0.75.
- Management described risks from market, liquidity, credit, operational, model, legal, compliance, conduct, regulatory and reputational exposures. Average daily VaR rose to $73 million from $64 million in Q1 2017; period-end VaR was $79 million.
- Legal and regulatory matters remain significant. Management estimated the upper end of reasonably possible aggregate loss for matters where a range could be estimated at approximately $1.5 billion above aggregate reserves. Mortgage-related repurchase exposure and various investigations generally could not be meaningfully estimated.
- The filing identifies continuing investigations and litigation involving mortgage activities, foreign exchange, interest-rate swaps, credit default swaps, commodities, U.S. Treasury securities, underwriting, employment practices and 1MDB-related matters.
- Moody’s changed the outlook for GS Bank USA, GSIB and GSI from stable to negative during Q1 2018; Group Inc.’s listed ratings outlook remained stable.
- The firm expects a gross balance-sheet increase of approximately $2 billion when the new lease accounting standard becomes effective in 2019. The filing also discusses future CECL adoption and the potential for earlier credit-loss recognition.
Most important facts for investors to verify
- Whether elevated market-making and private-equity gains are sustainable or reflect favorable, potentially volatile market conditions.
- The composition, credit quality and growth of the $71.70 billion loan portfolio, $128.01 billion of lending commitments and Marcus consumer-loan book.
- The effect of rising rates, deposit costs, funding spreads and the $225.90 billion unsecured long-term borrowing balance on future net interest income and liquidity.
- The firm’s ability to resume planned share repurchases while maintaining regulatory capital buffers and meeting Federal Reserve requirements.
- Developments in the approximately $1.5 billion excess reasonably possible litigation-loss estimate, mortgage repurchase exposure and investigations that management cannot currently quantify.
- The impact of ASC 606 presentation changes, Tax Legislation estimates and future CECL and lease-accounting adoption on comparability and capital.
- Whether the 129% average LCR, $229.03 billion of average GCLA and 11.1% Basel III Advanced CET1 ratio remain adequate under higher volatility or a ratings downgrade.