Goldman Sachs Group Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
The Goldman Sachs Group is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and individuals. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016, and the financial position as of March 31, 2017 compared with December 31, 2016.
The firm reports four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. Management described the quarter as favorable for underwriting and principal investing, while low market volatility constrained client activity in market making.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $8.026 billion | $6.338 billion | Up 27% |
| Pre-tax earnings | $2.539 billion | $1.576 billion | Up 61% |
| Net earnings | $2.255 billion | $1.135 billion | Up 99% |
| Net earnings applicable to common shareholders | $2.162 billion | $1.200 billion | Up 80% |
| Diluted EPS | $5.15 | $2.68 | Up 92% |
| Operating expenses | $5.487 billion | $4.762 billion | Up 15% |
| Net interest income | $516 million | $883 million | Down 42% |
Net earnings margin was approximately 28.1% and pre-tax margin was approximately 31.6%, based on reported net revenues. Compensation and benefits were $3.291 billion, or 41.0% of net revenues, compared with 42.0% in the prior-year quarter. Net provisions for litigation and regulatory proceedings were $139 million, compared with $77 million.
| Revenue category | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Investment banking | $1.703 billion | $1.463 billion | Up 16% |
| Investment management | $1.397 billion | $1.262 billion | Up 11% |
| Commissions and fees | $771 million | $917 million | Down 16% |
| Market making | $2.418 billion | $1.862 billion | Up 30% |
| Other principal transactions | $1.221 billion | $(49) million | Material improvement |
Segment performance
- Investment Banking: Net revenues increased 16% to $1.703 billion and pre-tax earnings increased 4% to $728 million. Underwriting revenue rose 37% to $947 million, while financial advisory revenue declined 2% to $756 million. M&A volumes declined, but equity and debt underwriting activity improved.
- Institutional Client Services: Net revenues declined 2% to $3.359 billion and pre-tax earnings declined 20% to $815 million. FICC Client Execution was essentially unchanged at $1.685 billion; Equities declined 6% to $1.674 billion, primarily due to lower commissions and fees.
- Investing & Lending: Net revenues increased to $1.464 billion from $87 million, and the segment generated pre-tax earnings of $714 million versus a $356 million pre-tax loss. Results benefited from gains in private and public equities, debt investments and loans.
- Investment Management: Net revenues increased 12% to $1.500 billion and pre-tax earnings increased 35% to $282 million. Assets under supervision were $1.373 trillion at quarter-end, up from $1.287 trillion a year earlier, but down from $1.379 trillion at December 31, 2016 because of $30 billion of net outflows, primarily from liquidity products.
Cash flow, balance sheet, debt and liquidity
- Net cash used in operating activities was $3.364 billion, compared with $2.542 billion used in Q1 2016. Net cash used in investing activities was $1.573 billion, compared with $3.140 billion used in the prior-year quarter. Net cash provided by financing activities was $6.261 billion, compared with $10.194 billion.
- Cash and cash equivalents increased to $123.035 billion from $121.711 billion at year-end 2016.
- Total assets increased to $894.069 billion from $860.165 billion. Total liabilities increased to $807.152 billion from $773.272 billion. Shareholders’ equity was $86.917 billion, essentially unchanged from $86.893 billion.
- Unsecured long-term borrowings increased to $199.370 billion from $189.086 billion. Unsecured short-term borrowings declined to $35.872 billion from $39.265 billion. Total long-term borrowings, including other secured financings, were $210.497 billion.
- Deposits increased to $127.929 billion from $124.098 billion. Collateralized financings increased to $120.607 billion from $100.863 billion, primarily because repurchase agreements increased.
- Global Core Liquid Assets were $222.497 billion at March 31, 2017, compared with $226.066 billion at year-end 2016. Management stated that the firm’s average liquidity coverage ratio exceeded the regulatory minimum during the quarter.
- Book value per common share was $184.98, up from $182.47 at year-end. Tangible book value per common share was $175.05, up from $172.60.
Capital, accounting and unusual items
- Basel III Advanced CET1, Tier 1 and total capital ratios were 12.9%, 14.8% and 17.5%, respectively, compared with 13.1%, 15.0% and 17.8% at December 31, 2016. The Tier 1 leverage ratio was 9.5%, compared with 9.4%.
- The firm adopted ASU 2016-09 for employee share-based payment accounting. RSU deliveries and option exercises reduced the tax provision by $475 million, increased diluted EPS by $1.13 and increased annualized return on average common equity by 2.5 percentage points.
- The effective tax rate was 11.2%, compared with 28.2% for full-year 2016, largely because of the share-based compensation tax benefit. This low rate is not necessarily indicative of future periods.
- Other comprehensive loss was $154 million, including a $139 million after-tax debt valuation adjustment loss.
- The firm repurchased 6.2 million common shares for $1.500 billion during the quarter. On April 17, 2017, the board increased the quarterly common dividend from $0.65 to $0.75 per share and authorized an additional 50 million shares for repurchase, subject to Federal Reserve non-objection.
Outlook, risks and contingencies
The filing does not provide quantitative earnings or revenue guidance. Management expects results to remain sensitive to market volatility, client activity, asset prices, credit spreads, interest rates, funding conditions and the level of investment banking activity.
- Low volatility and macroeconomic uncertainty could reduce market-making and investment banking revenues. Declines in equity prices, weaker corporate performance or wider credit spreads could adversely affect Investing & Lending results.
- Investment Management revenue could be pressured by lower asset prices, continued withdrawals, or shifts toward lower-fee products. Liquidity product outflows were $35 billion in the quarter.
- Legal and regulatory expenses remain elevated. Management estimated the upper end of reasonably possible aggregate loss for certain matters at approximately $1.8 billion in excess of aggregate reserves, while stating that many investigations and proceedings cannot currently be quantified.
- Mortgage-related contingencies remain uncertain, including potential repurchase claims. The firm stated it could not meaningfully estimate that exposure.
- Other disclosed matters include mortgage-related litigation, SunEdison bankruptcy litigation, foreign-exchange and interest-rate-swap antitrust matters, securities litigation, commodities-related litigation, employment matters and regulatory investigations, including matters involving 1MDB and trading practices.
- Derivative guarantees had a total maximum payout or notional amount of $1.063 trillion, although the filing states that notional amounts do not represent anticipated losses. A two-notch credit-rating downgrade could have required approximately $1.880 billion of additional collateral or termination payments as of March 31, 2017.
- Total commitments were $189.111 billion, including $115.062 billion of commitments to extend credit. Maximum exposure to loss from nonconsolidated VIEs was $15.473 billion, excluding mitigating offsets.
- The Volcker Rule, Basel III capital requirements, TLAC requirements, margin rules for uncleared swaps and proposed NSFR requirements may affect capital, liquidity, funding and business practices. The firm expects to comply with applicable future requirements, but regulatory interpretations may change.
Most important facts for investors to verify
- Determine how much of the Q1 earnings increase was recurring versus driven by the $475 million share-based compensation tax benefit and unusually strong Investing & Lending gains.
- Monitor whether the 11.2% effective tax rate normalizes in subsequent quarters and assess EPS excluding the $1.13 share-based compensation benefit.
- Evaluate sustainability of market-making and principal transaction revenues in a low-volatility environment and compare future results with the Q1 2017 benchmark.
- Track liquidity products, total assets under supervision, fee rates and net flows in Investment Management.
- Review litigation reserves and the approximately $1.8 billion estimated reasonably possible loss above reserves, including unquantified mortgage-related and regulatory matters.
- Assess the effect of rising debt, repurchase financing and future borrowing maturities on funding costs and liquidity.
- Compare transitional and fully phased-in capital ratios with future regulatory minimums, including the expected 2019 buffers and the 2018 supplementary leverage requirement.
- Confirm the regulatory status of planned dividends and share repurchases, including Federal Reserve approval and restrictions applicable to regulated subsidiaries.