Goldman Sachs Group Inc. 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. The firm had 34,400 staff, offices in more than 30 countries, generated 40% of net revenues outside the Americas, and reported under U.S. GAAP.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | $30.61 billion | $33.82 billion | Down 9% |
| Pre-tax earnings | $10.30 billion | $8.78 billion | Up 17% |
| Net earnings | $7.40 billion | $6.08 billion | Up 22% |
| Net earnings applicable to common shareholders | $7.09 billion | $5.57 billion | Up 27% |
| Diluted EPS | $16.29 | $12.14 | Up 34% |
| Return on average common equity | 9.4% | 7.4% | Up 2.0 percentage points |
| Operating expenses | $20.30 billion | $25.04 billion | Down 19% |
| Effective tax rate | 28.2% | 30.7% | Down 2.5 percentage points |
Calculated consolidated pre-tax margin was approximately 33.7% in 2016 versus 26.0% in 2015; net margin was approximately 24.2% versus 18.0%.
- Net interest income declined 16% to $2.59 billion as interest expense increased faster than interest income.
- Market-making revenue increased 4% to $9.93 billion, primarily from interest-rate and credit products.
- Investment banking revenue declined 11% to $6.27 billion, reflecting lower advisory and equity underwriting activity; debt underwriting increased.
- Investing & Lending revenue declined 25% to $4.08 billion. Relationship-lending economic hedge losses were $596 million versus a $329 million gain in 2015.
- Investment Management revenue declined 7% to $5.79 billion, primarily because incentive fees fell to $421 million from $780 million.
- Assets under supervision increased to $1.379 trillion from $1.252 trillion, including $94 billion of net inflows and $33 billion of market appreciation.
- Cash and cash equivalents rose to $121.71 billion from $93.44 billion. Net cash provided by operating activities was $5.57 billion, investing activities provided $9.27 billion, and financing activities provided $13.43 billion.
- Total assets were $860.17 billion and total shareholders’ equity was $86.89 billion at year-end. Unsecured long-term borrowings were $189.09 billion, deposits were $124.10 billion, and unsecured short-term borrowings were $39.27 billion.
- Global Core Liquid Assets increased to $226.07 billion from $199.12 billion. The firm stated that its average fourth-quarter liquidity coverage ratio exceeded the fully phased-in minimum; the filing does not provide a clear numerical LCR value in the supplied text.
- Fully phased-in CET1 ratios were 14.0% under the Standardized approach and 12.7% under Basel III Advanced; the applicable transitional Basel III Advanced CET1 ratio was 13.1%. The supplementary leverage ratio was 6.4%.
Material changes versus the prior comparable period
- Profitability improved despite lower revenue because operating expenses fell substantially, particularly litigation and regulatory provisions. Net provisions for litigation and regulatory proceedings declined to $396 million from $4.01 billion in 2015, which included the $3.37 billion RMBS Working Group settlement provision.
- Institutional Client Services pre-tax earnings increased to $4.75 billion from $1.21 billion, mainly because 2015 included the RMBS settlement provision. Segment revenue declined 5% to $14.47 billion.
- Headcount declined 7% to 34,400. An efficiency program produced approximately $900 million of annualized compensation savings and approximately $500 million of net savings in 2016 after related costs.
- Deposits increased $26.58 billion, principally following the acquisition of GE Capital Bank’s online deposit platform, which added approximately $16.52 billion of deposits.
- The firm repurchased 36.6 million common shares for $6.07 billion and paid $1.13 billion of common dividends, returning $7.20 billion of capital to shareholders.
- Total assets remained broadly stable, while financial instruments owned declined and cash, deposits, and unsecured long-term borrowings increased.
Guidance, outlook, management commentary, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management reported that operating conditions improved during the second half of 2016, but warned that lower market-making or investment banking activity, declining asset values, or a shift toward lower-fee assets could reduce future revenue.
- Investment banking backlog was lower at year-end than at year-end 2015. Backlog transactions may be modified, delayed, or canceled and therefore are not assured sources of revenue.
- The firm expects increasing margin requirements for uncleared derivatives as regulatory rules phase in. New TLAC requirements become effective in January 2019; management expects compliance by that date.
- The Volcker Rule requires the firm to reduce most covered-fund interests. The firm reported $6.47 billion of investments in funds at NAV and stated that interests may need to be sold by July 2017 if requested extensions are not granted, potentially at values below carrying amounts.
- Brexit creates uncertainty regarding the future regulatory framework and Goldman Sachs’ ability to serve European clients from U.K. entities. Other risks include changing U.S. and international capital, liquidity, leverage, derivatives, compensation and resolution regulations.
- Key recurring risks are market, liquidity, credit, operational, model, legal, regulatory, reputational, cybersecurity and employee-retention risks. A one-notch and two-notch downgrade could have required approximately $677 million and $2.22 billion, respectively, of additional collateral or termination payments on bilateral derivatives.
- Legal proceedings remain significant. Management estimated the upper end of reasonably possible aggregate loss at approximately $1.8 billion in excess of reserves for matters where a range could be estimated. The filing states that other matters, including mortgage-related investigations and repurchase claims, generally cannot be reliably estimated.
- Other unusual items include a $544 million after-tax debt valuation adjustment loss recorded in other comprehensive income, the $266 million benefit associated with the APEX/preferred-stock exchange, and $68 million of office-space exit costs.
- Management concluded that internal control over financial reporting and disclosure controls were effective, and PricewaterhouseCoopers issued unqualified opinions.
Most important facts an investor should verify
- Reconcile the sharp improvement in earnings and margins to the unusually large reduction in litigation and regulatory provisions, and assess normalized profitability excluding those items.
- Review the composition, maturity profile and cost of the $189.09 billion of unsecured long-term borrowings and the growth in deposits.
- Confirm the numerical LCR, NSFR, transitional capital ratios, stress-test results and the effect of fully phased-in 2019 capital and TLAC requirements.
- Evaluate the quality and liquidity of the $1.379 trillion of assets under supervision, including the increased mix of liquidity products that generally generate lower fees.
- Assess exposure to private equity, level 3 assets, covered funds, relationship lending and economic hedges, including the $596 million hedge loss in 2016.
- Review legal reserves and the approximately $1.8 billion excess reasonably possible loss estimate, together with unresolved mortgage, antitrust, securities and regulatory matters.
- Monitor Brexit-related restructuring, Volcker Rule fund disposals, cybersecurity exposure, counterparty credit quality and potential collateral requirements following ratings changes.