GOLDMAN SACHS GROUP INC quarterly report, Q3 FY2013

Goldman Sachs Group Inc. — 3Q13 Form 10-Q Summary

Business context and reporting period

The filing covers the unaudited three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.

Financial performance and key metrics

Metric	3Q13	3Q12	9M13	9M12
Net revenues	$6.72 billion	$8.35 billion	$25.42 billion	$24.93 billion
Pre-tax earnings	$2.17 billion	$2.30 billion	$8.19 billion	$6.89 billion
Net earnings	$1.52 billion	$1.51 billion	$5.71 billion	$4.58 billion
Net earnings applicable to common	$1.43 billion	$1.46 billion	$5.48 billion	$4.46 billion
Diluted EPS	$2.88	$2.85	$10.89	$8.57
Annualized ROE	8.1%	8.6%	10.4%	8.8%

Implied net margin was approximately 22.6% in 3Q13 and 22.5% for 9M13; implied pre-tax margin was approximately 32.2% in both periods. Compensation and benefits were $2.38 billion in 3Q13 and $10.42 billion for 9M13, representing 41.0% of 9M13 net revenues versus 44.0% in 9M12. The effective tax rate for 9M13 was 30.3%, down from 33.3% for 2012.

Investment Banking net revenues were $1.17 billion in 3Q13 and $4.29 billion in 9M13. Nine-month growth was driven by debt and equity underwriting, particularly leveraged finance and initial public offerings.
Institutional Client Services net revenues were $2.86 billion in 3Q13 and $12.32 billion in 9M13, down 32% and 11%, respectively. Fixed Income, Currency and Commodities Client Execution was pressured by lower mortgage, interest-rate and currency activity.
Investing & Lending net revenues were $1.48 billion in 3Q13 and $4.96 billion in 9M13. Nine-month results included $2.53 billion of equity investment gains, primarily from private equity investments.
Investment Management net revenues were $1.22 billion in 3Q13 and $3.87 billion in 9M13. Assets under supervision increased to $991 billion, including $763 billion of long-term assets.

Cash flow, balance sheet, debt and liquidity

Cash and cash equivalents were $65.48 billion at September 30, 2013, down from $72.67 billion at December 31, 2012.
For 9M13, operating activities provided $2.26 billion of cash, investing activities used $5.82 billion, and financing activities used $3.64 billion, producing a $7.19 billion decrease in cash.
Total assets were $923.22 billion, down from $938.56 billion at year-end 2012. Financial instruments owned at fair value declined to $324.26 billion from $407.01 billion, while collateralized agreements increased.
Total liabilities were $845.61 billion and shareholders’ equity was $77.62 billion, compared with $862.84 billion and $75.72 billion, respectively, at year-end 2012.
Unsecured short-term borrowings were $39.24 billion; unsecured long-term borrowings were $168.08 billion. Total short- and long-term borrowings, including other secured financings, were $234.37 billion.
Goldman reported $174.90 billion of Global Core Excess liquidity at September 30, 2013 and maintained $181.75 billion of excess liquidity and cash in its internal balance-sheet allocation.
Regulatory capital remained strong: Tier 1 capital ratio was 16.3%, Tier 1 common ratio was 14.2%, total capital ratio was 19.4%, and Tier 1 leverage ratio was 7.9% at September 30, 2013.

Material changes versus comparable periods

3Q13 net revenues fell 20%, principally because market-making revenue declined 49% to $1.36 billion. Nine-month net revenues increased 2%, as higher Investment Banking and Investing & Lending revenue more than offset weaker Institutional Client Services and net interest income.
3Q13 operating expenses declined 25% to $4.56 billion, largely reflecting lower compensation, lower depreciation and amortization, and the sale of the Americas reinsurance business. The quarter included $142 million of net provisions for litigation and regulatory proceedings; 9M13 provisions totaled $401 million.
Net earnings were broadly unchanged in 3Q13 despite lower revenue because expenses declined substantially. For 9M13, net earnings increased 25% and diluted EPS increased 27%.
The Americas reinsurance business was deconsolidated after the sale of a majority stake in April 2013. The European insurance business was classified as held for sale at September 30, 2013; an agreement to sell a majority stake was entered into in October 2013, subject to regulatory approvals.
The firm repurchased 10.2 million common shares for $1.65 billion in 3Q13 and 30.8 million shares for $4.77 billion during 9M13. The board subsequently increased the quarterly common dividend to $0.55 per share from $0.50.
On October 1, 2013, Berkshire Hathaway exercised its warrant; Goldman delivered 13.1 million shares on October 4. Management estimated an approximately 3% reduction to October 2013 book value and tangible book value per common share.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal earnings or revenue guidance. Management cautioned that results are inherently unpredictable and depend on global financial markets, economic conditions, market volatility, client activity, asset values, credit spreads and funding conditions.

Management described market-making conditions as difficult in certain businesses because of macroeconomic uncertainty and expectations for Federal Reserve tapering. Continued uncertainty could further pressure client activity and market-making revenue.
Investment banking backlog increased significantly during the quarter, particularly for potential advisory and equity underwriting transactions, but transactions may be delayed, modified or cancelled.
Regulatory changes, including Basel III-related capital requirements, the Volcker Rule, derivatives rules and possible liquidity requirements, could increase capital, funding, compliance and operating costs. The firm estimated a fully phased-in Basel III Advanced CET1 ratio of 9.8% at September 30, 2013, but noted that the estimate could change as rules and interpretations develop.
Legal and regulatory proceedings remain significant. Management estimated the upper end of reasonably possible aggregate losses for certain matters at approximately $4.0 billion above reserves, excluding matters for which a loss range could not be estimated, including potential mortgage-related put-back claims and certain investigations.
Two-notch credit-rating downgrades could have required approximately $2.83 billion of additional collateral or termination payments on bilateral derivatives at September 30, 2013.
Fair-value assets included $41.97 billion of Level 3 assets, or 4.5% of total assets. Valuations are sensitive to unobservable assumptions, including credit spreads, recovery rates, volatility, correlations, discount rates and growth rates.
Commitments totaled $170.36 billion, including $81.49 billion of commitments to extend credit. The firm also reported $764.57 billion of derivative guarantees by notional amount; these amounts are not expected losses and are subject to netting, collateral and other mitigants.

Most important facts for investors to verify

Whether the sharp 3Q13 decline in Institutional Client Services and market-making revenue persisted after the reporting date.
The quality and sustainability of 9M13 Investing & Lending gains, particularly the $2.53 billion of equity investment gains.
The final financial and capital effects of the European insurance sale, the Americas reinsurance deconsolidation and the Berkshire Hathaway warrant settlement.
The ultimate impact of Basel III, the Volcker Rule, derivatives regulation and proposed liquidity and leverage requirements.
Developments in mortgage-related litigation, regulatory investigations and the approximately $4.0 billion estimated reasonably possible loss exposure above reserves.
Actual liquidity, collateral and funding needs under market stress, including the effect of potential credit-rating downgrades.