Goldman Sachs Group Inc. 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. 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 operated in more than 30 countries, generated 42% of net revenues outside the Americas, and had 32,900 staff at year-end.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenues | $34.21 billion | $34.16 billion | Essentially unchanged |
| Pre-tax earnings | $11.74 billion | $11.21 billion | +5% |
| Net earnings | $8.04 billion | $7.48 billion | +8% |
| Net earnings applicable to common shareholders | $7.73 billion | $7.29 billion | +6% |
| Diluted EPS | $15.46 | $14.13 | +9% |
| Return on average common equity | 11.0% | 10.7% | +0.3 percentage points |
| Operating expenses | $22.47 billion | $22.96 billion | -2% |
| Effective tax rate | 31.5% | 33.3% | Lower by 1.8 percentage points |
Calculated margins were approximately 34.3% on a pre-tax basis and 23.5% on a net-income basis, compared with approximately 32.8% and 21.9%, respectively, in 2012. Compensation and benefits were $12.61 billion, or 36.9% of net revenues, versus 37.9% in 2012. Net provisions for litigation and regulatory proceedings increased to $962 million from $448 million.
- Investment Banking: Net revenues increased 22% to $6.00 billion and pre-tax earnings increased 58% to $2.53 billion, driven by stronger equity and debt underwriting, particularly initial public offerings and leveraged finance.
- Institutional Client Services: Net revenues declined 13% to $15.72 billion and pre-tax earnings declined 30% to $3.94 billion. Fixed income, mortgages, equities and securities services were pressured by lower activity and volatility, as well as business sales.
- Investing & Lending: Net revenues increased 19% to $7.02 billion and pre-tax earnings increased 34% to $4.33 billion, mainly from higher equity investment gains and stronger global equity markets.
- Investment Management: Net revenues increased 5% to $5.46 billion and pre-tax earnings increased 20% to $1.11 billion. Assets under supervision rose $77 billion to $1.04 trillion, including $41 billion of long-term net inflows and $40 billion of market appreciation.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $4.54 billion. Investing activities used $8.73 billion, primarily reflecting $8.39 billion of net lending to fund loans held for investment. Financing activities used $7.35 billion, including $6.18 billion of common-stock repurchases. Cash and cash equivalents declined $11.54 billion to $61.13 billion.
- Total assets declined 3% to $911.51 billion, while total liabilities declined to $833.04 billion. Shareholders’ equity increased to $78.47 billion from $75.72 billion.
- Unsecured long-term borrowings were $160.97 billion, down from $167.31 billion. Unsecured short-term borrowings were $44.69 billion, and deposits were $70.81 billion.
- The leverage ratio improved to 11.6x from 12.4x, and the debt-to-equity ratio declined to 2.1x from 2.2x.
- Global Core Excess liquidity was $184.07 billion at year-end, up from $174.62 billion. The firm stated that its liquidity position was appropriate under its internal stress framework.
- Regulatory capital remained strong under Basel I: Tier 1 capital ratio was 16.7%, Tier 1 common ratio was 14.6%, Total capital ratio was 19.9%, and Tier 1 leverage ratio was 8.1%. The estimated fully phased-in Basel III Advanced CET1 ratio was 9.8%, a non-GAAP estimate.
Material changes versus the prior comparable period
- Profitability improved despite flat revenue because operating expenses declined, the compensation ratio improved, and the effective tax rate decreased.
- Revenue mix shifted toward Investment Banking and Investing & Lending, while Institutional Client Services weakened materially.
- The firm completed the sale of a majority stake in its Americas reinsurance business in April 2013 and its European insurance business in December 2013. These transactions reduced consolidated assets and insurance-related liabilities and produced a $211 million gain on the European sale.
- Market-making revenue declined 17% to $9.37 billion. The loss from changes in the firm’s own credit spreads on fair-value-option borrowings improved to $296 million from $714 million.
- Level 3 assets declined to $40.01 billion from $47.10 billion, representing 4.4% of total assets versus 5.0% in 2012.
- The firm repurchased 39.3 million common shares for $6.17 billion. Berkshire Hathaway exercised its warrant, and Goldman Sachs delivered 13.1 million shares through net settlement, reducing book value per common share by approximately 3%.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantified earnings or revenue guidance. Management emphasized that results are highly dependent on global market conditions, client activity, volatility, asset prices, credit spreads and regulatory developments. The investment banking backlog increased significantly, but management cautioned that transactions may be modified, delayed or cancelled.
- The Volcker Rule was finalized in December 2013, with compliance generally required by July 2015 and possible extensions for certain provisions through July 2017. Management did not expect the proprietary-trading prohibition to have a material financial impact, but noted uncertainty regarding implementation and covered-fund divestitures.
- Basel III capital, leverage and liquidity requirements began affecting the firm in 2014 and were expected to increase capital and funding requirements over time. The firm’s risk-weighted asset methodology was expected to change beginning in the second quarter of 2014.
- Key risks include market and liquidity stress, credit and counterparty defaults, funding or rating downgrades, operational and cybersecurity failures, regulatory restrictions, litigation, reputational damage, conflicts of interest, electronic-trading competition, commodities exposures and employee retention.
- As of December 2013, a one-notch and two-notch credit-rating downgrade could have triggered approximately $911 million and $2.99 billion, respectively, of additional collateral or termination payments under bilateral derivatives agreements.
- Legal and regulatory matters remained significant. The estimated upper end of reasonably possible aggregate litigation losses was approximately $3.6 billion in excess of recorded reserves, excluding matters for which management could not estimate a range. Mortgage-related repurchase and other claims could increase materially, although management could not meaningfully estimate the exposure.
Most important facts for investors to verify
- Confirm the year-end consolidated financial statements, particularly the $8.04 billion of net earnings, $34.21 billion of net revenues, $22.47 billion of expenses and $61.13 billion of cash.
- Review the revenue sustainability of Investment Banking and Investing & Lending, including the extent to which 2013 gains were market-driven or investment-specific.
- Assess the recovery prospects of Institutional Client Services amid lower volatility, electronic-trading pressure and ongoing regulatory changes.
- Reconcile regulatory capital ratios under Basel I with the estimated Basel III CET1 ratios and subsequent required capital buffers.
- Review liquidity portability among regulated subsidiaries, unsecured debt maturities, deposit stability and downgrade-related collateral requirements.
- Examine the $962 million of 2013 litigation provisions and the approximately $3.6 billion excess reasonably possible loss estimate, including mortgage-related contingencies not included in that estimate.
- Evaluate the effects of the Volcker Rule, derivatives regulation, Basel III implementation and other proposed capital, leverage and liquidity requirements.