Goldman Sachs Group Inc. 2010 Q3 Form 10-Q Summary
Business context and reporting period
Goldman Sachs is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and high-net-worth individuals. Its three segments are Investment Banking; Trading and Principal Investments; and Asset Management and Securities Services. The filing covers the unaudited three and nine months ended September 30, 2010, compared with September 25, 2009, and the financial position as of September 30, 2010 compared with December 31, 2009.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|
| Net revenues | $8.90 billion | $12.37 billion | $30.52 billion | $35.56 billion |
| Pre-tax earnings | $2.81 billion | $4.79 billion | $9.42 billion | $12.45 billion |
| Net earnings | $1.90 billion | $3.19 billion | $5.97 billion | $8.44 billion |
| Net earnings applicable to common shareholders | $1.74 billion | $3.03 billion | $5.49 billion | $7.41 billion |
| Diluted EPS | $2.98 | $5.25 | $9.39 | $13.74 |
| Annualized ROE on average common equity | 10.3% | 21.4% | 11.6% | 19.2% |
- Q3 net revenue declined 28% and pre-tax earnings declined 41% year over year. Nine-month net revenue declined 14% and pre-tax earnings declined 24%.
- Approximate pre-tax margin was 31.6% in Q3 2010 versus 38.7% in Q3 2009; the nine-month margin was 30.9% versus 35.0%. Approximate net margin was 21.3% versus 25.8% in Q3 and 19.6% versus 23.7% for the nine-month period.
- Investment Banking revenue increased 24% in Q3 to $1.12 billion and 2% for nine months to $3.22 billion. Q3 pre-tax earnings rose 81% to $230 million.
- Trading and Principal Investments revenue fell 36% in Q3 to $6.38 billion and 17% for nine months to $23.18 billion. Q3 pre-tax earnings fell 47% to $2.37 billion.
- Asset Management and Securities Services revenue decreased 3% in Q3 to $1.40 billion and 7% for nine months to $4.12 billion, while segment pre-tax earnings increased 6% in Q3 and 6% for nine months.
- Net interest income declined 33% in Q3 to $1.13 billion and 26% for nine months to $4.17 billion, primarily due to higher long-term borrowing expense, tighter securities-lending spreads and lower average fixed-income trading assets.
- Operating expenses decreased 20% in Q3 to $6.09 billion and 9% for nine months to $21.10 billion. Compensation and benefits declined 28% in Q3 and 21% for nine months, excluding the separately reported $600 million U.K. bank payroll tax.
Balance sheet, debt, liquidity and capital
| Balance-sheet item | September 30, 2010 | December 31, 2009 |
|---|
| Total assets | $908.68 billion | $848.94 billion |
| Total liabilities | $833.02 billion | $778.23 billion |
| Total shareholders’ equity | $75.66 billion | $70.71 billion |
| Cash and cash equivalents | $36.13 billion | $38.29 billion |
| Trading assets at fair value | $351.80 billion | $342.40 billion |
| Unsecured short-term borrowings | $43.95 billion | $37.52 billion |
| Unsecured long-term borrowings | $185.12 billion | $185.09 billion |
- Total assets increased $59.74 billion, primarily from higher securities purchased under resale agreements and higher cash and securities segregated for regulatory purposes. Trading liabilities increased $26.20 billion and repurchase liabilities increased $22.07 billion.
- Nine-month operating cash flow was $3.13 billion, compared with $23.35 billion in the prior-year period. Investing activities used $777 million and financing activities used $4.51 billion. Cash and cash equivalents decreased $2.16 billion during the period.
- Average Global Core Excess liquidity was $173.03 billion during Q3, and the period-end amount was $171.52 billion. Aggregate estimated loan value of Global Core Excess, other qualifying cash and other unencumbered assets averaged $213.52 billion.
- Total short-term borrowings were $58.60 billion, including $14.65 billion of other secured financings. Total long-term borrowings were $197.07 billion, including $11.95 billion of secured financings.
- Basel 1 Tier 1 capital ratio was 15.7%, total capital ratio was 18.8% and Tier 1 leverage ratio was 8.1%, up from 15.0%, 18.2% and 7.6%, respectively, at December 31, 2009. Tier 1 common ratio was 13.0%.
- Book value per common share was $127.08 and tangible book value per common share was $116.23, up approximately 8% and 7%, respectively, from year-end 2009.
Material changes versus comparable periods
- Trading conditions weakened substantially from the strong 2009 comparison period. FICC revenue declined 37% in Q3 and 20% for nine months, while total Equities revenue declined 33% in Q3 and 32% for nine months. Management cited lower client activity, lower volatility and continued market uncertainty.
- Principal Investments remained profitable, with $754 million of Q3 revenue and $2.21 billion for nine months. Results included corporate investment gains, ICBC gains and overrides, including $132 million of Q3 overrides primarily related to a partial ICBC sale.
- Investment Banking benefited from stronger financial advisory and debt underwriting activity, especially leveraged finance, but equity underwriting was weaker.
- Assets under management ended at $823 billion, down $25 billion from December 2009. Nine-month net outflows were $76 billion, partly offset by $28 billion of market appreciation. Q3 net outflows were $13 billion, partly offset by $34 billion of market appreciation.
- During the nine months, Goldman Sachs incurred a $600 million U.K. bank payroll tax and a $550 million SEC settlement charge. Excluding these items, nine-month diluted EPS was $11.34 and annualized ROE was 13.2%.
- The firm adopted new VIE consolidation guidance in 2010, increasing assets and liabilities by approximately $3 billion at adoption without a material impact on earnings or cash flows.
- Goldman Sachs repurchased 5.4 million common shares in Q3 for $794 million and 18.6 million shares during the nine months for approximately $3.07 billion.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management stated that results are inherently unpredictable and materially affected by global financial markets, economic conditions and client activity.
- Management reported that the Q3 environment included higher global equity prices, tighter credit spreads and lower volatility, but continued low activity levels and uncertainty regarding financial regulatory reform.
- The Dodd-Frank Act is expected to affect proprietary trading, investments in hedge and private equity funds, OTC derivatives, capital requirements, affiliate transactions and compensation regulation. The firm had liquidated substantially all positions held in Principal Strategies.
- Potential future capital requirements are uncertain because of Basel 2.5, Basel 3 and Dodd-Frank implementation. These changes could increase required capital, risk-weighted assets and funding costs and could reduce the regulatory benefit of certain preferred stock and junior subordinated debt beginning in 2013.
- Mortgage-related litigation, regulatory investigations and potential repurchase claims remain significant uncertainties. Management could not meaningfully estimate potential exposure from future mortgage repurchase claims.
- The SEC ABACUS settlement included $15 million of disgorgement and a $535 million civil penalty. Goldman Sachs International also agreed to a £17.5 million FSA settlement related to notification and compliance controls.
- As of September 30, 2010, written and purchased credit derivatives had gross notional amounts of $2.17 trillion and $2.30 trillion, respectively, with net purchased protection of $129.44 billion. These notional amounts are not expected losses.
- Derivative agreements could have required approximately $1.50 billion of additional collateral or termination payments after a one-notch credit downgrade and $2.98 billion after a two-notch downgrade.
- Total commitments were $137.32 billion, including $54.16 billion of commitments to extend credit, $56.11 billion of forward-starting resale and securities-borrowing agreements, and $11.83 billion of investment commitments. These amounts do not necessarily represent future cash outflows.
- The filing identifies a potential impairment risk for NYSE designated market-maker rights. If business conditions did not improve, management expected to test the $391 million carrying value and estimated a possible writedown of approximately $300 million.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2010, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Whether trading volumes, volatility and client activity recovered after Q3 2010, particularly in FICC and Equities.
- The sustainability and quality of Principal Investments gains, ICBC-related gains and overrides versus recurring operating revenue.
- Progression of assets under management, net flows and securities-lending spreads.
- Liquidity coverage, collateral requirements and sensitivity to credit-rating downgrades, including the availability of liquidity held at regulated subsidiaries.
- Future effects of Dodd-Frank, Basel 2.5 and Basel 3 on capital ratios, proprietary trading and fund investments.
- Developments in mortgage-related litigation, foreclosure reviews, repurchase claims, SEC-related matters and other regulatory proceedings.
- Valuation risk in level 3 assets, private equity, real estate, mortgage-related instruments and derivatives; level 3 assets totaled $46.49 billion, of which $43.83 billion represented Goldman Sachs economic exposure.
- Whether the potential NYSE designated market-maker impairment and other unusual charges materialize.
