Goldman Sachs Group Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
The Goldman Sachs Group, Inc. is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and individuals. The filing covers the unaudited quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. The firm reports four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total net revenues | $9.461 billion | $9.636 billion | $18.268 billion | $19.716 billion |
| Pre-tax earnings | $3.127 billion | $3.276 billion | $5.846 billion | $6.695 billion |
| Net earnings | $2.421 billion | $2.565 billion | $4.672 billion | $5.397 billion |
| Net earnings applicable to common shareholders | $2.198 billion | $2.348 billion | $4.380 billion | $5.085 billion |
| Diluted EPS | $5.81 | $5.98 | $11.52 | $12.93 |
| Provision for credit losses | $214 million | $234 million | $438 million | $278 million |
| Operating expenses | $6.120 billion | $6.126 billion | $11.984 billion | $12.743 billion |
Calculated pre-tax margins were approximately 33.1% in the second quarter and 32.0% for the first half. Net margins were approximately 25.6% in both periods. The reported efficiency ratio was 64.7% for the second quarter and 65.6% for the first half.
- Quarterly revenue mix included investment banking of $1.863 billion, investment management of $1.480 billion, market making of $2.423 billion, other principal transactions of $1.817 billion and net interest income of $1.071 billion.
- First-half net interest income increased 19% to $2.289 billion, reflecting higher interest income from collateralized agreements and loans, partly offset by higher funding costs.
- Annualized ROE was 11.1% for both the quarter and first half, compared with 12.8% and 14.1%, respectively, in the 2018 comparable periods. Annualized ROTE was 11.7% for both 2019 periods.
- Assets were $944.903 billion at June 30, 2019, compared with $931.796 billion at December 31, 2018. Shareholders’ equity was $90.892 billion versus $90.185 billion.
- Cash and cash equivalents declined to $91.092 billion from $130.547 billion at year-end. Six-month operating cash flow was negative $35.567 billion, compared with positive $7.634 billion in the prior-year period, mainly reflecting growth in financial instruments owned and collateralized transactions.
- Total loans receivable were $83.769 billion, net of a $1.212 billion allowance. The allowance represented approximately 1.4% of gross loans, compared with 1.3% at year-end.
- Deposits were $166.367 billion. Unsecured short-term borrowings were $49.643 billion and unsecured long-term borrowings were $221.145 billion. Total shareholders’ equity represented approximately 15% of stated funding sources.
- Average Global Core Liquid Assets were $225.316 billion during the second quarter. The average Liquidity Coverage Ratio was 133%, above the 100% minimum.
- The Basel III Advanced CET1 ratio was 13.5%, compared with a 9.5% firmwide requirement. The Tier 1 leverage ratio was 9.1% and the supplementary leverage ratio was 6.4%.
Material changes versus prior comparable periods
- Second-quarter revenue decreased 2%, net earnings decreased 6%, and diluted EPS decreased 3% year over year. First-half revenue decreased 7%, net earnings decreased 13%, and diluted EPS decreased 11%.
- Investment Management revenue declined 14% in the quarter and 13% in the first half, primarily because of lower incentive fees. Assets under supervision nevertheless increased to $1.660 trillion, supported by market appreciation, net inflows and the Rocaton acquisition.
- Institutional Client Services revenue declined 3% in the quarter and 11% in the first half. FICC Client Execution was pressured by low client activity and low volatility, while quarterly Equities revenue increased 6%.
- Investment Banking revenue declined 9% in the quarter and 4% in the first half. Debt underwriting was weaker, while first-half financial advisory revenue increased 20% because of higher completed mergers and acquisitions volume.
- Investing & Lending revenue increased 16% in the quarter, aided by public-equity gains and company-specific events, but was essentially unchanged for the first half. First-half pre-tax earnings declined 10%, partly because of higher credit-loss provisions and expenses.
- Operating expenses were essentially flat in the quarter and decreased 6% for the first half. The first-half decline primarily reflected lower compensation expense, while technology, depreciation, occupancy and consolidated investment costs increased.
- The firm repurchased $2.5 billion of common stock during the first half and paid $625 million of common dividends. On July 15, 2019, the quarterly common dividend was increased from $0.85 to $1.25 per share, subject to applicable conditions.
- Other comprehensive income included a $1.728 billion after-tax debt valuation adjustment loss for the first half, compared with a $1.148 billion gain in the prior-year period. This substantially contributed to the decline in accumulated other comprehensive income.
Guidance, outlook, risks and unusual items
- Management expected the 2019 effective tax rate to be approximately 22% to 23%, subject to earnings mix, profitability, regulatory guidance and tax developments.
- The firm expected adoption of the CECL credit-loss standard on January 1, 2020 to increase the allowance for credit losses by approximately $600 million to $800 million, although the ultimate impact could differ.
- The 2019 CCAR plan permitted up to $8.8 billion of capital return from the third quarter of 2019 through the second quarter of 2020, including up to $7.0 billion of common-stock repurchases and $1.8 billion of common dividends. Actual actions remain subject to capital conditions and regulatory non-objection.
- Management highlighted risks from low trading activity and volatility, weaker investment-banking volumes, market declines, widening credit spreads, macroeconomic and geopolitical uncertainty, trade tensions, Brexit, LIBOR and other IBOR replacement, and regulatory changes.
- Legal and regulatory matters remain material contingencies. The firm estimated the upper end of reasonably possible aggregate loss for certain matters at approximately $2.6 billion in excess of related reserves, while noting that many matters could not be estimated. The filing identifies significant 1MDB-related investigations and litigation, mortgage-related matters, antitrust proceedings and other regulatory investigations.
- The firm had $239.720 billion of total commitments, including $142.277 billion of lending commitments. Maximum exposure to loss from nonconsolidated VIEs was $20.183 billion, excluding offsetting risk mitigants.
- The firm had a $1.80 billion consumer-relief commitment under a mortgage-related settlement; approximately $1.40 billion had been provided by June 30, 2019.
- The quarter included approximately $275 million of pre-tax losses associated with investments in Marcus and planned credit-card and transaction-banking activities during the first half of 2019.
Most important facts for investors to verify
- Whether trading activity, volatility and investment-banking volumes recover sufficiently to offset weaker first-half Institutional Client Services and Investment Management results.
- The final 2019 tax rate and the ultimate CECL adoption impact, including effects on earnings, capital and credit-loss allowances.
- The sustainability and regulatory approval of planned share repurchases and the increased common dividend.
- The evolution of 1MDB, mortgage-related, antitrust and other legal or regulatory matters, including potential losses beyond recorded reserves.
- Liquidity trends following the $39.455 billion first-half decrease in cash and the decline in average GCLA to $225.316 billion from $233.765 billion in the prior quarter.
- The quality and performance of the growing loan portfolio, including the increase in criticized exposures, consumer lending losses and the $120.402 billion of held-for-investment lending commitments.
- The effect of market movements on level 3 valuations, hybrid borrowings, debt valuation adjustments and other fair-value-sensitive positions.