GOLDMAN SACHS GROUP INC quarterly report, Q3 FY2017

Goldman Sachs Group Inc. — 2017 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 individuals. Its four segments are Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. The filing covers the unaudited three and nine months ended September 30, 2017, compared primarily with the comparable 2016 periods and December 31, 2016 balance-sheet data.

Key financial metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Net revenues	$8.326 billion	$8.168 billion	$24.239 billion	$22.438 billion
Pre-tax earnings	$2.976 billion	$2.868 billion	$8.024 billion	$6.907 billion
Net earnings	$2.128 billion	$2.094 billion	$6.214 billion	$5.051 billion
Net earnings applicable to common	$2.035 billion	$2.100 billion	$5.828 billion	$4.934 billion
Diluted EPS	$5.02	$4.88	$14.11	$11.24
Operating expenses	$5.350 billion	$5.300 billion	$16.215 billion	$15.531 billion
Net interest income	$730 million	$614 million	$2.034 billion	$2.251 billion

Q3 pre-tax margin was approximately 35.7% and net margin was approximately 25.6%. Nine-month pre-tax margin was approximately 33.1% and net margin was approximately 25.6%. Annualized return on average common equity was 10.9% in Q3 and 10.3% for the first nine months, compared with 11.2% and 8.7%, respectively, in the prior-year periods.

Investment Banking revenue increased 17% in Q3 to $1.797 billion and 9% for nine months to $5.230 billion, supported by financial advisory activity and underwriting.
Institutional Client Services revenue declined 17% in Q3 to $3.120 billion and 12% for nine months to $9.530 billion, primarily because of weaker FICC client activity and low market volatility.
Investing & Lending revenue increased 35% in Q3 to $1.883 billion and 90% for nine months to $4.923 billion, driven principally by gains on private and public equity investments and higher net interest income.
Investment Management revenue increased 3% in Q3 to $1.526 billion and 9% for nine months to $4.556 billion. Assets under supervision reached $1.456 trillion, up from $1.347 trillion at September 2016.

Balance sheet, liquidity, debt and capital

Total assets were $930.132 billion at September 30, 2017, up $69.967 billion from December 2016. Financial instruments owned increased to $333.474 billion and loans receivable increased to $61.486 billion.
Total liabilities were $843.840 billion and shareholders’ equity was $86.292 billion, compared with $86.893 billion at year-end 2016. Book value per common share was $190.73; tangible book value per common share was $180.42.
Cash and cash equivalents were $116.610 billion, down from $121.711 billion at December 2016. Global Core Liquid Assets were $220.379 billion, compared with $226.066 billion at year-end.
Deposits increased to $132.761 billion from $124.098 billion. Unsecured short-term borrowings were $45.357 billion and unsecured long-term borrowings were $211.852 billion, up from $39.265 billion and $189.086 billion, respectively.
Leverage ratio was 10.8x, compared with 9.9x at December 2016. The applicable Basel III Advanced CET1, Tier 1 and total capital ratios were 12.0%, 13.7% and 16.1%, respectively, versus minimum requirements of 7.0%, 8.5% and 10.5%. The Tier 1 leverage ratio was 8.9%.
The average liquidity coverage ratio was 128%, based on eligible high-quality liquid assets of $165.542 billion and net cash outflows of $129.459 billion.

Cash flow and material changes versus prior periods

For the nine months, operating activities used $11.119 billion, compared with $2.965 billion provided in 2016. The 2017 use primarily reflected growth in financial instruments owned.
Investing activities used $18.086 billion, principally reflecting $12.468 billion of net loan funding and $1.848 billion used for business acquisitions.
Financing activities provided $24.104 billion, primarily from $44.831 billion of unsecured long-term debt issuance, partly offset by $25.107 billion of repayments, $5.143 billion of common stock repurchases and $1.271 billion of dividends.
Net earnings increased 23% for nine months, while diluted EPS increased 26%, aided by a $496 million tax reduction from the adoption of ASU 2016-09 for employee share-based payments. Management said the adoption increased nine-month diluted EPS by $1.20 and reduced the effective tax rate by 6.1 percentage points.
Compensation and benefits expense rose 5% for nine months to $9.696 billion, while the compensation-to-net-revenue ratio improved to 40.0% from 41.0%. Total staff was 35,800 at period-end, up 4% from December 2016.
The firm repurchased 22.4 million common shares for $5.135 billion during the first nine months and declared common dividends of $0.75 per share for Q3.

Outlook, risks, contingencies and unusual items

Management reported mixed global growth, low volatility and low client conviction to transact. Continued low volatility or reduced market-making activity could pressure Institutional Client Services revenue.
Investment Banking backlog declined during Q3 and the first nine months, primarily because advisory deal replenishment trailed completed transactions. Backlog transactions may be modified, delayed or cancelled and are not assured sources of future revenue.
Investing & Lending results benefited from higher asset prices, tighter credit spreads and company-specific events; adverse corporate performance, lower equity markets or wider credit spreads could reverse these gains.
Credit exposure increased, particularly in loans and lending commitments. Loans receivable were $61.486 billion with a $737 million allowance; held-for-investment lending commitments were approximately $105.0 billion.
Total commitments were $204.434 billion, including $119.832 billion of commitments to extend credit. Maximum exposure to loss from nonconsolidated VIEs was $18.774 billion, excluding risk-mitigation benefits.
Management estimated the upper end of reasonably possible aggregate litigation losses at approximately $1.6 billion above recorded reserves for matters where a range could be estimated. Mortgage repurchase exposure and certain regulatory investigations could not be meaningfully estimated. The filing identifies ongoing matters involving mortgage-related activities, 1MDB, foreign exchange, interest rate swaps, credit default swaps, securities lending, commodities, Treasury securities, underwriting and employment practices.
The firm expects future regulatory requirements to affect capital and liquidity, including fully phased-in capital buffers, a 5.0% supplementary leverage requirement for G-SIBs beginning in 2018, TLAC requirements effective in 2019 and phased-in margin requirements for uncleared swaps.
The firm expected the adoption of ASC 606 revenue guidance in January 2018 to have no material initial impact, although certain investment management fees would be recognized earlier and some cost presentations would change.
Financial statement estimates are particularly sensitive to fair value measurements, level 3 valuations, goodwill, compensation, litigation and regulatory provisions, tax audits and loan-loss allowances. Level 3 financial assets represented 2.2% of total assets at September 30, 2017.

Most important facts for investors to verify

Whether the strong nine-month earnings growth, particularly from Investing & Lending, is sustainable after the $496 million share-based compensation tax benefit and investment gains.
Whether low market volatility and weak FICC client activity continue to suppress Institutional Client Services revenue.
The composition, maturity profile and refinancing cost of the $211.852 billion of unsecured long-term borrowings and the $45.357 billion of short-term borrowings.
Changes in CET1, leverage, liquidity and TLAC requirements, including the impact of fully phased-in regulatory buffers and possible increases in risk-weighted assets.
Credit quality trends in corporate and real-estate lending, the $737 million loan-loss allowance, $105.0 billion of held-for-investment lending commitments and the increase in non-investment-grade exposures.
Developments in litigation, mortgage repurchase claims, 1MDB-related investigations and other regulatory proceedings, including potential losses beyond recorded reserves.
Actual cash generation and balance-sheet funding needs, given the $11.119 billion operating cash outflow and $5.101 billion decline in cash and cash equivalents during the first nine months.