Goldman Sachs Group Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 2020. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. Results reflect the COVID-19 pandemic, elevated market volatility, government and central-bank support, increased client trading activity, and significant litigation and regulatory provisions.
Key financial metrics
| $ in millions, except per-share data | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total net revenues | $13,295 | $9,461 | $22,038 | $18,268 |
| Pre-tax earnings | $1,291 | $3,127 | $2,639 | $5,846 |
| Net earnings | $373 | $2,421 | $1,586 | $4,672 |
| Net earnings applicable to common | $197 | $2,198 | $1,320 | $4,380 |
| Diluted EPS | $0.53 | $5.81 | $3.66 | $11.52 |
| Provision for credit losses | $1,590 | $214 | $2,527 | $438 |
| Operating expenses | $10,414 | $6,120 | $16,872 | $11,984 |
| Efficiency ratio | 78.3% | 64.7% | 76.6% | 65.6% |
| Annualized ROE | 1.0% | 11.1% | 3.3% | 11.1% |
- Q2 net revenues increased 41%, while net earnings declined 85%; first-half net revenues increased 21%, while net earnings declined 66%.
- Approximate net margin was 2.8% in Q2 2020 versus 25.6% in Q2 2019, and 7.2% for the first half versus 25.6% in the prior-year period. Approximate pre-tax margin was 9.7% in Q2 and 12.0% for the first half.
- Market making revenue increased to $5.79 billion in Q2 and $9.47 billion for the first half, compared with $2.48 billion and $5.20 billion, respectively, in the comparable periods.
- Investment banking revenue increased 55% in Q2 and 32% for the first half, driven by equity and debt underwriting, partly offset by lower advisory activity.
- Net interest income declined 12% in Q2 to $944 million and 1% for the first half to $2.26 billion, primarily because of lower interest rates.
- Compensation and benefits expense was $4.48 billion in Q2 and $7.71 billion for the first half, up from $3.32 billion and $6.58 billion, respectively.
Balance sheet, debt and liquidity
- Total assets were $1.142 trillion at June 30, 2020, up from $992.97 billion at December 31, 2019. Total shareholders’ equity was $90.03 billion versus $90.27 billion.
- Cash and cash equivalents were $132.60 billion. Management reported average global core liquid assets of $290.01 billion in Q2, up from $242.75 billion in Q1.
- Deposits increased to $268.54 billion from $190.02 billion, primarily due to consumer, transaction banking and private-bank deposits.
- Unsecured borrowings totaled $266.89 billion, consisting of $44.26 billion of short-term and $222.63 billion of long-term borrowings. Collateralized financings totaled $130.74 billion.
- Six-month cash flow was negative from operations by $64.68 billion and from investing by $28.43 billion, partly offset by $92.16 billion provided by financing activities. Cash decreased $947 million during the period.
- Average daily liquidity coverage ratio was 144%, above the 100% minimum. The firm’s Standardized CET1 ratio was 13.3% and Advanced CET1 ratio was 11.9%; Tier 1 leverage ratio was 7.6% and supplementary leverage ratio was 6.6%.
- Loans totaled $117.09 billion net of a $3.90 billion allowance. Nonaccrual loans increased to $4.00 billion from $1.53 billion at year-end 2019.
Material changes versus prior comparable periods
- Strong Global Markets and underwriting performance more than offset weaker investment results and lower interest income, producing substantially higher revenue but materially lower earnings after provisions and expenses.
- Provision for credit losses rose sharply because of CECL adoption, COVID-19 economic forecasts, individual impairments, borrower downgrades and consumer credit deterioration. The allowance ratio increased to 3.7% from 1.6% at year-end 2019.
- Asset Management net revenues declined 18% in Q2 and 54% for the first half, primarily from lower private-equity and other investment gains. First-half Asset Management pre-tax earnings were a loss of $875 million versus earnings of $1.92 billion.
- Investment Banking recorded a Q2 pre-tax loss of $866 million versus earnings of $817 million, mainly because of credit provisions and litigation expenses despite higher underwriting revenue.
- Consumer & Wealth Management recorded a Q2 pre-tax loss of $155 million versus earnings of $34 million, reflecting higher credit provisions and operating expenses.
- The firm adopted CECL in January 2020, increasing the allowance for credit losses by $848 million and reducing retained earnings by $638 million, net of tax.
- Stock repurchases were suspended during Q2 and are required to remain suspended through Q3 2020. The firm continued common dividends, declaring $1.25 per share for Q2.
Guidance, outlook, commentary and unusual items
- The filing does not provide conventional quarterly revenue or earnings guidance. Management expects performance to remain sensitive to the duration and severity of COVID-19, market volatility, client activity, credit losses, asset valuations and investment banking volumes.
- Management indicated that sustained pandemic-related weakness could reduce market-making, mergers and acquisitions, underwriting, asset-management fees and consumer activity, while increasing defaults, credit provisions, liquidity needs and valuation uncertainty.
- On July 24, 2020, after the earnings release, Goldman Sachs announced an agreement in principle with Malaysia concerning 1MDB. The proposed resolution includes a $2.5 billion payment and a guarantee that Malaysia receives at least $1.4 billion in seized assets and proceeds.
- The Form 10-Q recorded an additional $2.01 billion provision for litigation and regulatory proceedings related to the agreement, bringing Q2 net litigation and regulatory provisions to approximately $2.96 billion. This reduced Q2 net earnings by approximately $2.05 billion and diluted EPS by $5.73 versus the Form 8-K earnings release.
- The filing estimates the upper end of reasonably possible aggregate legal losses at approximately $900 million above recorded reserves for matters where a range could be estimated. Other investigations and proceedings may produce material period-specific results.
- Investment banking backlog declined significantly from March and December 2019, primarily because of lower expected advisory and debt-underwriting revenue and uncertainty about transaction completion.
- Management expects its medium-term Standardized CET1 target to be 13.0% to 13.5%, including management buffers, while noting that the stress capital buffer and G-SIB surcharge may increase.
Most important facts for investors to verify
- Whether the Malaysia/1MDB agreement in principle was finalized and whether the $2.5 billion payment and $1.4 billion asset guarantee ultimately match the disclosed terms.
- Subsequent changes in COVID-19-related credit losses, nonaccrual loans, loan forbearance, consumer delinquencies and the $3.90 billion allowance balance.
- Whether market-making strength and underwriting activity persisted after Q2, particularly if volatility, credit spreads or client activity normalized.
- Changes in investment banking backlog, Asset Management private-equity valuations and fee-generating assets under supervision.
- Capital-distribution restrictions, future dividends, the timing of share-repurchase resumption, and the effect of the 13.7% Standardized CET1 requirement beginning October 1, 2020.
- Liquidity and funding trends, including deposits, global core liquid assets, collateral requirements, credit ratings and the 144% average LCR.
- Material legal, regulatory, mortgage-related, antitrust and 1MDB contingencies beyond recorded reserves.