Goldman Sachs Group, Inc. — 2019 Q3 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 nine months ended September 30, 2019, compared primarily with the corresponding 2018 periods and December 31, 2018 balance-sheet amounts. Activities are reported through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total net revenues | $8.323 billion | $8.820 billion | $26.591 billion | $28.536 billion |
| Pre-tax earnings | $2.416 billion | $3.078 billion | $8.262 billion | $9.773 billion |
| Net earnings | $1.877 billion | $2.524 billion | $6.549 billion | $7.921 billion |
| Net earnings applicable to common shareholders | $1.793 billion | $2.453 billion | $6.173 billion | $7.538 billion |
| Diluted EPS | $4.79 | $6.28 | $16.32 | $19.21 |
| Provision for credit losses | $291 million | $174 million | $729 million | $452 million |
| Operating expenses | $5.616 billion | $5.568 billion | $17.600 billion | $18.311 billion |
- Q3 net revenues declined 6%, pre-tax earnings declined 22%, net earnings declined 26%, and diluted EPS declined 24% year over year.
- Nine-month net revenues declined 7%, pre-tax earnings declined 15%, net earnings declined 17%, and diluted EPS declined 15% year over year.
- Calculated pre-tax margin was approximately 29.0% in Q3 2019 versus 34.9% in Q3 2018, and 31.1% for the first nine months versus 34.2% in the prior-year period. Net margin was approximately 22.6% in Q3 versus 28.6%, and 24.6% for nine months versus 27.8%.
- Net interest income increased 18% in Q3 to $1.008 billion and 19% for nine months to $3.297 billion, supported by higher average balances and interest rates.
- Operating expenses were essentially flat in Q3 and declined 4% for nine months. The efficiency ratio increased to 67.5% from 63.1% in Q3 and to 66.2% from 64.2% for nine months.
- Annualized ROE was 9.0% in Q3 and 10.4% for nine months, compared with 13.1% and 13.7%, respectively, in the prior-year periods. Annualized ROTE was 9.5% and 11.0%, compared with 13.8% and 14.6%.
Revenue and segment developments
- Q3 Investment Banking revenue declined 15% to $1.687 billion, reflecting lower financial advisory and underwriting revenue. Nine-month revenue declined 8% to $5.360 billion.
- Q3 Institutional Client Services revenue increased 6% to $3.287 billion, including higher FICC Client Execution and Equities revenue. Nine-month revenue declined 6% to $10.368 billion due to weaker market-making results.
- Q3 Investing & Lending revenue declined 17% to $1.681 billion and pre-tax earnings declined 61% to $421 million, driven by lower equity investment gains and higher credit-loss provisions. Nine-month pre-tax earnings declined 27% to $2.274 billion.
- Investment Management revenue declined 2% in Q3 and 9% for nine months, primarily because of lower incentive fees. Assets under supervision increased to $1.762 trillion from $1.550 trillion, aided by acquisitions, net inflows and market appreciation.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents declined to $94.094 billion at September 30, 2019 from $130.547 billion at December 31, 2018.
- Nine-month operating cash flow was an outflow of $27.483 billion, compared with an inflow of $2.320 billion in 2018. Investing cash flow was an outflow of $19.396 billion and financing cash flow was an inflow of $10.426 billion.
- Total assets increased to $1.007 trillion from $931.796 billion, primarily because financial instruments owned increased to $424.989 billion from $336.161 billion.
- Total shareholders’ equity increased to $92.012 billion from $90.185 billion. Book value per common share was $218.82, versus $207.36 at year-end 2018; tangible book value per common share was $205.59, versus $196.64.
- Deposits increased to $182.702 billion from $158.257 billion, while collateralized financings increased to $139.792 billion from $111.964 billion.
- Unsecured short-term borrowings increased to $51.958 billion from $40.502 billion. Unsecured long-term borrowings declined to $216.878 billion from $224.149 billion; total long-term borrowings, including secured financings, were $228.723 billion.
- Average Q3 Global Core Liquid Assets were $238.313 billion. Average daily liquidity coverage ratio was 134%, above the 100% minimum.
Material changes, outlook and unusual items
- Management attributed the revenue decline to weaker investment banking activity, lower private-equity gains, lower incentive fees and challenging market-making conditions, partly offset by stronger Q3 FICC activity and higher net interest income.
- The firm expected its 2019 effective income tax rate to be approximately 22%, subject to earnings mix, regulatory guidance and other factors.
- The 2019 CCAR plan authorized up to $8.8 billion of capital returns through the second quarter of 2020, including up to $7.0 billion of common-stock repurchases and $1.8 billion of common dividends. The firm returned $1.14 billion in Q3 and $4.26 billion in the first nine months.
- Management estimated that adoption of the CECL credit-loss standard in January 2020 would increase the allowance for credit losses by approximately $600 million to $800 million, although the final impact could vary.
- The firm adopted the new lease standard in January 2019, increasing the balance sheet by approximately $1.77 billion and retained earnings by $12 million net of tax.
- Management identified slower global growth, trade tensions, Brexit, geopolitical uncertainty, declining transaction volumes, market volatility, asset-price declines, widening credit spreads and reduced client activity as risks to future revenue.
- Significant contingencies include 1MDB-related investigations and litigation, mortgage-related claims, antitrust matters, securities-offering litigation and other regulatory investigations. The estimated upper end of reasonably possible aggregate legal losses exceeded recorded reserves by approximately $2.9 billion, excluding matters for which a range could not be estimated.
- The firm had not made a meaningful estimate of potential exposure to certain legacy residential mortgage repurchase claims. It also had a commitment to provide $1.80 billion of consumer relief by January 2021, of which approximately $1.45 billion had been provided by September 2019.
- Controls and procedures were assessed as effective as of September 30, 2019, and the independent accountant’s review identified no material modifications needed to the interim financial statements.
Most important facts for investors to verify
- Whether revenue and profitability recover from the Q3 and nine-month declines, particularly in Investment Banking, Investing & Lending and Investment Management.
- The trajectory of credit-loss provisions, consumer-loan performance and the estimated $600 million to $800 million CECL adoption increase.
- Actual capital distributions compared with the CCAR authorization and the effect of future capital requirements, including the proposed stress capital buffer.
- Liquidity trends, deposit stability, secured-funding reliance, collateral requirements and the effect of any credit-rating downgrade.
- Developments in 1MDB, mortgage-related, antitrust and other legal or regulatory matters, including potential losses beyond recorded reserves.
- The effect of Brexit, LIBOR and other IBOR transitions, final regulatory rules, and the execution costs and revenue potential of consumer lending, credit cards and transaction banking initiatives.