Goldman Sachs Group Inc. 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019, with quarterly information for the fourth quarter. Goldman Sachs is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and individuals. Beginning in the fourth quarter, the firm reported four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. Prior-period segment information was reclassified to conform to the new presentation.
The firm had 38,300 employees at year-end, offices in more than 30 countries, and 46% of headcount outside the Americas. The financial statements received an unqualified audit opinion, and management concluded that internal control over financial reporting was effective.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $36.546 billion | $36.616 billion | Essentially unchanged |
| Pre-tax earnings | $10.583 billion | $12.481 billion | Down 15% |
| Net earnings | $8.466 billion | $10.459 billion | Down 19% |
| Net earnings to common | $7.897 billion | $9.860 billion | Down 20% |
| Diluted EPS | $21.03 | $25.27 | Down 17% |
| ROE | 10.0% | 13.3% | Down 3.3 percentage points |
| ROTE | 10.6% | 14.1% | Down 3.5 percentage points |
| Efficiency ratio | 68.1% | 64.1% | Higher by 4.0 percentage points |
| Provision for credit losses | $1.065 billion | $674 million | Up 58% |
| Operating expenses | $24.898 billion | $23.461 billion | Up 6% |
| Effective tax rate | 20.0% | 16.2% | Higher, partly due to the 2018 tax benefit |
Net interest income increased 16% to $4.362 billion. Market-making revenue increased 4% to $10.157 billion, while investment banking revenue declined 9% to $6.798 billion, investment management revenue declined 6% to $6.189 billion, and commissions and fees declined 7% to $2.988 billion.
- Investment Banking segment net revenues were $7.599 billion, down 7%, and pre-tax earnings were $2.581 billion, down 28%.
- Global Markets segment net revenues were $14.779 billion, up 2%, and pre-tax earnings were $3.893 billion, up 2%. FICC revenue increased 6%, while Equities revenue was essentially unchanged.
- Asset Management segment net revenues were $8.965 billion, essentially unchanged, but pre-tax earnings fell 14% to $3.874 billion because of higher expenses, credit provisions and lower incentive fees.
- Consumer & Wealth Management segment net revenues were $5.203 billion, essentially unchanged, while pre-tax earnings declined 61% to $235 million. Consumer banking revenue increased 41%, but credit card and other growth investments increased expenses and provisions.
Cash flow, balance sheet, debt and liquidity
| Metric | December 2019 | December 2018 |
|---|---|---|
| Total assets | $992.968 billion | $931.796 billion |
| Total liabilities | $902.703 billion | $841.611 billion |
| Shareholders’ equity | $90.265 billion | $90.185 billion |
| Cash and cash equivalents | $133.546 billion | $130.547 billion |
| Deposits | $190.019 billion | $158.257 billion |
| Unsecured long-term borrowings | $207.076 billion | $224.149 billion |
| Leverage ratio | 11.0x | 10.3x |
| Debt-to-equity ratio | 2.3x | 2.5x |
| Average daily LCR | 127% | 127% |
Net cash provided by operating activities was $23.868 billion, net cash used in investing activities was $24.236 billion, and net cash provided by financing activities was $3.367 billion. Cash and cash equivalents increased by $2.999 billion during 2019. Management noted that traditional cash-flow analysis is less meaningful for a global financial institution than liquidity and asset-liability measures.
Average global core liquid assets were $233.650 billion in 2019. The firm reported a 13.3% standardized CET1 ratio, a 13.7% advanced CET1 ratio, an 8.7% Tier 1 leverage ratio and a 6.2% supplementary leverage ratio. The 2019 CCAR plan authorized up to $8.8 billion of capital return through the second quarter of 2020.
Material changes versus the prior comparable period
- Profitability weakened despite broadly flat revenue, primarily because of higher litigation and regulatory provisions, higher technology and consolidated-investment expenses, and increased credit-loss provisions.
- Net provisions for litigation and regulatory proceedings increased to $1.24 billion from $844 million and reduced 2019 diluted EPS by $3.16 and ROE by 1.5 percentage points.
- Credit-loss provisions increased by $391 million, reflecting higher corporate-loan impairments and higher provisions on credit card loans. The allowance for loan losses rose to $1.441 billion from $1.066 billion.
- Total assets increased 7%, primarily from higher trading assets, investments and loans. Deposits increased 20%, primarily from consumer deposits, while unsecured long-term borrowings declined 8%.
- Assets under supervision increased to $1.859 trillion from $1.542 trillion, reflecting $173 billion of net inflows and $144 billion of market appreciation. Acquisitions contributed approximately $71 billion of those inflows, including United Capital, SPIAS and Rocaton.
- The firm repurchased $5.335 billion of common stock and paid $1.544 billion of common dividends in 2019, returning $6.88 billion to common shareholders.
- The firm adopted the lease accounting standard in 2019, increasing the balance sheet by approximately $1.77 billion at adoption. The CECL standard was adopted in January 2020, resulting in an approximately $848 million increase in the allowance for credit losses and an approximately $640 million after-tax reduction to retained earnings.
Guidance, outlook, commentary and risks
- Management estimated approximately $1.3 billion of expense efficiencies and $1.0 billion of interest-expense savings over the following three years through funding optimization, deposit growth and reduced wholesale funding. The filing estimated a 2020 tax rate of approximately 21%, excluding certain tax benefits and non-deductible litigation.
- Management’s target CET1 ratio over the next three years was 13.0% to 13.5%, including management buffers. The firm expected its G-SIB surcharge to increase to 3% over the following three years.
- Brexit created uncertainty regarding post-2020 access to European markets, subsidiary capital and liquidity requirements, operational costs and client migration. Goldman Sachs planned to use Goldman Sachs Bank Europe SE as its principal European operating entity where required.
- The firm continued preparations for the expected discontinuation of LIBOR after 2021 and related transition to alternative risk-free rates, including SOFR and SONIA. The transition could create legal, operational, model, funding, accounting and market risks.
- Material risks include market volatility and illiquidity, credit deterioration, funding and liquidity stress, ratings downgrades, regulatory reform, cyber and operational failures, model risk, employee misconduct, litigation, reputational damage, competition, consumer-credit losses, Brexit and climate-related disruption.
- The firm reported approximately $3.3 billion of reasonably possible aggregate legal losses in excess of reserves for matters where a range could be estimated. The filing highlighted ongoing 1MDB-related investigations and proceedings, including potential significant fines, penalties and activity restrictions.
- The firm’s net derivative liabilities could have required approximately $358 million of additional collateral or termination payments after a one-notch downgrade and $1.268 billion after a two-notch downgrade as of December 2019.
Most important facts for an investor to verify
- Whether planned expense efficiencies and funding savings are realized without impairing revenue growth or risk controls.
- The trajectory of credit losses, particularly in corporate lending, unsecured consumer loans and credit cards, after CECL adoption.
- The amount and timing of litigation and regulatory settlements, especially 1MDB-related matters and other antitrust, securities and market-conduct proceedings.
- Whether Consumer & Wealth Management can scale profitably after substantial technology, credit-card and consumer-lending investment.
- The sustainability and quality of Asset Management gains, including the contribution from private-equity realizations, incentive fees and market appreciation.
- Capital and liquidity headroom relative to higher G-SIB, TLAC, leverage, stress-testing and other regulatory requirements.
- Exposure to LIBOR replacement, Brexit implementation, ratings downgrades, derivative collateral calls and wholesale-funding stress.
- The comparability of segment results because the firm changed segment definitions and reclassified prior periods beginning in the fourth quarter of 2019.