Goldman Sachs Group Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also presents unaudited fourth-quarter results. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. The firm had 36,800 staff, offices in more than 30 countries, and generated 44% of net revenues outside the Americas.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $33.82 billion | $34.53 billion | Down 2% |
| Pre-tax earnings | $8.78 billion | $12.36 billion | Down 29% |
| Net earnings | $6.08 billion | $8.48 billion | Down 28% |
| Net earnings applicable to common shareholders | $5.57 billion | $8.08 billion | Down 31% |
| Diluted EPS | $12.14 | $17.07 | Down 29% |
| ROE on average common equity | 7.4% | 11.2% | Down 3.8 percentage points |
| Operating expenses | $25.04 billion | $22.17 billion | Up 13% |
| Pre-tax margin | Approximately 26% | Approximately 36% | Lower |
| Effective tax rate | 30.7% | 31.4% | Lower |
The fourth quarter generated net revenues of $7.27 billion, pre-tax earnings of $1.07 billion, net earnings of $765 million, and diluted EPS of $1.27. Fourth-quarter operating expenses were $6.20 billion.
Revenue and segment performance
| Segment | 2015 net revenues | 2015 pre-tax earnings | 2014 net revenues |
|---|---|---|---|
| Investment Banking | $7.03 billion | $3.31 billion | $6.46 billion |
| Institutional Client Services | $15.15 billion | $1.21 billion | $15.20 billion |
| Investing & Lending | $5.44 billion | $3.03 billion | $6.83 billion |
| Investment Management | $6.21 billion | $1.37 billion | $6.04 billion |
- Investment Banking revenue increased 9%, led by a 40% increase in Financial Advisory revenue from strong mergers and acquisitions activity. Underwriting revenue declined 11% as debt and equity issuance weakened.
- Institutional Client Services revenue was broadly unchanged. Equities revenue increased 16%, offsetting a 13% decline in Fixed Income, Currency and Commodities Client Execution.
- Investing & Lending revenue decreased 20%, reflecting lower equity and debt investment gains, the prior-year sale of Metro International Trade Services, weaker equity markets, and wider high-yield spreads.
- Investment Management revenue increased 3%. Assets under supervision rose to $1.25 trillion from $1.18 trillion, supported by $94 billion of net inflows despite $20 billion of market depreciation.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents increased $17.51 billion to $75.11 billion at year-end. Operating activities provided $6.96 billion, investing activities used $18.57 billion, and financing activities provided $29.12 billion.
- Total assets were $861.40 billion, compared with $855.84 billion at year-end 2014. Total liabilities were $774.67 billion and shareholders’ equity was $86.73 billion.
- Unsecured long-term borrowings were $175.42 billion, up from $167.30 billion. Unsecured short-term borrowings were $42.79 billion, down from $44.54 billion. Deposits increased to $97.52 billion from $82.88 billion.
- Global Core Liquid Assets were $199.12 billion, up from $182.95 billion. Management stated that liquidity was appropriate, and average fourth-quarter U.S. liquidity coverage exceeded the fully phased-in minimum based on the firm’s interpretation of applicable rules.
- Leverage ratio was 9.9x, compared with 10.3x; debt-to-equity was 2.0x in both periods. Book value per common share rose to $171.03 from $163.01.
- Fully phased-in Basel III Advanced CET1, Tier 1 and total capital ratios were 11.7%, 13.5% and 16.1%, respectively. Transitional Basel III Advanced CET1 was 12.4%; the Tier 1 leverage ratio was 9.3%.
- The firm repurchased 22.1 million common shares for $4.20 billion and declared $2.55 per common share of dividends during 2015.
Material changes and unusual items
- The firm recorded $3.37 billion of provisions related to an agreement in principle with the RMBS Working Group, reducing after-tax earnings by approximately $2.99 billion, diluted EPS by $6.53, and ROE by 3.8 percentage points. The agreement contemplated a $2.39 billion civil penalty, $875 million of cash payments, and $1.80 billion of consumer relief; definitive documentation remained subject to negotiation.
- Total litigation and regulatory provisions increased to $4.01 billion from $754 million. The filing estimated reasonably possible aggregate legal losses at approximately $2.0 billion above recorded reserves for matters where a range could be estimated.
- Non-compensation expenses increased 30% to $12.36 billion, while compensation and benefits expense was essentially unchanged at $12.68 billion. Headcount increased 8% to 36,800.
- Standardized and Basel III Advanced capital ratios strengthened, although Basel III Advanced operational risk-weighted assets increased by $33.10 billion, substantially related to mortgage-related legal and regulatory matters.
- The Volcker Rule became effective in July 2015. The firm held $7.76 billion of investments in funds measured at net asset value and expected to reduce most applicable covered-fund interests during the conformance period.
Outlook, management commentary and principal risks
Management did not provide numerical earnings guidance. The outlook remained highly dependent on global financial-market conditions, client activity, asset prices, volatility, credit spreads, interest rates, and regulatory implementation.
- Management indicated that sustained macroeconomic concerns, lower market-making or investment-banking activity, declining asset prices, or further credit-spread widening could reduce revenues and profitability.
- Investment-banking backlog was higher at year-end, but transactions may be delayed, modified, or cancelled and therefore may not produce the estimated revenues.
- Major risks include market, liquidity, credit, operational, legal, regulatory, reputational, cyber and model risk; employee retention; conflicts of interest; and intense competition and pricing pressure.
- A one-notch and two-notch credit-rating downgrade could have required approximately $1.06 billion and $2.69 billion, respectively, of additional collateral or termination payments on bilateral derivative liabilities.
- Regulatory capital, liquidity, leverage, TLAC, derivatives-margin, resolution-planning and compensation requirements were continuing to evolve and could increase funding costs, constrain activities, or limit capital distributions.
- Mortgage-related representations and warranties remain a significant contingency. The filing stated that the firm could not meaningfully estimate potential exposure to future residential-mortgage repurchase claims.
- Management concluded that disclosure controls and internal control over financial reporting were effective. PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal controls.
Most important facts for an investor to verify
- Reconcile the $3.37 billion RMBS provision with the final settlement terms, cash payments, consumer-relief obligations, and any subsequent legal reserves.
- Assess normalized earnings and ROE excluding mortgage-related litigation and regulatory provisions.
- Review the sustainability and composition of the $199 billion liquidity reserve, regulatory LCR, capital ratios, and the impact of fully phased-in G-SIB and TLAC requirements.
- Evaluate the growth in loans and lending commitments, including non-investment-grade exposures, oil-and-gas exposure, and related allowance coverage.
- Monitor fixed-income and commodities revenue trends, market liquidity, credit spreads, and the effect of regulatory constraints on Institutional Client Services.
- Review legal proceedings, mortgage repurchase contingencies, guarantees, commitments, derivatives, and the estimated $2.0 billion of reasonably possible losses above recorded reserves.
- Confirm the timing and economic impact of the proposed acquisition of approximately $16 billion of GE Capital Bank online and brokered deposits.