Goldman Sachs Group Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
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 filing covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013 and balance-sheet comparisons to December 31, 2013. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / Prior period |
|---|---|---|
| Net revenues | $9.328 billion | $10.090 billion; down 8% |
| Pre-tax earnings | $3.021 billion | $3.373 billion; down 10% |
| Net earnings | $2.033 billion | $2.260 billion; down 10% |
| Net earnings applicable to common shareholders | $1.949 billion | $2.188 billion; down 11% |
| Diluted EPS | $4.02 | $4.29 |
| Net interest income | $1.037 billion | $925 million; up 12% |
| Operating expenses | $6.307 billion | $6.717 billion; down 6% |
| Pre-tax margin | 32.4% | 33.4% |
| Net margin | 21.8% | 22.4% |
| Compensation-to-revenue ratio | 43.0% | 43.0% |
| Annualized ROE on average common equity | 10.9% | 12.4% |
| Common dividend declared per share | $0.55 | $0.50 |
Investment Banking revenue increased 13% to $1.779 billion, led by stronger financial advisory activity, particularly in Europe. Institutional Client Services revenue declined 13% to $4.446 billion, reflecting weaker fixed-income, currency, commodities and equities activity. Investing & Lending revenue fell 26% to $1.529 billion, primarily because public-equity gains were lower. Investment Management revenue rose 20% to $1.574 billion, supported by higher incentive fees and management fees.
Assets under supervision increased to $1.083 trillion from $1.042 trillion at year-end 2013, including $27 billion of net inflows and $14 billion of market appreciation. Long-term assets under supervision increased by $54 billion, including $40 billion of net inflows.
Balance sheet, debt, liquidity and cash flow
- Total assets were $915.665 billion, up from $911.507 billion at December 31, 2013. Total liabilities were $836.566 billion and shareholders’ equity was $79.099 billion.
- Cash and cash equivalents were $58.858 billion, down $2.275 billion during the quarter. Cash and securities segregated for regulatory and other purposes increased to $60.180 billion.
- Unsecured short-term borrowings were $46.391 billion; total short-term borrowings, including short-term secured financings, were $64.504 billion.
- Unsecured long-term borrowings were $165.627 billion, up from $160.965 billion. Total long-term borrowings, including secured financings, were $172.499 billion.
- Global Core Excess liquidity was $174.994 billion at quarter-end. Management stated that liquidity was appropriate under its internal stress framework.
- Operating activities used $4.221 billion of cash, investing activities used $3.203 billion, and financing activities provided $5.149 billion. Net cash used in Q1 2013 was $9.336 billion.
- The firm repurchased 10.3 million common shares for $1.72 billion and paid $348 million in dividends and dividend equivalents.
- Regulatory capital remained strong: CET1 ratio was 14.6%, Tier 1 capital ratio 16.3%, total capital ratio 19.3%, and Tier 1 leverage ratio 8.2%. The Revised Capital Framework became effective January 1, 2014.
Material changes versus the prior comparable period
- Revenue mix shifted away from market-sensitive businesses: market-making revenue declined 23% to $2.639 billion and other principal transactions declined 28% to $1.503 billion.
- Investment Banking and Investment Management provided partial offsets to lower Institutional Client Services and Investing & Lending results.
- Operating expenses declined by $410 million, principally because compensation fell $328 million and insurance reserves fell $127 million following the sale of a majority stake in the Americas reinsurance business in April 2013.
- Depreciation and amortization increased $88 million, including $150 million of impairment charges related to assets of a consolidated Latin American investment.
- Level 3 financial assets increased to $40.923 billion from $40.013 billion; they represented 4.5% of total assets at March 31, 2014.
- Risk-weighted assets increased to $462.323 billion from $433.226 billion, primarily due to the new capital framework and the treatment of investments in certain nonconsolidated entities.
Outlook, commentary, risks and unusual items
The filing provides no formal quantitative revenue or earnings guidance. Management described market-making conditions as improved from the fourth quarter of 2013 but characterized client risk appetite and activity levels as generally subdued. Future results remain highly sensitive to global economic conditions, market volatility, asset prices, credit spreads, client activity and regulatory developments.
- The Volcker Rule requires compliance by July 2015, with possible extensions for certain provisions. Covered-fund investments may need to be sold at values below carrying amounts if secondary-market liquidity is limited.
- Management estimated the upper end of reasonably possible aggregate legal losses at approximately $3.7 billion in excess of reserves for matters where a range could be estimated. Potential mortgage-related put-back claims and certain investigations were excluded because exposure could not be meaningfully estimated.
- The firm reported substantial mortgage-related, securities, antitrust, commodities, foreign-exchange, employment and regulatory litigation. A Libya-related derivative action sought damages exceeding $1 billion; the firm moved for summary judgment.
- Derivative guarantees had a total maximum payout/notional amount of $759.488 billion, while securities lending indemnifications totaled $33.101 billion. These notional amounts are not expected losses.
- A one-notch downgrade could have required approximately $930 million of additional collateral or termination payments; a two-notch downgrade could have required approximately $2.755 billion.
- Total commitments were $179.992 billion, including $97.483 billion of commitments to extend credit, $59.055 billion of contingent and forward-starting resale or securities-borrowing agreements, and $5.997 billion of investment commitments.
Most important facts for investors to verify
- Whether subsequent quarters confirm stabilization in Institutional Client Services and whether low volatility continues to pressure market-making revenue.
- The sustainability and composition of Investment Management inflows and the extent to which Q1 incentive fees were nonrecurring.
- The effect of the Basel III capital framework, future RWA methodology changes, capital buffers and the Volcker Rule on capital returns and fund investments.
- Changes in legal reserves, the estimated $3.7 billion excess reasonably possible loss range, and developments in mortgage-related claims and investigations.
- Liquidity coverage under stress, including Global Core Excess, secured-funding maturities, collateral calls and potential effects of credit-rating downgrades.
- The performance and valuation sensitivity of Level 3 assets, private-equity investments, loans, derivatives and the Latin American consolidated investment impairment.
- Whether common-share repurchases and dividends remain consistent with regulatory approval, capital requirements and subsidiary liquidity restrictions.