GOLDMAN SACHS GROUP INC quarterly report, Q2 FY2013

Goldman Sachs Group Inc. — 2Q13 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 high-net-worth individuals. The filing covers the unaudited three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. The firm reports four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.

Key financial metrics

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Net revenues	$8.612 billion	$6.627 billion	$18.702 billion	$16.576 billion
Pre-tax earnings	$2.645 billion	$1.415 billion	$6.018 billion	$4.596 billion
Net earnings	$1.931 billion	$962 million	$4.191 billion	$3.071 billion
Net earnings applicable to common shareholders	$1.861 billion	$927 million	$4.049 billion	$3.001 billion
Diluted EPS	$3.70	$1.78	$7.99	$5.72
Net interest income	$826 million	$1.090 billion	$1.751 billion	$2.071 billion
Total operating expenses	$5.967 billion	$5.212 billion	$12.684 billion	$11.980 billion

Approximate pre-tax margin was 30.7% in the second quarter and 32.2% for the first half, compared with 21.4% and 27.7%, respectively, in the comparable 2012 periods. Approximate net margin was 22.4% in both the second quarter and first half of 2013, compared with 14.5% and 18.5%, respectively, in 2012.

Second-quarter net revenues increased 30%; first-half net revenues increased 13%.
Second-quarter revenue growth was led by Other principal transactions, market making and investment banking. Other principal transactions increased to $1.402 billion from $169 million, while market making increased to $2.692 billion from $2.097 billion.
Investment banking revenue increased 29% in the second quarter and 32% for the first half, driven primarily by debt and equity underwriting.
Investing & Lending generated $1.415 billion of second-quarter revenue versus $203 million in 2012, including $462 million of equity investment gains and $658 million from debt securities and loans.
Compensation and benefits expense increased 27% in the second quarter and 10% for the first half. The first-half compensation-to-net-revenue ratio improved to 43.0% from 44.0%.
Annualized return on average common equity was 10.5% in the second quarter and 11.5% for the first half, compared with 5.4% and 8.8%, respectively, in 2012.
Total staff was 31,700 at quarter-end, down from 32,300 at June 30, 2012.

Cash flow, balance sheet, debt and liquidity

Cash and cash equivalents were $72.398 billion at June 30, 2013, compared with $72.669 billion at December 31, 2012. Six-month operating cash flow was $5.634 billion; investing activities used $1.660 billion and financing activities used $4.245 billion.
Total assets were $938.456 billion, essentially unchanged from $938.555 billion at year-end 2012. Financial instruments owned at fair value declined to $356.161 billion from $407.011 billion, while collateralized agreements increased.
Total shareholders’ equity increased to $78.043 billion from $75.716 billion. Common shareholders’ equity was $70.843 billion; tangible common shareholders’ equity was $66.349 billion.
Unsecured short-term borrowings were $41.801 billion and total short-term borrowings were $61.460 billion. Unsecured long-term borrowings were $162.042 billion, and total long-term borrowings were $169.717 billion.
Deposits were $69.395 billion, compared with $70.124 billion at year-end. The firm’s global core excess liquidity pool was $183.124 billion at June 30, 2013, compared with $174.622 billion at year-end.
Adjusted assets were $651.555 billion, producing an adjusted leverage ratio of 8.3x versus 9.1x at year-end. The debt-to-equity ratio was 2.1x versus 2.2x.
Basel 1 Tier 1 capital was $71.141 billion and the Tier 1 capital ratio was 15.6%; total capital was $84.480 billion and the total capital ratio was 18.5%. The Tier 1 common ratio was 13.5%.
Management estimated a fully phased-in Basel 3 Tier 1 common ratio of 9.3% as of June 30, 2013. This estimate is non-GAAP and subject to evolving rules and regulatory interpretation.

Material changes versus comparable periods and year-end

Profitability improved substantially year over year, primarily because of stronger underwriting, market-making and Investing & Lending results.
Net interest income fell 24% in the second quarter and 15% for the first half, principally because of lower yields on financial instruments owned.
Institutional Client Services revenue rose 11% in the second quarter but declined 2% for the first half. The second quarter benefited from stronger currencies, credit products, commodities and equities, partly offset by weaker mortgages and interest-rate products.
Investment Management revenue was flat in the second quarter and up 6% for the first half. Assets under supervision declined to $955 billion at June 30, 2013 from $965 billion at year-end, reflecting market depreciation and lower liquidity products.
The firm completed the sale of a majority stake in its Americas reinsurance business in April 2013 and retained an approximately 20% interest. The European insurance business was classified as held for sale in the second quarter, with approximately $9.66 billion of assets and $10.62 billion of liabilities classified accordingly.
Common stock repurchases totaled $1.60 billion in the second quarter and $3.125 billion for the first half. Preferred stock liquidation preference increased to $7.2 billion from $6.2 billion at year-end.
Accumulated other comprehensive loss increased to $583 million from $193 million, primarily reflecting available-for-sale securities adjustments and currency translation losses.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal numerical earnings or revenue guidance. Management emphasizes that results are inherently volatile and depend on global financial markets, economic conditions, client activity, asset prices, volatility, credit spreads and regulatory developments.
Management noted more challenging market conditions late in the quarter as interest rates and volatility increased and equity prices declined amid concerns about potential Federal Reserve tapering.
Investment banking backlog was essentially unchanged from the first quarter and year-end, with potential debt underwriting activity offsetting weaker potential advisory activity. Backlog may not convert to revenue because transactions can be delayed, modified or cancelled.
Material unusual or judgment-sensitive items included investment gains, the Americas reinsurance sale, European insurance assets held for sale, fair-value gains on certain borrowings and insurance liabilities, and $149 million of second-quarter net provisions for litigation and regulatory proceedings.
Management estimated the upper end of reasonably possible aggregate legal losses, in excess of reserves, at approximately $3.5 billion for matters where a range could be estimated. Mortgage-related claims, regulatory investigations, securities litigation, antitrust matters and other proceedings remain significant contingencies.
Total commitments were $159.030 billion, including $78.259 billion of commitments to extend credit, $52.649 billion of contingent and forward-starting resale and securities-borrowing agreements, and $15.360 billion of forward-starting repurchase and secured-lending agreements.
Derivative guarantees had $750.159 billion of maximum payout or notional amounts, while securities-lending indemnifications had $29.333 billion. These notional amounts are not expected losses and are substantially mitigated by collateral, netting and hedging.
Regulatory uncertainty remained elevated, including implementation of Basel 3, the Volcker Rule, derivatives requirements, capital and liquidity standards, and possible changes to systemic-bank surcharges.
A one-notch downgrade could have required approximately $1.261 billion of additional collateral or termination payments; a two-notch downgrade could have required approximately $2.166 billion.

Most important facts for an investor to verify

Whether the large second-quarter Investing & Lending gains and fair-value-related gains are recurring or primarily event-driven.
The composition, maturity and refinancing risk of the $162.042 billion of unsecured long-term borrowings and $61.460 billion of short-term borrowings.
The sustainability of the $183.124 billion global core excess liquidity pool and the extent to which liquidity is restricted at regulated subsidiaries.
The final impact of Basel 3, the Volcker Rule and other regulatory changes on capital ratios, business mix and returns.
The development of mortgage-related litigation, regulatory proceedings and the approximately $3.5 billion estimated excess reasonably possible legal loss range.
The valuation sensitivity and liquidity of level 3 assets, which totaled $42.824 billion, and of investments and commitments to private equity, credit, hedge and real estate funds.
The ability of the investment banking backlog and assets under supervision to support future revenue, particularly if market activity, asset prices or client flows weaken.