Goldman Sachs Group Inc. — Q1 2013 Form 10-Q
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2013, with comparison to March 31, 2012 and balance-sheet comparison to December 31, 2012. Goldman Sachs is a global investment banking, securities and investment management firm reporting four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $10.09 billion | $9.95 billion | 2% increase |
| Pre-tax earnings | $3.37 billion | $3.18 billion | 6% increase |
| Net earnings | $2.26 billion | $2.11 billion | 7% increase |
| Net earnings applicable to common shareholders | $2.19 billion | $2.07 billion | 5% increase |
| Diluted EPS | $4.29 | $3.92 | 9% increase |
| Dividends declared per common share | $0.50 | $0.35 | Increase |
| Net margin | 22.4% | 21.2% | Improved |
| Annualized ROE on common equity | 12.4% | 12.2% | Improved |
- Revenue composition: investment banking $1.57 billion, investment management $1.25 billion, commissions and fees $829 million, market making $3.44 billion, other principal transactions $2.08 billion, and net interest income $925 million.
- Operating expenses were $6.72 billion versus $6.77 billion. Compensation and benefits were $4.34 billion, or 43.0% of net revenues versus 44.0% in the prior-year quarter. Total staff declined to approximately 32,000 from 32,400.
- The effective tax rate was 33.0%. Net earnings and diluted EPS benefited from higher investment banking, investing and lending, and investment management results, partly offset by weaker market-making revenue.
- Segment pre-tax earnings were $504 million in Investment Banking, $1.57 billion in Institutional Client Services, $1.07 billion in Investing & Lending, and $225 million in Investment Management.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents declined $9.34 billion during the quarter to $63.33 billion. Operating activities used $5.70 billion, investing activities used $953 million, and financing activities used $2.69 billion.
- Total assets increased to $959.22 billion from $938.56 billion, primarily due to higher collateralized agreements. Total liabilities increased to $882.00 billion from $862.84 billion. Shareholders’ equity rose to $77.23 billion from $75.72 billion.
- Unsecured short-term borrowings were $40.98 billion; total short-term borrowings, including short-term secured financings, were $61.48 billion. Unsecured long-term borrowings were $167.01 billion, and total long-term borrowings were $175.98 billion.
- The debt-to-equity ratio was 2.2x, leverage was 12.4x, and adjusted leverage was 8.9x. The firm reported $174.44 billion of Global Core Excess liquidity at quarter-end and an average of $180.51 billion for the quarter.
- Regulatory capital remained above stated minimums: Tier 1 capital ratio was 14.4%, total capital ratio was 17.3%, Tier 1 leverage ratio was 7.5%, and Tier 1 common ratio was 12.7%. Risk-weighted assets increased substantially to $480.08 billion following revised market-risk capital requirements.
Material changes versus prior comparable periods
- Investment Banking net revenues rose 36%, led by debt underwriting, leveraged finance, commercial mortgage-related activity and stronger equity underwriting.
- Institutional Client Services net revenues fell 10% to $5.14 billion. Fixed Income, Currency and Commodities Client Execution declined 7%, while Equities declined 15%; interest-rate products and equity derivatives were weaker than in the strong Q1 2012 comparison.
- Investing & Lending net revenues increased 8% to $2.07 billion, supported by higher equity prices and tighter credit spreads. Equity investments generated $1.10 billion of net gains, while the ICBC gain declined to $24 million from $169 million.
- Investment Management net revenues increased 12% to $1.32 billion. Assets under supervision rose to $968 billion, reflecting $12 billion of market appreciation, partly offset by $9 billion of net outflows.
- Market-making revenue decreased 12% to $3.44 billion; other principal transactions revenue increased to $2.08 billion from $1.94 billion. Net interest income declined 6% to $925 million.
- Cash flow shifted from $3.78 billion of operating cash inflow in Q1 2012 to $5.70 billion of operating cash outflow in Q1 2013, reflecting changes in securities financing and trading balances.
Guidance, outlook, risks and unusual items
- The filing provides no formal quantitative earnings or revenue guidance. Management emphasizes that results are inherently variable and depend on global financial markets, economic conditions, asset prices, volatility, credit spreads, client activity and regulatory developments.
- Management stated that continued macroeconomic concerns, political uncertainty, lower market volumes, declining asset values, widening credit spreads or reduced client activity could pressure investment banking, market-making, investing and lending, and investment management results.
- Regulatory uncertainty remained significant, including the Volcker Rule, Basel capital changes, derivatives clearing and margin rules, and potential financial transaction taxes. Since March 2012, the firm had redeemed approximately $1.32 billion of hedge-fund interests, including approximately $260 million in Q1 2013, in preparation for Volcker Rule compliance.
- The firm recorded $110 million of net provisions for litigation and regulatory proceedings during Q1 2013. Management estimated the upper end of reasonably possible aggregate legal losses at approximately $3.5 billion in excess of recorded reserves, although many matters could not be reasonably estimated.
- Mortgage-related matters remain material. Active cases seeking rescission involved approximately $19.7 billion of mortgage-related securities sold to plaintiffs, excluding threatened and other potential claims. Management stated that potential repurchase exposure could increase but could not be meaningfully estimated.
- The firm completed the sale of a majority stake in its reinsurance business in April 2013, after quarter-end, and expected to cease consolidating that business. The business had approximately $16.8 billion of assets and $14.5 billion of liabilities classified as held for sale at March 31, 2013.
- On March 25, 2013, the Berkshire Hathaway warrant was amended for net share settlement on October 1, 2013, covering 43.5 million shares with a $115 exercise price. On April 25, 2013, the company issued $1.0 billion liquidation preference of Series J preferred stock.
- The firm repurchased 10.1 million common shares for $1.52 billion during the quarter. On April 15, 2013, the Board authorized an additional 75 million shares for repurchase, subject to Federal Reserve approval.
Most important facts for an investor to verify
- Whether the modest consolidated revenue growth is sustainable given the decline in Institutional Client Services and market-making revenue.
- The sensitivity of Investing & Lending gains and fair values to equity prices, credit spreads and other market conditions.
- The effect of revised market-risk capital rules and pending Basel, Dodd-Frank and Volcker Rule requirements on capital ratios, leverage, business mix and distributions.
- The post-quarter sale and deconsolidation of the reinsurance business, including any gain, loss, capital or liquidity effects not reflected in Q1 results.
- The ultimate cost and timing of mortgage-related litigation, regulatory proceedings, repurchase claims and the approximately $3.5 billion excess reasonably possible legal-loss estimate.
- The decline in cash balances and operating cash flow, alongside the availability and transferability of the reported $174.44 billion Global Core Excess liquidity pool.
- The terms and potential dilution associated with the amended Berkshire Hathaway warrant and the company’s planned share repurchases and preferred-stock issuance.