Goldman Sachs Group, Inc. — Q1 2010 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; Trading and Principal Investments; and Asset Management and Securities Services. The filing covers the three months ended March 31, 2010, compared with the three months ended March 27, 2009. The financial statements are unaudited. The firm changed its fiscal year-end to December 31 beginning in the fourth quarter of 2009.
Financial performance and key metrics
| Metric | Q1 2010 | Comparable period | Change |
|---|---|---|---|
| Net revenues | $12.775 billion | $9.425 billion | +36% |
| Pre-tax earnings | $5.159 billion | $2.629 billion | +96% |
| Net earnings | $3.456 billion | $1.814 billion | +91% |
| Net earnings applicable to common shareholders | $3.296 billion | $1.659 billion | +99% |
| Diluted EPS | $5.59 | $3.39 | +65% |
| Annualized return on average common equity | 20.1% | 14.3% | +580 basis points |
| Compensation as a percentage of net revenues | 43.0% | 50.0% | Down 700 basis points |
- Net revenue margin was approximately 40.4% on a pre-tax basis and 27.1% on a net earnings basis. These calculated measures are based on reported net revenues.
- Investment Banking revenue increased 44% to $1.184 billion. Underwriting revenue more than doubled to $720 million, while Financial Advisory revenue declined 12% to $464 million.
- Trading and Principal Investments revenue increased 43% to $10.250 billion, producing $4.685 billion of pre-tax earnings versus $2.277 billion in the prior period. FICC revenue rose 13% to $7.386 billion, and Equities revenue rose 18% to $2.354 billion.
- Principal Investments generated $510 million of revenue versus a $1.408 billion loss in the prior period. Q1 2010 included a $760 million gain from corporate principal investments, a $222 million loss on ICBC shares and a $34 million real estate investment loss.
- Asset Management and Securities Services revenue declined 8% to $1.341 billion, although pre-tax earnings increased 6% to $261 million. Assets under management ended at $840 billion, reflecting $39 billion of net outflows partially offset by $8 billion of market appreciation.
- Total operating expenses increased 12% to $7.616 billion. Non-compensation expenses increased 2% to $2.123 billion. Litigation and regulatory provisions were $21 million, compared with $13 million in the prior period.
- The effective income tax rate was 33.0%, compared with 32.5% for fiscal 2009.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents decreased by $11.227 billion during the quarter to $27.064 billion. Operating activities used $7.504 billion, investing activities used $966 million and financing activities used $2.757 billion.
- Total assets increased to $880.528 billion from $848.942 billion at December 31, 2009, primarily due to increases in securities purchased under resale agreements and securities borrowed related to client-driven activity.
- Total shareholders’ equity increased to $72.944 billion from $70.714 billion. Common shareholders’ equity was $65.987 billion, and tangible common shareholders’ equity was $60.004 billion.
- Unsecured short-term borrowings were $40.784 billion, while total short-term borrowings, including other secured financings, were $51.62 billion. Long-term borrowings totaled $193.61 billion, including $180.414 billion of unsecured long-term borrowings.
- The firm maintained $161.601 billion of Global Core Excess liquidity on an average basis during the quarter. The aggregate loan value of Global Core Excess, other cash deposits and other unencumbered assets averaged $207.10 billion.
- Basel I Tier 1 capital was $68.472 billion, with a Tier 1 capital ratio of 15.0%, total capital ratio of 18.0% and Tier 1 leverage ratio of 8.1%. The Tier 1 common ratio was 12.4%.
- The firm repurchased 13.2 million common shares for $2.269 billion, or an average $172.15 per share. The Board declared a $0.35 common dividend for payment in June 2010.
Material changes versus the prior comparable period
- Results benefited from stronger client-driven trading activity, improved credit and mortgage performance, higher currencies and derivatives revenue, and a substantial recovery in principal investment results.
- Investment Banking benefited from higher equity and leveraged-finance underwriting activity, while completed mergers and acquisitions declined.
- Compensation grew 17%, but compensation expense as a percentage of revenue fell to a record-low first-quarter ratio of 43.0%.
- Cash flow shifted from $21.612 billion of net cash inflow in the prior period to an $11.227 billion decrease, principally reflecting balance-sheet and client-financing activity.
- The adoption of ASU Nos. 2009-16 and 2009-17 on January 1, 2010 increased reported assets by approximately $3 billion and increased other assets by $545 million through consolidation and reclassification of certain VIEs. Management stated that adoption did not materially affect results of operations or cash flows.
- Level 3 assets declined to $45.153 billion from $46.475 billion, while level 3 unrealized gains were $2.555 billion versus a $2.795 billion loss in the prior period.
Guidance, outlook, commentary and risks
- The filing does not provide formal earnings or revenue guidance. Management stated that earnings are not predictable and may be materially affected by global financial markets, economic conditions and other factors.
- Management described generally improved global economic conditions, rising equity markets and lower volatility during the quarter, but noted continuing fiscal concerns in certain European economies and generally weaker investment banking activity.
- The United Kingdom enacted a 50% nondeductible tax on certain financial-sector discretionary bonuses. Goldman Sachs estimated the related payment at more than $600 million, with recognition expected in the second quarter of 2010; the amount could change based on discussions with HM Revenue and Customs.
- Key operating risks include market volatility, liquidity and funding conditions, counterparty and credit risk, concentrated financial-services exposures, valuation uncertainty for Level 3 assets, regulatory capital changes, and potential credit-rating downgrades.
- A one-notch or two-notch downgrade could have triggered approximately $1.51 billion or $2.77 billion, respectively, of additional collateral or termination payments under certain derivative agreements.
- Total commitments were $138.521 billion, including $48.946 billion of commitments to extend credit, $58.751 billion of forward-starting resale and securities-borrowing agreements, and $12.535 billion of investment commitments.
- Management stated that litigation and regulatory proceedings were not expected to have a material adverse effect on financial condition, but could materially affect results for a particular period. Subsequent to quarter-end, the SEC filed an action concerning a 2007 CDO offering, followed by additional regulatory inquiries and shareholder litigation. The filing states that adverse resolution could restrict certain regulated activities.
- The filing identifies potential impairment risk for goodwill and intangible assets, including $410 million of NYSE designated market-maker rights, if market structure, trading volumes or business performance deteriorate.
Important facts for investors to verify
- Whether the strong trading and principal-investment results are sustainable given their sensitivity to market conditions and significant quarter-to-quarter volatility.
- The final amount and earnings impact of the U.K. bonus tax expected in the second quarter of 2010.
- The progression and potential financial or regulatory consequences of the SEC CDO action, related investigations and shareholder litigation.
- The quality and liquidity of Level 3 assets, VIE exposures, retained securitization interests and unfunded commitments.
- The effect of future Basel, liquidity and financial-regulatory changes on capital requirements, funding costs and permitted activities.
- Whether assets under management recover from the $39 billion of first-quarter net outflows, particularly money-market outflows.
- Funding and collateral requirements under stressed conditions, including the impact of potential credit-rating downgrades.