Goldman Sachs Group Inc. 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019, and balance-sheet data as of March 31, 2020 versus December 31, 2019. Goldman Sachs operates through Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. Results were materially affected by the COVID-19 pandemic, extreme market volatility, widening credit spreads, and an abrupt contraction in economic activity during March.
PricewaterhouseCoopers completed a review of the interim financial statements and reported no material modifications were necessary for conformity with U.S. GAAP.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total net revenues | $8.743 billion | $8.807 billion | Essentially unchanged |
| Pre-tax earnings | $1.348 billion | $2.719 billion | Down 50% |
| Net earnings | $1.213 billion | $2.251 billion | Down 46% |
| Net earnings applicable to common | $1.123 billion | $2.182 billion | Down 49% |
| Diluted EPS | $3.11 | $5.71 | Down 46% |
| Annualized ROE | 5.7% | 11.1% | Down 5.4 percentage points |
| Annualized ROTE | 6.0% | 11.7% | Down 5.7 percentage points |
| Operating expenses | $6.458 billion | $5.864 billion | Up 10% |
| Efficiency ratio | 73.9% | 66.6% | Higher by 7.3 percentage points |
| Provision for credit losses | $937 million | $224 million | Up $713 million |
| Net interest income | $1.313 billion | $1.218 billion | Up 8% |
Market making revenue increased 35% to $3.682 billion, commissions and fees increased 37% to $1.020 billion, investment management revenue increased 23% to $1.768 billion, and investment banking revenue increased 8% to $1.742 billion. These gains were offset by other principal transactions, which declined to a $782 million loss from $1.067 billion of revenue in the prior-year quarter.
The effective tax rate was 10.0%. Management stated that, based on first-quarter results, it expected the 2020 tax rate to be below 20%, excluding the impact of any non-deductible litigation.
Segment results
| Segment | Q1 2020 net revenues | Q1 2020 pre-tax earnings/(loss) | Q1 2020 ROE |
|---|---|---|---|
| Investment Banking | $2.184 billion | $393 million | 12.1% |
| Global Markets | $5.163 billion | $2.248 billion | 19.7% |
| Asset Management | $(96) million | $(1.373) billion | (23.6)% |
| Consumer & Wealth Management | $1.492 billion | $80 million | 3.8% |
Global Markets benefited from strong client activity and volatility. Asset Management was the principal earnings drag, reflecting losses in lending and debt investments and public-equity marks. Consumer & Wealth Management revenue rose 21%, but higher credit provisions and expenses reduced pre-tax earnings.
Cash flow, balance sheet, debt and liquidity
- Total assets increased to $1.090 trillion from $992.968 billion, primarily due to higher customer receivables, collateralized agreements, trading assets, and loans.
- Cash and cash equivalents declined to $105.489 billion from $133.546 billion. Operating cash flow was negative $53.031 billion and investing cash flow was negative $32.336 billion; financing cash flow was positive $57.310 billion.
- Loans increased to $128.453 billion, with gross loans of $131.321 billion. The allowance for loan losses increased to $2.868 billion from $1.441 billion.
- Deposits increased to $219.994 billion from $190.019 billion. Unsecured short-term borrowings declined to $37.148 billion, while unsecured long-term borrowings increased to $225.476 billion.
- Total shareholders’ equity was $92.379 billion. Book value per common share was $228.21, up from $218.52 at year-end 2019; tangible book value per common share was $214.69.
- Average global core liquid assets were $242.746 billion in the quarter, up from $237.116 billion in the fourth quarter of 2019. Average daily liquidity coverage ratio was 131%, above the 100% minimum.
- Funding included $15.7 billion of unsecured vanilla debt issued during the quarter. Goldman Sachs also accessed the Federal Reserve discount window during the quarter as part of the banking sector’s coordinated liquidity response.
Capital, credit and unusual items
- Advanced CET1, Tier 1, and total capital ratios were 12.3%, 14.1%, and 16.3%, respectively, versus required levels of 9.5%, 11.0%, and 13.0%. The Tier 1 leverage ratio was 8.2% and the supplementary leverage ratio was 5.9%.
- Risk-weighted assets increased to $605.926 billion under the Advanced approach, primarily because of higher derivatives, lending activity, and market volatility.
- The firm adopted CECL in January 2020. The adoption increased the allowance for credit losses by $848 million and reduced retained earnings by $638 million after tax. The quarterly provision also reflected COVID-19-related economic deterioration, loan growth, energy-sector pressure, and seasoning of credit-card loans.
- Other comprehensive income included a $2.914 billion after-tax debt valuation adjustment, compared with a $1.417 billion after-tax loss in Q1 2019. This largely reflected changes in the fair value of the firm’s liabilities as its credit spreads and equity markets moved.
- Level 3 financial assets increased to $30.776 billion from $23.068 billion, primarily because reduced market liquidity and price transparency made certain corporate debt, private-equity, and derivative inputs less observable.
Material changes, outlook and management commentary
- Management reported that approximately 98% of global employees were working remotely under the business continuity plan and that operations continued to support elevated transaction volumes.
- Management expects continued uncertainty from COVID-19. A prolonged pandemic or recession could reduce market-making and investment-banking activity, asset values and assets under supervision, while increasing credit losses, defaults, collateral calls, and operational and cybersecurity risks.
- Management temporarily suspended common-stock repurchases through the second quarter of 2020 and stated that future capital distributions would be evaluated in light of client needs, reinvestment requirements, regulatory expectations, and market conditions. A $1.25 per-share common dividend was declared for payment in June 2020.
- Management’s three-year target CET1 ratio was 13.0% to 13.5%, including management buffers. The filing also noted that the G-SIB surcharge could rise above 3% based on current estimates.
- The firm committed approximately $550 million to COVID-19 relief efforts through mid-April 2020, including emergency loan capital and grants for underserved small businesses and community lenders.
- Legal proceedings remained significant. Management estimated the upper end of reasonably possible aggregate loss for matters where a range could be estimated at approximately $3.2 billion in excess of aggregate reserves. The filing also identifies continuing 1MDB, mortgage-related, securities, antitrust, employment, regulatory, and underwriting matters.
- The firm had $250.266 billion of commitments, including $151.965 billion of lending commitments. Nonconsolidated VIEs had maximum exposure to loss of $21.001 billion, excluding offsetting risk mitigants.
- Management continued preparations for Brexit and the transition away from LIBOR and other interbank offered rates, with significant uncertainty regarding regulatory equivalence, contractual amendments, and market impacts.
Most important facts for investors to verify
- Whether COVID-19-related credit losses, defaults, loan drawdowns, and allowance increases continue beyond the first quarter.
- Whether market-making strength persists if volatility and client activity normalize or liquidity deteriorates further.
- The valuation and subsequent performance of Asset Management’s private-equity, corporate-debt, real-estate, and other Level 3 exposures.
- Changes in CET1, leverage, TLAC, liquidity, and G-SIB surcharge requirements as balance-sheet growth and regulatory rules evolve.
- The timing and amount of future share repurchases and dividends following the temporary buyback suspension.
- Developments in the $3.2 billion excess reasonably possible litigation-loss estimate, including 1MDB and mortgage-related matters.
- The effect of continued declines in assets under supervision, investor withdrawals, and shifts toward lower-fee liquidity products.
- Progress and costs associated with LIBOR replacement, Brexit implementation, consumer-credit expansion, and other strategic initiatives.