Goldman Sachs Group Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2019, compared with the quarter ended March 31, 2018, and year-end December 31, 2018 balances. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total net revenues | $8.807 billion | $10.080 billion | Down 13% |
| Pre-tax earnings | $2.719 billion | $3.419 billion | Down 20% |
| Net earnings | $2.251 billion | $2.832 billion | Down 21% |
| Net earnings applicable to common shareholders | $2.182 billion | $2.737 billion | Down 20% |
| Diluted EPS | $5.71 | $6.95 | Down 18% |
| Annualized ROE | 11.1% | 15.4% | Down 4.3 percentage points |
| Annualized ROTE | 11.7% | 16.3% | Down 4.6 percentage points |
| Operating expenses | $5.864 billion | $6.617 billion | Down 11% |
| Provision for credit losses | $224 million | $44 million | Up $180 million |
Net interest income increased 33% to $1.218 billion, as interest income rose to $5.597 billion while interest expense increased to $4.379 billion. The approximate pre-tax margin was 30.9% and the net margin was 25.6%. The efficiency ratio increased to 66.6% from 65.6%.
- Investment banking revenue was $1.810 billion, essentially flat year over year. Financial advisory revenue increased 51% to $887 million, while underwriting revenue declined 24% to $923 million.
- Institutional Client Services revenue declined 18% to $3.605 billion. FICC Client Execution fell 11% to $1.839 billion, and Equities declined 24% to $1.766 billion.
- Investing & Lending revenue declined 14% to $1.837 billion. Equity securities revenue fell 21% to $847 million, and debt securities and loans revenue fell 7% to $990 million.
- Investment Management revenue declined 12% to $1.555 billion, primarily due to lower incentive and transaction fees. Assets under supervision increased to $1.599 trillion from $1.498 trillion a year earlier, supported by $59 billion of market appreciation and $20 billion of long-term net inflows.
At March 31, 2019, total assets were $925.349 billion, total liabilities were $835.076 billion, and shareholders’ equity was $90.273 billion. Cash and cash equivalents were $87.884 billion, down from $130.547 billion at December 31, 2018. Loans receivable increased to $82.674 billion from $80.590 billion, while the allowance for loan losses increased to $1.133 billion from $1.066 billion.
Debt and funding included $45.432 billion of unsecured short-term borrowings, $224.473 billion of unsecured long-term borrowings, $102.917 billion of collateralized financings and $164.136 billion of deposits. The reported leverage ratio was 10.3x and the debt-to-equity ratio was 2.5x.
Operating cash flow was negative $45.006 billion, compared with negative $964 million in Q1 2018, primarily because of increases in financial instruments owned and collateralized transactions. Investing cash flow was negative $1.501 billion and financing cash flow was positive $3.844 billion. Cash decreased by $42.663 billion during the quarter.
Regulatory capital remained above stated requirements. The Basel III Advanced CET1 ratio was 13.4%, Tier 1 capital ratio was 15.3%, total capital ratio was 17.8%, Tier 1 leverage ratio was 9.0%, and supplementary leverage ratio was 6.4%. Average liquidity coverage ratio was 134%, compared with 127% in the fourth quarter of 2018; average global core liquid assets were $233.765 billion.
Material changes versus comparable periods
- Revenue weakness was concentrated in market making, other principal transactions, commissions and fees, and investment management incentive fees.
- Lower revenue was partly offset by an 11% reduction in operating expenses, principally lower compensation and benefits expense.
- Credit costs increased materially, primarily because of consumer loans; the allowance for loan losses as a percentage of gross loans rose to 1.4% from 1.3% at year-end.
- Other comprehensive income was negative $1.306 billion, largely because of a $1.417 billion after-tax debt valuation adjustment, compared with positive other comprehensive income of $110 million in Q1 2018.
- The firm repurchased 6.3 million common shares for $1.250 billion and paid $306 million of common dividends. The quarterly common dividend was subsequently increased from $0.80 to $0.85 per share.
- The firm adopted the new lease standard in January 2019, increasing the balance sheet by approximately $1.77 billion and increasing retained earnings by $12 million after tax.
Guidance, outlook, risks and unusual items
- Management expected the 2019 effective tax rate to be approximately 22% to 23%, subject to earnings mix, profitability, tax guidance and regulatory developments.
- The firm plans to adopt the CECL credit-loss standard on January 1, 2020. Management estimated an initial allowance increase of approximately $600 million to $800 million, although the ultimate impact may change as models, forecasts and loan portfolios evolve.
- Management cautioned that persistently low client activity or volatility could reduce market-making revenue; weaker equity markets, wider credit spreads, lower asset prices, reduced investment banking activity or weaker company-specific performance could also negatively affect results.
- Material contingencies include 1MDB-related investigations and litigation, mortgage-related claims and potential repurchase exposure, antitrust matters, underwriting litigation, employment-related litigation and other regulatory investigations. Management estimated the upper end of reasonably possible aggregate loss for certain legal matters at approximately $2.0 billion above recorded reserves, while noting that many matters cannot be reasonably estimated.
- The firm had committed approximately $1.30 billion of the $1.80 billion consumer-relief obligation arising from its residential mortgage-backed securities settlement, with the remaining obligation due by January 2021.
- Additional risks include Brexit and the possibility of a hard Brexit, replacement of LIBOR and other IBORs, evolving capital and liquidity rules, credit-rating downgrades, model risk, operational risk and restrictions on transferring capital from regulated subsidiaries.
- Derivative disclosures included $237.641 billion of maximum payout or notional amounts for derivative guarantees and $31.636 billion for securities lending indemnifications. These amounts are not expected losses and are substantially mitigated by collateral, netting and hedging.
Most important facts for investors to verify
- Whether market-making and client activity recover sufficiently to offset the Q1 decline, particularly in Equities and FICC.
- The performance and credit quality of consumer loans, the allowance build and the eventual CECL adoption impact.
- The sustainability of the $233.765 billion average liquidity buffer, the 134% LCR and access to subsidiary liquidity subject to regulatory restrictions.
- The timing and amount of future capital returns, including repurchases and the $0.85 common dividend.
- Developments in 1MDB-related investigations, mortgage contingencies and other litigation beyond recorded reserves.
- The effect of the reported $1.417 billion after-tax DVA loss in accumulated other comprehensive income and the sensitivity of fair-value results to market conditions.
- The filing’s interim financial statements are unaudited; PwC performed a review and reported that it was not aware of material modifications required for conformity with U.S. GAAP.