Goldman Sachs Group Inc. 2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with quarterly information including the fourth quarter. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. The firm had 36,600 employees in more than 30 countries at year-end, with 46% of headcount outside the Americas.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $36.62 billion | $32.73 billion | +12% |
| Pre-tax earnings | $12.48 billion | $11.13 billion | +12% |
| Net earnings | $10.46 billion | $4.29 billion | +144% |
| Net earnings applicable to common shareholders | $9.86 billion | $3.69 billion | +168% |
| Diluted EPS | $25.27 | $9.01 | +181% |
| ROE | 13.3% | 4.9% | +8.4 pts |
| ROTE | 14.1% | 5.2% | +8.9 pts |
| Operating expenses | $23.46 billion | $20.94 billion | +12% |
| Efficiency ratio | 64.1% | 64.0% | Broadly stable |
| Provision for credit losses | $674 million | $657 million | +3% |
Reported net margin was approximately 28.6%, and pre-tax margin was approximately 34.1%. The 2018 effective tax rate was 16.2%, compared with 61.5% in 2017. The 2018 results included a $487 million tax benefit from finalizing the impact of the Tax Cuts and Jobs Act; 2017 included an estimated $4.40 billion tax expense related to that legislation. Excluding these tax items, 2018 diluted EPS was $24.02 versus $19.76 in 2017, and ROE was 12.7% versus 10.8%.
Revenue and segment performance
- Investment Banking: Net revenues of $7.86 billion, up 7%; pre-tax earnings of $3.52 billion, down 9% because expenses increased faster than revenues. Financial Advisory revenue rose 10%, while equity underwriting benefited from IPO activity and debt underwriting declined.
- Institutional Client Services: Net revenues of $13.48 billion, up 13%; pre-tax earnings of $3.13 billion, up 42%. FICC Client Execution increased 11% and Equities increased 15%, supported by higher volatility and improved client activity.
- Investing & Lending: Net revenues of $8.25 billion, up 14%; pre-tax earnings of $4.21 billion, up 11%. Debt securities and loans revenue rose 43%, primarily from higher net interest income. Private equity gains were strong, while public equity investments produced a $183 million net loss.
- Investment Management: Net revenues of $7.02 billion, up 13%; pre-tax earnings of $1.76 billion, up 24%. Incentive fees increased to $830 million from $417 million. Assets under supervision rose to $1.54 trillion from $1.49 trillion, despite $41 billion of market depreciation.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents increased by $20.50 billion to $130.55 billion. Operating activities provided $20.42 billion, investing activities used $22.68 billion, and financing activities provided $22.75 billion.
- Total assets were $931.80 billion, up from $916.78 billion. Loans receivable increased to $80.59 billion from $65.93 billion, while the allowance for loan losses increased to $1.07 billion from $803 million.
- Total liabilities were $841.61 billion and shareholders’ equity was $90.19 billion. Unsecured long-term borrowings were $224.15 billion, up from $217.69 billion; deposits increased to $158.26 billion from $138.60 billion.
- The leverage ratio was 10.3x versus 11.1x, and the debt-to-equity ratio was 2.5x versus 2.6x. Book value per common share increased 14.6% to $207.36.
- Average global core liquid assets were $233.34 billion, up from $218.55 billion. Average daily fourth-quarter LCR was 127%, above the 100% minimum.
- Basel III Advanced CET1 ratio was 13.1%, compared with 10.9% in 2017. The firm returned $4.52 billion to common shareholders, including $3.29 billion of repurchases and $1.23 billion of common dividends.
Fourth-quarter results and material changes
Fourth-quarter 2018 net revenues were $8.08 billion, compared with $8.12 billion in fourth-quarter 2017. Net earnings applicable to common shareholders were $2.32 billion, versus a $2.14 billion loss in fourth-quarter 2017. Diluted EPS was $6.04, compared with negative $5.51 in the prior-year quarter. Fourth-quarter 2017 was significantly affected by the $4.40 billion Tax Cuts and Jobs Act charge, while fourth-quarter 2018 included the $487 million tax benefit from finalizing that estimate.
- Net interest income increased 28% for the year, reflecting higher rates, larger loans and financial instrument balances, and higher deposits.
- Operating expenses increased 12%; net litigation and regulatory provisions increased to $844 million from $188 million.
- Headcount increased 9%, reflecting technology investment and expansion of new business initiatives, including consumer lending and deposits.
- Common share repurchases declined to $3.29 billion from $6.72 billion in 2017, while the remaining authorization was approximately 33.7 million shares at year-end.
- The firm adopted ASC 606 in 2018. The adoption increased both reported revenues and operating expenses by approximately $300 million and reduced opening retained earnings by $53 million.
Guidance, outlook, risks and unusual items
- Management expected the 2019 effective tax rate to be approximately 22% to 23%, excluding the impact of equity-based compensation.
- Management expected continued sensitivity to market volatility, client activity, asset prices, investment banking volumes, credit conditions and assets under supervision.
- Brexit presented operational, regulatory, capital, liquidity, tax and client-access risks. The firm planned to shift certain European activities to German and other European entities if necessary.
- The firm was preparing for the expected transition away from LIBOR and other interbank offered rates after 2021, with potential legal, operational, valuation, funding and capital impacts.
- The firm planned to adopt the CECL credit-loss standard in January 2020 and expected its allowance for credit losses to increase, although the ultimate impact remained dependent on economic conditions and portfolio composition.
- Legal and regulatory matters included extensive investigations and litigation, particularly 1MDB-related matters, mortgage-related claims, securities and derivatives antitrust matters, underwriting litigation and employment-related claims. The estimated upper end of reasonably possible aggregate loss exceeded recorded reserves by approximately $1.9 billion for matters where a range could be estimated.
- In connection with the RMBS settlement, the firm committed to provide $1.80 billion of consumer relief by January 2021; approximately $1.20 billion had been provided by December 2018.
- The filing identified cyber security, operational failures, model risk, market and liquidity stress, counterparty defaults, regulatory changes, reputational damage and competition as significant continuing risks.
Most important facts for investors to verify
- Whether revenue gains, particularly in market making, private equity and investment management incentive fees, are sustainable under less favorable market conditions.
- The underlying composition and credit performance of the rapidly growing consumer, corporate and commercial real estate loan portfolios.
- The ultimate financial and regulatory consequences of 1MDB-related investigations and other legal proceedings.
- The effect of CECL adoption, LIBOR replacement, Brexit implementation and evolving capital, liquidity and TLAC requirements.
- The sustainability of capital returns relative to regulatory approval, CET1 requirements, earnings volatility and liquidity needs.
- The extent to which the $487 million tax benefit and other unusual items affect comparisons with 2017 and future periods.