Goldman Sachs Group Inc. — Form 10-Q Summary
Business context and reporting period
Goldman Sachs is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and individuals. The filing covers the unaudited quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. The firm reports four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|
| Net revenues | $9.402 billion | $7.887 billion | $19.438 billion | $15.913 billion |
| Pre-tax earnings | $3.276 billion | $2.509 billion | $6.695 billion | $5.048 billion |
| Net earnings | $2.565 billion | $1.831 billion | $5.397 billion | $4.086 billion |
| Net earnings applicable to common shareholders | $2.348 billion | $1.631 billion | $5.085 billion | $3.793 billion |
| Diluted EPS | $5.98 | $3.95 | $12.93 | $9.10 |
| Pre-tax margin | 34.8% | 31.8% | 34.4% | 31.7% |
| Net margin | 27.3% | 23.2% | 27.8% | 25.7% |
- Second-quarter net revenues increased 19%, pre-tax earnings 31%, net earnings 40% and diluted EPS 51% year over year. First-half net revenues increased 22%, pre-tax earnings 33%, net earnings 32% and diluted EPS 42%.
- Annualized return on average common equity was 12.8% in the quarter and 14.1% for the first half, versus 8.7% and 10.1%, respectively, in the comparable 2017 periods.
- Net interest income increased 27% in the quarter to $1.002 billion and 47% for the first half to $1.920 billion, reflecting higher rates, larger average balances and growth in loans and other interest-earning assets.
- Operating expenses increased 14% in the quarter to $6.126 billion and 17% for the first half to $12.743 billion. Compensation and benefits were $3.466 billion in the quarter and $7.581 billion for the first half.
- Quarterly net provisions for litigation and regulatory proceedings were $148 million, compared with $22 million in the prior-year quarter. First-half provisions were $192 million, compared with $161 million.
Segment performance and material changes
| Segment | Q2 2018 net revenues | Change versus Q2 2017 | Q2 2018 pre-tax earnings |
|---|
| Investment Banking | $2.045 billion | Up 18% | $835 million |
| Institutional Client Services | $3.570 billion | Up 17% | $1.018 billion |
| Investing & Lending | $1.944 billion | Up 23% | $991 million |
| Investment Management | $1.843 billion | Up 20% | $432 million |
- Investment Banking benefited from higher advisory and underwriting revenue, particularly equity underwriting and initial public offerings. The investment banking backlog increased significantly from March 2018.
- Institutional Client Services benefited mainly from a 45% increase in FICC Client Execution revenue, reflecting higher client activity and improved conditions in interest rates, credit, commodities and mortgages. Equities revenue was essentially unchanged.
- Investing & Lending benefited from private-equity gains, including company-specific events and sales, and higher interest income. Approximately 60% of quarterly equity-securities revenue was driven by private-equity gains from company-specific events and public equities.
- Investment Management benefited from significantly higher incentive fees from harvesting, higher average assets under supervision and net inflows. Assets under supervision increased to $1.513 trillion from $1.406 trillion a year earlier.
- Market making revenue increased 33% in both the quarter and first half. Interest-rate products were volatile: quarterly interest-rate market-making revenue was a loss of $3.222 billion, offset by strong currency and equity results.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $131.417 billion at June 30, 2018, up $21.366 billion from December 31, 2017. Six-month cash flow was $7.634 billion provided by operating activities, $12.803 billion used in investing activities and $26.535 billion provided by financing activities.
- Total assets were $968.610 billion, up from $916.776 billion at year-end 2017. Financial instruments owned increased to $347.959 billion, loans receivable to $74.082 billion and deposits to $153.441 billion.
- Unsecured long-term borrowings were $227.354 billion and unsecured short-term borrowings were $44.390 billion. Total shareholders’ equity was $86.599 billion, including $11.203 billion of preferred stock.
- The firm’s leverage ratio was 11.2x and debt-to-equity ratio was 2.6x. Basel III Advanced CET1, Tier 1 and total capital ratios were 11.5%, 13.2% and 15.5%, respectively.
- Average global core liquid assets were $237.418 billion in the second quarter. Average daily liquidity coverage ratio was 131%, above the 100% minimum.
- Quarter-end loans and lending commitments totaled approximately $221.7 billion for commercial lending. Total commitments were $257.273 billion, including $161.618 billion of lending commitments.
Guidance, outlook, risks and unusual items
- Management expected a full-year 2018 effective tax rate of approximately 20%. No consolidated revenue or earnings guidance was provided.
- The 2018 capital plan, approved without objection by the Federal Reserve, authorized up to $6.30 billion of capital return from the third quarter of 2018 through the second quarter of 2019, consisting of up to $5.00 billion of common-stock repurchases and $1.30 billion of common dividends, subject to board approval and capital conditions. The plan contemplated increasing the common dividend to $0.85 per share in the second quarter of 2019.
- Economic and market risks included trade tensions, tariffs, higher U.S. interest rates, a stronger U.S. dollar, emerging-market weakness, lower market volatility and geopolitical uncertainty. Management stated that lower investment-banking activity, reduced trading activity or volatility, declining asset prices, or withdrawals from assets under supervision could reduce future revenue.
- Legal and regulatory matters remain significant. Management estimated the upper end of reasonably possible aggregate loss for certain matters at approximately $1.5 billion in excess of aggregate reserves, while noting that many matters could not be estimated. Mortgage-related repurchase exposure could not be meaningfully estimated.
- The firm committed to provide $1.80 billion of consumer relief under a residential mortgage-backed securities settlement by January 2021; approximately $1.0 billion had been provided by June 2018.
- Other notable exposures included maximum exposure to loss of $20.963 billion from nonconsolidated VIEs, total commitments of $257.273 billion, and derivative-related contingent collateral or termination payments of $710 million under a two-notch credit-rating downgrade scenario.
- Adoption of ASC 606 in January 2018 changed revenue timing and presentation. It increased net revenues by approximately $40 million in each of the quarter and first half from earlier investment-management fee recognition and increased both net revenues and non-compensation expenses by approximately $80 million and $130 million, respectively, from gross presentation changes.
- Debt valuation adjustment produced an after-tax gain of $878 million in the quarter and $1.148 billion in the first half, recorded in other comprehensive income rather than earnings. This materially increased comprehensive income but is sensitive to changes in Goldman Sachs’ credit spreads.
Most important facts for investors to verify
- Whether strong quarterly results are sustainable after elevated incentive fees, private-equity gains, company-specific events, and favorable market-making conditions.
- The composition, valuation sensitivity and liquidity of the firm’s level 3 assets, loans, private-equity investments and retained securitization interests.
- Progress and ultimate cost of litigation, regulatory investigations, mortgage-related claims, the 1MDB-related matters and the $1.80 billion consumer-relief obligation.
- Actual capital distributions versus the authorized $6.30 billion capital plan, including Federal Reserve and board approvals.
- Credit quality trends in corporate loans, commercial real estate, Marcus loans and lending commitments, including the $882 million loan-loss allowance and $276 million commitment allowance.
- The effect of higher funding costs, interest rates, credit spreads, market volatility, trade tensions and emerging-market stress on revenue, liquidity, capital and collateral requirements.
- The filing text does not provide a clear consolidated common-equity Tier 1 capital buffer above applicable minimums; investors should verify the regulatory ratios and buffers using the firm’s detailed capital disclosures.
