Goldman Sachs Group Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2015, with comparison to the three months ended March 31, 2014 and financial-condition comparisons to December 31, 2014. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenues | $10.617 billion | $9.328 billion | +14% |
| Pre-tax earnings | $3.934 billion | $3.021 billion | +30% |
| Net earnings | $2.844 billion | $2.033 billion | +40% |
| Net earnings applicable to common shareholders | $2.748 billion | $1.949 billion | +41% |
| Diluted EPS | $5.94 | $4.02 | +48% |
| Pre-tax margin | 37.1% | 32.4% | Up |
| Net margin | 26.8% | 21.8% | Up |
| Annualized ROE on average common equity | 14.7% | 10.9% | Up |
| Operating expenses | $6.683 billion | $6.307 billion | +6% |
| Compensation and benefits | $4.459 billion | $4.011 billion | +11% |
| Net cash from operating activities | $6.719 billion | $(4.221) billion | Improved |
Market making was the largest revenue driver at $3.925 billion, up 49%, supported by currencies, equity derivatives, interest-rate products and equity cash products. Investment banking revenue increased 7% to $1.905 billion, while investment management revenue was essentially unchanged at $1.503 billion. Net interest income declined 17% to $859 million.
At March 31, 2015, total assets were $865.458 billion, total liabilities were $780.331 billion and shareholders’ equity was $85.127 billion. Cash and cash equivalents were $63.129 billion. Unsecured short-term borrowings were $44.367 billion, unsecured long-term borrowings were $163.682 billion and total short- and long-term borrowings, including secured financings, were $232.142 billion. The leverage ratio was 10.2x and the debt-to-equity ratio was 1.9x.
Global Core Liquid Assets were $174.799 billion at quarter-end. The firm reported a CET1 ratio of 11.4% under the applicable Standardized approach and 12.6% under Basel III Advanced rules; the applicable Standardized ratio was lower. The supplementary leverage ratio was 5.3% on a fully phased-in basis.
Material changes versus prior comparable period
- Institutional Client Services net revenue increased 23% to $5.459 billion and pre-tax earnings increased 40% to $1.888 billion. Equities revenue increased 46%, while Fixed Income, Currency and Commodities Client Execution increased 10%.
- Investment Banking net revenue rose 7%, driven by a 41% increase in financial advisory revenue. Underwriting revenue fell 14%, primarily because of lower debt and leveraged-finance activity; equity underwriting improved.
- Investing & Lending net revenue increased 9% to $1.669 billion and pre-tax earnings increased 46% to $932 million, reflecting stronger public-equity gains and favorable company-specific events. Operating expenses declined 17%, partly because of lower impairment charges.
- Investment Management net revenue was essentially unchanged, with higher management and other fees offset by lower incentive fees. Assets under supervision were $1.177 trillion versus $1.083 trillion a year earlier, but were essentially unchanged from December 2014.
- Compensation as a percentage of net revenues decreased to 42.0% from 43.0%, while total staff increased to approximately 34,400 from 32,600.
- Cash flow improved materially: operating activities provided $6.719 billion versus using $4.221 billion in Q1 2014. Cash and cash equivalents increased $5.529 billion during the quarter.
- The firm repurchased 6.8 million common shares for $1.250 billion. The quarterly common dividend declared was $0.60 per share; subsequent to quarter-end, the Board increased it to $0.65 per share.
Guidance, outlook, risks and unusual items
The filing does not provide specific earnings or revenue guidance. Management expects results to remain sensitive to market volatility, client activity, asset prices, credit spreads, interest rates and the global economic environment. Diverging U.S. and European monetary policies increased volatility and supported market-making activity during the quarter. Management stated that renewed macroeconomic concerns, weaker investment-banking activity, declining asset prices or lower market activity could negatively affect results.
- Q1 2015 included $190 million of net provisions for litigation and regulatory proceedings, compared with $115 million in Q1 2014.
- The firm recorded $33 million of impairments related to assets of a consolidated Latin American investment, compared with $150 million of related impairments in Q1 2014.
- Level 3 financial assets declined to $40.124 billion from $42.005 billion, representing 4.6% of total assets. Valuation remains sensitive to unobservable inputs, including credit spreads, recovery rates, volatility, correlations, duration and projected cash flows.
- Potential additional collateral or termination payments under derivatives were $1.590 billion for a one-notch downgrade and $3.302 billion for a two-notch downgrade.
- Total commitments were $192.541 billion, including $93.153 billion of commitments to extend credit. Notional derivative guarantees were $789.903 billion; these notional amounts do not represent expected losses.
- Management estimated the upper end of reasonably possible aggregate legal losses, in matters for which a range could be estimated, at approximately $3.8 billion in excess of recorded reserves. The filing states that other mortgage-related, regulatory and litigation exposures could increase materially but generally cannot be estimated.
- Mortgage-related representations and warranties, RMBS investigations, benchmark and commodities-related litigation, foreign-exchange and credit-derivatives antitrust matters, and other regulatory investigations remain significant contingencies.
- The Volcker Rule requires the firm to reduce most covered-fund interests. NAV-based investments totaled $9.444 billion at March 31, 2015, with $2.800 billion of unfunded commitments. The firm expects to exit substantially all affected interests in an orderly manner, subject to market conditions.
- Future capital and liquidity requirements may increase as Basel III, G-SIB surcharges, liquidity rules and other regulatory reforms phase in. The firm stated that its U.S. LCR exceeded the fully phased-in minimum requirement, but the calculation remains subject to regulatory interpretation.
Most important facts for investors to verify
- Whether market-making revenue growth, particularly in currencies, rates and equities, is sustainable or primarily reflects quarter-specific volatility.
- The composition and quality of the $174.8 billion GCLA and the firm’s ability to meet funding and collateral needs during market stress.
- Actual legal and regulatory settlements relative to the approximately $3.8 billion estimated excess reasonably possible loss range, including mortgage-related claims not presently estimable.
- Future effects of Basel III, G-SIB surcharges, the Volcker Rule, the LCR and other regulatory requirements on capital returns, balance-sheet capacity and profitability.
- Credit and market exposures to oil and gas companies, European sovereigns, Russia and Greece, including the effectiveness of collateral and hedges.
- Performance and valuation of Level 3 assets, private-equity and fund investments, retained securitization interests, and other instruments dependent on model-based assumptions.
- The effect of compensation growth, litigation provisions and other unusual items on future operating leverage and margins.