Goldman Sachs Group, Inc. — 2Q15 Form 10-Q Summary
Reporting period: Quarterly period ended June 30, 2015; unaudited U.S. GAAP financial statements. Comparisons are primarily with the three and six months ended June 30, 2014, and the December 31, 2014 balance sheet.
Business context
Goldman Sachs is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and high-net-worth individuals. Its four reported segments are Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Financial performance and key metrics
| Metric | 2Q15 | 2Q14 | Change |
|---|---|---|---|
| Net revenues | $9.07 billion | $9.13 billion | Essentially unchanged |
| Pre-tax earnings | $1.73 billion | $2.82 billion | Down 39% |
| Net earnings | $1.05 billion | $2.04 billion | Down 49% |
| Net earnings applicable to common shareholders | $916 million | $1.95 billion | Down 53% |
| Diluted EPS | $1.98 | $4.10 | Down 52% |
| Annualized ROE | 4.8% | 10.9% | Down 6.1 percentage points |
| Net margin | 11.6% | 22.3% | Down approximately 10.7 points |
First half of 2015: Net revenues were $19.69 billion, up 7%; pre-tax earnings were $5.66 billion, down 3%; net earnings were $3.89 billion, down 4%; diluted EPS was $7.93, down 2%; and annualized ROE was 9.7%, compared with 10.9% in the prior-year period. The estimated pre-tax margin was approximately 28.8%, versus 31.7% in the first half of 2014.
Revenue and segment trends
- Investment Banking: 2Q15 revenue increased 13% to $2.02 billion, driven by a 62% increase in Financial Advisory revenue. Underwriting revenue declined 6% because of lower debt and leveraged-finance activity. First-half revenue rose 10% to $3.92 billion.
- Institutional Client Services: 2Q15 revenue declined 6% to $3.60 billion. Fixed Income, Currency and Commodities Client Execution fell 28%, while Equities revenue rose 24%. The segment recorded a $407 million pre-tax loss, compared with $785 million of earnings in 2Q14, primarily because of litigation and regulatory provisions.
- Investing & Lending: 2Q15 revenue declined 13% to $1.80 billion and pre-tax earnings declined 12% to $948 million. Lower private-equity, consolidated-investment and relationship-lending gains outweighed stronger public-equity results.
- Investment Management: 2Q15 revenue increased 14% to $1.65 billion and pre-tax earnings increased 25% to $323 million. Assets under supervision increased to $1.18 trillion, including $1.03 trillion of assets under management.
Expenses, unusual items and margins
- Operating expenses increased 16% year over year to $7.34 billion in 2Q15; non-compensation expenses increased 48% to $3.53 billion.
- The firm recorded a $1.45 billion net provision for mortgage-related litigation and regulatory matters in 2Q15, compared with $284 million in 2Q14. Management estimated that this reduced 2Q15 diluted EPS by $2.77 and annualized ROE by 6.7 percentage points.
- Compensation and benefits declined 3% to $3.81 billion; the compensation-to-net-revenues ratio declined to 42.0% from 43.0%. Total staff was approximately 34,900 at quarter-end, up from 32,400.
- The first half of 2015 included $1.64 billion of net litigation and regulatory provisions, compared with $399 million in the prior-year period.
- The first half of 2015 also included $77 million of impairment charges related to consolidated investments, primarily energy-related assets affected by low commodity prices.
Cash flow, balance sheet, debt and liquidity
| Metric | June 30, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $859.88 billion | $856.24 billion |
| Cash and cash equivalents | $60.85 billion | $57.60 billion |
| Total liabilities | $772.23 billion | $773.44 billion |
| Shareholders’ equity | $87.65 billion | $82.80 billion |
| Deposits | $89.06 billion | $83.01 billion |
| Unsecured short-term borrowings | $46.38 billion | $44.54 billion |
| Unsecured long-term borrowings | $170.26 billion | $167.57 billion |
| Loans receivable | $38.40 billion | $28.94 billion |
| Global Core Liquid Assets | $189.48 billion | $182.95 billion |
- Six-month operating cash flow was negative $1.13 billion, compared with negative $3.69 billion in the prior-year period.
- Six-month investing cash flow was negative $11.42 billion, including $9.46 billion of net lending and $1.58 billion for business acquisitions.
- Six-month financing cash flow was positive $15.79 billion, primarily from unsecured long-term borrowings, increased deposits and preferred-stock issuance.
- Cash increased $3.25 billion during the first half, ending at $60.85 billion.
- Leverage was 9.8 times total assets to equity, versus 10.3 times at year-end; unsecured long-term debt to equity was 1.9 times, versus 2.0 times.
Capital, distributions and outlook
- Applicable standardized capital ratios at June 30, 2015 were 11.8% CET1, 13.5% Tier 1 and 15.9% total capital, compared with 11.3%, 12.7% and 14.7%, respectively, at December 31, 2014.
- The Basel III Advanced CET1, Tier 1 and total capital ratios were 12.5%, 14.3% and 16.8%; the Tier 1 leverage ratio was 9.6%.
- The firm repurchased 7.9 million common shares for $1.50 billion during the first half and declared $1.25 per common share of dividends. The board declared a further $0.65 per share dividend on July 15, 2015.
- No numerical revenue or earnings guidance is provided in the filing. Management expected results to remain sensitive to market conditions, client activity, asset prices, investment banking transaction completion, assets under supervision, credit spreads and regulatory developments.
- Management described 2Q15 market-making conditions as more challenging, particularly in fixed income, amid concerns regarding Greece and China. Investment banking activity remained supported by strong mergers and acquisitions activity.
Risks, contingencies and unusual exposures
- Management estimated the upper end of reasonably possible aggregate legal losses, in excess of recorded reserves, at approximately $5.9 billion for matters where a range could be estimated. The estimate excludes matters for which a meaningful range could not be determined.
- Mortgage-related litigation, repurchase claims and regulatory investigations remain significant; the firm stated that potential mortgage repurchase exposure cannot currently be meaningfully estimated.
- Nonconsolidated VIE maximum exposure to loss was $14.12 billion, including $5.94 billion from derivatives, $3.62 billion from loans and investments, and $1.08 billion from commitments and guarantees.
- Derivative guarantees had maximum payout or notional amounts of $736.66 billion; these amounts are not expected losses. A two-notch credit-rating downgrade could have required approximately $2.78 billion of additional collateral or termination payments.
- The firm had $181.77 billion of commitments, including $111.98 billion of commitments to extend credit. Oil and gas credit exposure was $12.0 billion, including $10.3 billion from loans and lending commitments.
- Volcker Rule conformance requires the firm to reduce most investments in covered funds. Investments in funds measured at NAV were $8.96 billion at June 30, 2015, with $2.76 billion of unfunded commitments.
- Key market and operating risks include global economic weakness, market volatility, declining asset values, credit deterioration, liquidity and funding access, regulatory capital requirements, legal and reputational risk, operational failures and cyber threats.
Most important facts for investors to verify
- Whether the $1.45 billion mortgage-related litigation and regulatory provision is sufficient, particularly given the disclosed $5.9 billion excess reasonably possible loss estimate.
- Whether the sharp 2Q15 decline in earnings and ROE was primarily unusual litigation-related or indicates sustained weakness in Institutional Client Services and net interest income.
- Future market-making volumes and margins, especially in fixed income, credit, mortgages and currencies.
- Loan growth, oil and gas exposure, allowance adequacy and the quality of lending commitments.
- Capital and liquidity requirements as Basel III transition provisions, G-SIB surcharges and supplementary leverage requirements phase in.
- The effect of Volcker Rule fund divestitures, regulatory changes and credit-rating movements on liquidity, capital and earnings.
- Cash-flow conversion and funding needs, recognizing that Goldman Sachs states traditional cash-flow analysis is less indicative of liquidity than its GCLA and asset-liability management measures.