Goldman Sachs Group Inc. 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014; the request references 2014 Q4, but the principal financial statements report full-year results. Goldman Sachs is a global investment banking, securities and investment management firm with four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. The firm operated in more than 30 countries, generated 42% of net revenues outside the Americas, and had approximately 34,000 staff at year-end.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues | $34.53 billion | $34.21 billion | Essentially unchanged |
| Pre-tax earnings | $12.36 billion | $11.74 billion | Up 5% |
| Net earnings | $8.48 billion | $8.04 billion | Up 5% |
| Net earnings applicable to common shareholders | $8.08 billion | $7.73 billion | Up 5% |
| Diluted EPS | $17.07 | $15.46 | Up 10% |
| ROE on average common equity | 11.2% | 11.0% | Up 20 basis points |
| Pre-tax margin | 35.8% | Approximately 34.3% | Up approximately 150 basis points |
| Operating expenses | $22.17 billion | $22.47 billion | Down 1% |
| Effective tax rate | 31.4% | 31.5% | Broadly unchanged |
| Total assets | $856.24 billion | $911.51 billion | Down $55.27 billion |
| Total shareholders’ equity | $82.80 billion | $78.47 billion | Up $4.33 billion |
| Cash and cash equivalents | $57.60 billion | $61.13 billion | Down $3.53 billion |
| Unsecured long-term borrowings | $167.57 billion | $160.97 billion | Up $6.61 billion |
| Global core liquid assets | $182.95 billion | $184.07 billion | Slightly lower |
Cash flow from operating activities was negative $7.62 billion, investing activities used $14.91 billion, and financing activities provided $19.00 billion. Management stated that cash flow analysis is less meaningful for a global financial institution than liquidity and asset-liability measures.
The firm returned $6.52 billion to shareholders, including $5.47 billion of common-stock repurchases and $1.05 billion of common dividends. The Basel III Advanced CET1 ratio was 12.2% under transitional provisions; the Tier 1 capital ratio was 13.8%, total capital ratio was 16.0%, and Tier 1 leverage ratio was 9.0%.
Segment results
| Segment | 2014 net revenues | 2014 pre-tax earnings | Change in pre-tax earnings vs. 2013 |
|---|---|---|---|
| Investment Banking | $6.46 billion | $2.78 billion | Up 10% |
| Institutional Client Services | $15.20 billion | $4.32 billion | Up 10% |
| Investing & Lending | $6.83 billion | $4.01 billion | Down 8% |
| Investment Management | $6.04 billion | $1.40 billion | Up 26% |
Material changes versus the prior comparable period
- Investment Banking benefited from stronger mergers and acquisitions activity. Financial advisory revenue increased 25% to $2.47 billion, while total segment revenue increased 8%.
- Institutional Client Services revenue declined 3%, primarily because of challenging market-making conditions, low volatility and weak activity in credit, rates and mortgages. Segment expenses fell 8%, supporting higher pre-tax earnings.
- Investing & Lending revenue declined 3% and pre-tax earnings declined 8%, reflecting lower public-equity gains and lower revenue from consolidated commodities-related investments, partly offset by stronger debt and loan results.
- Investment Management revenue rose 11%. Assets under supervision increased $136 billion to $1.18 trillion, supported by $111 billion of net inflows and $25 billion of net market appreciation.
- The firm reduced total assets by $55 billion through an initiative targeting lower-return activities, particularly matched-book and secured client-financing activities. The leverage ratio improved to 10.3x from 11.6x.
- Non-compensation expenses declined 4%, including lower litigation and regulatory provisions of $754 million versus $962 million in 2013. Total staff increased 3%.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide quantitative earnings guidance. Management indicated that future results remain highly dependent on global market conditions, client activity, asset prices, volatility, credit spreads and regulatory developments.
- Management described the investment banking environment as favorable in 2014 and reported that transaction backlog increased significantly, particularly for potential advisory transactions. Backlog estimates remain subject to cancellation, modification, financing constraints, market weakness and regulatory approvals.
- The Volcker Rule prohibits proprietary trading and limits investments in covered funds. Goldman Sachs stated that it did not expect the proprietary-trading prohibition to have a material effect, but disclosed approximately $9.84 billion of fund investments that would generally need to be reduced or exited over the transition period.
- U.S. liquidity rules became effective January 1, 2015, with an 80% minimum liquidity coverage ratio during 2015, rising to 100% by 2017. The filing states that the firm’s calculated LCR exceeded the fully phased-in minimum, subject to interpretation of the rules.
- The Federal Reserve and FDIC identified shortcomings in the firm’s prior resolution plan. The 2015 plan was required by July 1, 2015; failure to address deficiencies could result in higher capital, leverage or liquidity requirements, activity restrictions or divestitures.
- Unusual 2014 items included a $289 million gain from extinguishing junior subordinated debt, $360 million of impairments, and a $137 million charitable contribution funded through compensation reductions.
- Legal and regulatory matters remain significant. The filing estimates the upper end of reasonably possible aggregate legal losses at approximately $3.0 billion above recorded reserves for matters where a range could be estimated, while noting that additional mortgage-related and regulatory exposures could not be meaningfully estimated.
- Key operating risks include market and liquidity stress, counterparty defaults, credit and oil-and-gas exposure, cyber and operational failures, litigation, regulatory enforcement, conflicts of interest, employee retention and reputational damage.
Most important facts for investors to verify
- Confirm the composition and sustainability of earnings, particularly the contribution from investment banking, private-equity gains, debt extinguishment and other fair-value movements.
- Review the firm’s liquidity coverage ratio, global core liquid assets, funding maturity profile, credit ratings and collateral requirements following any ratings downgrade.
- Assess the effect of Basel III, the G-SIB surcharge, the supplementary leverage ratio, the Volcker Rule and other regulatory changes on capital usage, returns and business activities.
- Review legal proceedings, mortgage representations and warranties, RMBS investigations, regulatory inquiries and the approximately $3.0 billion estimate of reasonably possible aggregate loss above reserves.
- Evaluate the quality and concentration of credit exposure, including $10.9 billion of oil-and-gas loan and lending-commitment exposure and substantial non-investment-grade lending.
- Reconcile full-year results with the unaudited fourth-quarter figures: fourth-quarter net revenues were $7.69 billion, net earnings were $2.17 billion and diluted EPS was $4.38.