Goldman Sachs Group Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The financial statements are unaudited and prepared under U.S. GAAP. 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.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|
| Net revenues | $7.932 billion | $9.069 billion | $14.270 billion | $19.686 billion |
| Pre-tax earnings | $2.463 billion | $1.726 billion | $4.039 billion | $5.660 billion |
| Net earnings | $1.822 billion | $1.048 billion | $2.957 billion | $3.892 billion |
| Net earnings applicable to common | $1.634 billion | $916 million | $2.834 billion | $3.664 billion |
| Diluted EPS | $3.72 | $1.98 | $6.39 | $7.93 |
| Annualized ROE | 8.7% | 4.8% | 7.5% | 9.7% |
| Operating expenses | $5.469 billion | $7.343 billion | $10.231 billion | $14.026 billion |
- Q2 pre-tax margin was approximately 31.1% and net margin was approximately 23.0%; six-month pre-tax margin was approximately 28.3% and net margin was approximately 20.7%.
- Net interest income increased 14% in Q2 to $754 million and 8% for the first half to $1.637 billion.
- Q2 compensation and benefits expense was $3.331 billion; first-half expense was $5.993 billion. Compensation represented 42.0% of first-half net revenues, unchanged from the prior year.
- Net provisions for litigation and regulatory proceedings were $126 million in Q2 and $203 million for the first half, compared with $1.45 billion and $1.64 billion, respectively, in the comparable 2015 periods.
Segment results
| Segment | Q2 2016 net revenues | Q2 2016 pre-tax earnings | Six-month 2016 net revenues | Six-month 2016 pre-tax earnings |
|---|
| Investment Banking | $1.787 billion | $692 million | $3.250 billion | $1.393 billion |
| Institutional Client Services | $3.681 billion | $979 million | $7.124 billion | $2.001 billion |
| Investing & Lending | $1.111 billion | $530 million | $1.198 billion | $174 million |
| Investment Management | $1.353 billion | $262 million | $2.698 billion | $471 million |
- Institutional Client Services produced a Q2 pre-tax profit versus a Q2 2015 loss, largely because the prior-year period included $1.45 billion of mortgage-related litigation and regulatory provisions.
- Investing & Lending declined materially, reflecting lower gains from private and public equity investments and weaker results from debt securities and loans.
- Investment Management revenue declined as incentive fees fell, despite assets under supervision increasing to $1.310 trillion from $1.252 trillion at December 31, 2015.
Balance sheet, liquidity, debt and capital
- Total assets were $896.843 billion at June 30, 2016, up from $861.395 billion at December 31, 2015. Total shareholders’ equity was $86.514 billion versus $86.728 billion.
- Cash and cash equivalents were $103.293 billion, up $28.188 billion year to date. Global Core Liquid Assets were $211.255 billion, compared with $199.120 billion at year-end 2015.
- Deposits increased to $123.708 billion from $97.519 billion, primarily reflecting Goldman Sachs Bank USA’s April 2016 acquisition of GE Capital Bank’s online deposit platform and assumption of $16.52 billion of deposits.
- Unsecured long-term borrowings were $183.732 billion, while total short-term borrowings were $59.519 billion. The debt-to-equity ratio was 2.1x and the total-assets-to-equity leverage ratio was 10.4x.
- Six-month cash flow was positive: $5.673 billion from operating activities, $12.815 billion from investing activities and $9.700 billion from financing activities. Investing cash flow included $15.882 billion of net cash acquired in business acquisitions.
- Transitional Basel III Advanced ratios, which were the binding ratios, were 12.2% CET1, 14.0% Tier 1 capital, 16.7% total capital and 9.1% Tier 1 leverage. GS Bank USA was reported as meeting minimum and “well-capitalized” requirements.
- The firm repurchased 21.2 million common shares for $3.294 billion during the first half and declared a $0.65 per-share common dividend for the third quarter.
Material changes and unusual items
- Compared with Q2 2015, Q2 2016 net revenues fell 13%, but net earnings rose 74% and diluted EPS rose 88%, primarily because Q2 2015 included significant mortgage-related litigation provisions and Q2 2016 had lower expenses.
- For the first half, net revenues fell 28%, net earnings fell 24% and diluted EPS fell 19%, reflecting a difficult first quarter and lower market-making, Investing & Lending, investment banking and investment management revenues.
- The firm completed an efficiency initiative that reduced annual run-rate compensation by approximately $700 million. Management expects full-year 2016 net savings, after severance and related costs, to exceed $350 million.
- The firm adopted consolidation guidance that reduced total assets and liabilities by approximately $200 million without affecting earnings. It also early adopted debt valuation adjustment presentation requirements, resulting in a $305 million after-tax reclassification from retained earnings to accumulated other comprehensive loss.
- In the first quarter, the firm exchanged APEX securities with a fair value of $505 million for Series E and Series F preferred stock with a redemption value of $672 million, producing a $161 million benefit in preferred stock dividends.
Outlook, risks and contingencies
- Management described the operating environment as challenging, citing low interest rates, macroeconomic uncertainty, reduced client risk appetite, market volatility and the United Kingdom’s vote to leave the European Union. Brexit may increase volatility and require changes to the firm’s European operating structure.
- Investment banking backlog decreased from both the prior quarter and year-end 2015. Backlog transactions may be modified, cancelled or delayed, so expected revenue is uncertain.
- The firm must reduce most interests in covered funds under the Volcker Rule by the end of the applicable conformance period. Fund investments measured at NAV totaled $7.008 billion, with $1.931 billion of unfunded commitments.
- Legal and regulatory exposure remains significant. Management estimated the upper end of reasonably possible aggregate loss for certain matters at approximately $2.0 billion above recorded reserves, while stating that many other matters cannot yet be estimated. Mortgage-related repurchase claims and regulatory investigations may produce material results in individual periods.
- Total commitments were $186.431 billion, including $103.825 billion of commitments to extend credit. Maximum exposure to loss from nonconsolidated VIEs was $15.442 billion, excluding hedges and other risk mitigants.
- Derivative-related contingent obligations included $834.509 billion of maximum payout or notional amounts; these amounts are not expected losses. A two-notch credit-rating downgrade could have required approximately $2.110 billion of additional collateral or termination payments at June 30, 2016.
- Credit exposure to oil and gas companies through loans and lending commitments was $10.1 billion, including $4.5 billion to non-investment-grade counterparties. Market and credit exposures also remained sensitive to conditions in China, Brazil, Russia and other emerging markets.
Investor verification checklist
- Verify whether the Q2 improvement in earnings is sustainable without the benefit of unusually low litigation provisions relative to 2015.
- Assess the trajectory of market-making, Investment Banking backlog, Investing & Lending gains and Investment Management incentive fees.
- Review the quality, maturity and regulatory availability of the $211.3 billion of Global Core Liquid Assets and the effects of subsidiary-level liquidity restrictions.
- Monitor deposits, unsecured borrowing maturities, credit-rating sensitivity and collateral requirements under derivatives agreements.
- Evaluate potential legal, mortgage-related, regulatory and antitrust losses beyond recorded reserves, including the approximately $2.0 billion reasonably possible loss estimate.
- Track the effect of Brexit, Volcker Rule compliance, TLAC and other evolving capital and liquidity requirements on returns and business mix.
