Goldman Sachs Group Inc. — Q2 2012 Form 10-Q Summary
Business context and reporting period
The Goldman Sachs Group, Inc. is a global investment banking, securities and investment management firm serving corporations, financial institutions, governments and high-net-worth individuals. The unaudited Form 10-Q covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods and balance-sheet comparisons to December 31, 2011.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenues | $6.63 billion | $7.28 billion | $16.58 billion | $19.18 billion |
| Pre-tax earnings | $1.42 billion | $1.61 billion | $4.60 billion | $5.65 billion |
| Net earnings | $962 million | $1.09 billion | $3.07 billion | $3.82 billion |
| Net earnings applicable to common shareholders | $927 million | $1.05 billion | $3.00 billion | $1.96 billion |
| Diluted EPS | $1.78 | $1.85 | $5.72 | $3.40 |
| Operating expenses | $5.21 billion | $5.67 billion | $11.98 billion | $13.52 billion |
| Net interest income | $1.09 billion | $1.41 billion | $2.07 billion | $2.77 billion |
Q2 pre-tax margin was approximately 21.4% and net margin was approximately 14.5%. Six-month pre-tax margin was approximately 27.7% and net margin was approximately 18.5%. The six-month 2011 common-shareholder comparison was affected by a $1.64 billion preferred dividend related to the redemption of Series G Preferred Stock; excluding that item, 2011 diluted EPS was $6.25 versus $5.72 in 2012.
- Q2 revenue declined 9%; six-month revenue declined 14%.
- Q2 operating expenses declined 8%; six-month operating expenses declined 11%. Compensation and benefits were $2.92 billion in Q2 and $7.29 billion for the first half.
- Cash provided by operating activities was $8.91 billion for the first half, versus $12.66 billion in 2011. Cash and cash equivalents ended at $58.91 billion, up from $56.01 billion at December 31, 2011.
- Total assets were $948.64 billion, up from $923.23 billion. Shareholders’ equity was $72.86 billion, up from $70.38 billion.
- Unsecured short-term borrowings were $45.69 billion; total short-term borrowings were $65.14 billion. Unsecured long-term borrowings were $166.99 billion, and total long-term borrowings were $176.34 billion.
- Customer deposits increased to $57.32 billion from $46.11 billion. Management reported $174.58 billion of Global Core Excess liquidity at June 30, 2012.
- Regulatory capital remained strong: Tier 1 capital ratio was 15.0%, total capital ratio was 18.1%, Tier 1 leverage ratio was 7.0%, and Tier 1 common ratio was 13.1%.
- Average daily value-at-risk was $92 million in Q2 and $94 million for the first half, compared with $101 million and $107 million, respectively, in the 2011 periods.
Material changes versus prior comparable periods
- Investment Banking: Q2 net revenues fell 17% to $1.20 billion and first-half revenues fell 13% to $2.36 billion, driven by weaker completed M&A and equity underwriting activity. Debt underwriting was comparatively stronger.
- Institutional Client Services: Q2 net revenues increased 11% to $3.89 billion, primarily from stronger Fixed Income, Currency and Commodities Client Execution. First-half revenues decreased 6% to $9.60 billion. Q2 pre-tax earnings increased to $942 million from $475 million.
- Investing & Lending: Q2 net revenues fell to $203 million from $1.04 billion, producing a $53 million pre-tax loss. Results included a $194 million loss on ICBC ordinary shares and a $112 million loss on other equity investments. First-half pre-tax earnings fell 54% to $900 million.
- Investment Management: Q2 net revenues increased 5% to $1.33 billion, supported by higher incentive fees. Assets under management increased to $836 billion, including $16 billion of Q2 net inflows offset by $4 billion of market depreciation.
- Balance sheet and funding: Financial instruments owned at fair value increased to $387.20 billion from $364.21 billion. Deposits increased $11.21 billion, while unsecured long-term borrowings declined $6.55 billion.
- Capital actions: The firm repurchased 14.3 million common shares for $1.50 billion during Q2 and 17.6 million shares for $1.86 billion during the first half. Preferred stock increased by $1.75 billion following issuance of Series E Preferred Stock.
Guidance, outlook, commentary, risks and unusual items
- Management targeted approximately $500 million of additional annualized compensation and non-compensation expense reductions by year-end 2012.
- Management described global conditions as difficult, citing European sovereign-debt concerns, slowing U.S. and Chinese economies, wider credit spreads, lower equity prices and higher volatility. Continued weakness could reduce investment banking, market-making, investing and investment management revenues.
- Moody’s downgraded Group Inc.’s ratings during Q2, including long-term debt from A1 to A3 and short-term debt from P-1 to P-2. A two-notch downgrade could have required approximately $2.46 billion of additional collateral or termination payments as of June 30.
- The firm expects regulatory capital and liquidity requirements to evolve under Basel 2.5, Basel 3, the Dodd-Frank Act and the Volcker Rule. Basel 2.5 market-risk changes were expected to increase capital requirements beginning in January 2013.
- The firm planned to redeem certain hedge-fund interests to comply with the Volcker Rule and redeemed approximately $500 million during the first half. It also submitted resolution plans for Group Inc. and GS Bank USA on June 29, 2012.
- Level 3 financial assets were $46.51 billion, or 7.1% of financial assets measured at fair value. Valuation depends partly on unobservable assumptions, including credit spreads, recovery rates, volatility, correlation, yields and duration.
- Commitments totaled $160.74 billion, including $74.40 billion of commitments to extend credit. The firm also disclosed $3.4 billion as the estimated upper end of reasonably possible aggregate litigation losses for matters where a range could be estimated.
- Mortgage-related exposures remain uncertain. The firm stated that potential claims based on representations and warranties could increase but that it could not meaningfully estimate the exposure.
- Other notable items included a $159 million impairment charge in the first half related primarily to commodity-related property, equipment and intangible assets, and $126 million of litigation and regulatory provisions.
Important facts for investors to verify
- Whether expense-reduction initiatives achieve the targeted $500 million annual run rate without impairing revenue-generating capacity.
- The sustainability and quality of Investing & Lending gains, incentive fees and other fair-value-driven revenues.
- Actual effects of European sovereign stress, wider credit spreads, rating downgrades and potential collateral calls on liquidity and earnings.
- Progress and final impact of Basel 2.5, Basel 3, Dodd-Frank and Volcker Rule implementation.
- Changes in Level 3 assets, valuation assumptions and realized versus unrealized gains.
- Developments in mortgage-related litigation, repurchase claims, regulatory investigations and the disclosed $3.4 billion reasonably possible loss estimate.
- The availability of liquidity at the parent versus regulated subsidiaries, given restrictions on transfers of capital and cash.
- The filing’s unaudited interim results, non-GAAP measures such as adjusted assets and Tier 1 common ratio, and the comparability effects from the 2011 Series G preferred dividend.