Goldman Sachs Group, Inc. 2011 Q1 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 report covers the three months ended March 31, 2011, with comparable results for the three months ended March 31, 2010 and balance-sheet comparisons to December 31, 2010.
Reportable segments are Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net revenues | $11.894 billion | $12.775 billion |
| Pre-tax earnings | $4.040 billion | $5.159 billion |
| Net earnings | $2.735 billion | $3.456 billion |
| Net earnings applicable to common shareholders | $908 million | $3.296 billion |
| Diluted EPS | $1.56 | $5.59 |
| Operating expenses | $7.854 billion | $7.616 billion |
| Net interest income | $1.358 billion | $1.418 billion |
| Cash flow from operating activities | $1.900 billion | $(7.504) billion |
- Approximate net-revenue margin was 34.0% on a pre-tax basis and 23.0% on a net-earnings basis; the filing does not identify these as reported non-GAAP measures.
- Compensation and benefits were $5.233 billion, or 44.0% of net revenues, compared with 43.0% in Q1 2010. Non-compensation expenses increased 23% to $2.621 billion.
- Annualized return on average common shareholders’ equity was 12.2%, compared with 20.1%. Excluding the $1.643 billion Series G preferred-stock dividend, diluted EPS was $4.38 and annualized common ROE was 14.5%.
- Cash and cash equivalents were $42.683 billion at March 31, 2011, up from $39.788 billion at December 31, 2010. Net cash provided by investing and financing activities was approximately $1.0 billion, primarily reflecting net borrowing issuance.
- Total assets were $933.289 billion, up from $911.332 billion. Total shareholders’ equity was $72.469 billion, down from $77.356 billion, primarily because of the Series G redemption accrual and related dividend.
- Unsecured short-term borrowings were $53.746 billion and unsecured long-term borrowings were $173.793 billion. Total short- and long-term borrowings, including secured financings, were approximately $264.5 billion.
- Global Core Excess liquidity was $170.686 billion at March 31, 2011. Customer deposits were $38.727 billion.
- Basel 1 Tier 1 capital was $66.387 billion, with a Tier 1 capital ratio of 14.6%, total capital ratio of 17.6%, Tier 1 leverage ratio of 7.5% and Tier 1 common ratio of 12.8%.
Material changes versus the prior comparable period
- Net revenues declined 7%, pre-tax earnings declined 22%, net earnings declined 21%, and diluted EPS declined 72%. The decrease in common earnings and EPS was amplified by the Series G preferred-stock dividend recognized in Q1 2011.
- Institutional Client Services net revenues fell 22% to $6.647 billion and pre-tax earnings fell 44% to $2.063 billion, primarily because Q1 2010 had been particularly strong in Fixed Income, Currency and Commodities Client Execution.
- Investing & Lending net revenues rose 37% to $2.705 billion and pre-tax earnings rose 39% to $1.474 billion, helped by stronger equity and credit markets, including a $316 million gain on ICBC ordinary shares.
- Investment Banking net revenues increased 5% to $1.269 billion. Underwriting revenue rose to $912 million, while Financial Advisory revenue declined to $357 million.
- Investment Management net revenues increased 16% to $1.273 billion, driven by higher management, other and incentive fees. Assets under management were $840 billion, unchanged from year-end after $12 billion of market appreciation offset $12 billion of net outflows.
- Market making revenue declined to $4.462 billion from $6.385 billion, while Other principal transactions increased to $2.612 billion from $1.881 billion.
- Average daily market-risk VaR declined to $113 million from $161 million. The filing states that no daily trading loss exceeded the 95% one-day VaR during the quarter.
- Operating expenses increased 3% despite a 5% decline in compensation expense, primarily because non-compensation expenses increased, including higher depreciation and amortization.
Guidance, outlook, management commentary and unusual items
- The filing provides no formal earnings or revenue guidance. Management emphasizes that results are inherently unpredictable and materially dependent on global financial markets, economic conditions, volatility, client activity and regulatory developments.
- Management described the global environment as generally supportive, with rising equity prices, favorable credit markets and increased mergers, acquisitions and debt issuance activity. Risks included European sovereign-debt concerns, Middle East political unrest, the Japan earthquake and tsunami, inflation in emerging markets and uncertainty about financial regulation.
- The firm recognized a $1.643 billion preferred dividend related to the redemption of Berkshire Hathaway’s Series G preferred stock for $5.50 billion plus accrued dividends. The stock was redeemed on April 18, 2011; Berkshire retained a warrant to purchase up to 43.5 million common shares at $115 per share.
- The firm recognized approximately $220 million of impairment losses on assets classified as held for sale, primarily related to Litton Loan Servicing. The assets were expected to be sold within twelve months.
- The firm acquired Paternoster U.K. Limited, a U.K. life insurance company, during Q1 2011, acquiring approximately $4.75 billion of assets and assuming approximately $4.35 billion of liabilities.
- Aggregate reasonably possible losses for disclosed legal matters were estimated at approximately $2.7 billion as of March 31, 2011, although management stated that the aggregate outcomes were not expected to materially affect financial condition.
- Mortgage-related exposures remain subject to substantial uncertainty, including potential repurchase claims, foreclosure and servicing investigations, securities litigation and regulatory inquiries. Management stated that it could not meaningfully estimate the ultimate exposure to potential mortgage-loan repurchase claims.
- Future Basel 2.5, Basel 3, Dodd-Frank and other regulatory changes are expected to increase capital requirements, raise risk-weighted assets and potentially reduce reported capital ratios. The filing states that the ultimate requirements remained uncertain.
Most important facts for an investor to verify
- Reconcile reported diluted EPS of $1.56 with the $4.38 EPS excluding the Series G preferred dividend and assess the recurring earnings base after the redemption.
- Evaluate whether the decline in Institutional Client Services revenue reflects temporary normalization from an unusually strong 2010 comparison or sustained pressure on client activity and market-making spreads.
- Review the composition, liquidity and valuation sensitivity of $45.843 billion of Level 3 assets and the firm’s broader $641.556 billion of financial assets measured at fair value.
- Assess refinancing, collateral and downgrade risks, including $173.793 billion of unsecured long-term borrowings, $53.746 billion of unsecured short-term borrowings and up to $2.211 billion of additional collateral or termination payments after a two-notch downgrade.
- Review the $59.677 billion of commitments to extend credit, $140.300 billion of total commitments, $842.892 billion of derivative guarantees and the distinction between contractual notional amounts and expected losses.
- Monitor the $2.7 billion reasonably possible legal-loss estimate, mortgage-related claims and regulatory investigations, including matters for which the filing states no meaningful exposure estimate is available.
- Consider the effect of the $220 million Litton impairment, the Paternoster acquisition and future regulatory capital changes on subsequent periods.