GOLDMAN SACHS GROUP INC quarterly report, Q2 FY2017

Goldman Sachs Group Inc. — Q2 2017 Form 10-Q Summary

Business context and reporting period

The filing covers the unaudited three and six months ended June 30, 2017, compared with the respective 2016 periods, and the balance sheet as of June 30, 2017 versus December 31, 2016. Goldman Sachs is a global investment banking, securities and investment management firm operating through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.

Financial performance and key metrics

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Net revenues	$7.887 billion	$7.932 billion	$15.913 billion	$14.270 billion
Pre-tax earnings	$2.509 billion	$2.463 billion	$5.048 billion	$4.039 billion
Net earnings	$1.831 billion	$1.822 billion	$4.086 billion	$2.957 billion
Net earnings applicable to common shareholders	$1.631 billion	$1.634 billion	$3.793 billion	$2.834 billion
Diluted EPS	$3.95	$3.72	$9.10	$6.39
Operating expenses	$5.378 billion	$5.469 billion	$10.865 billion	$10.231 billion
Net interest income	$788 million	$754 million	$1.304 billion	$1.637 billion

Calculated pre-tax margins were approximately 31.8% in Q2 2017 and 31.7% for the first half; calculated net margins were approximately 23.2% and 25.7%, respectively. Annualized return on average common equity was 8.7% in Q2 and 10.1% for the first half, compared with 8.7% and 7.5% in the prior-year periods.

Q2 revenue was essentially flat year over year. Investment Banking revenue declined 3%, Market Making declined 23%, while Investment Management rose 14% and Other Principal Transactions rose 42%.
First-half revenue increased 12%, led by Other Principal Transactions, Investment Management and Investment Banking. Net interest income declined 20%, primarily because interest expense increased faster than interest income.
First-half compensation and benefits expense increased 9% to $6.524 billion, while the compensation-to-revenue ratio improved to 41.0% from 42.0%.
The first-half effective tax rate was 19.1%, benefiting from a $485 million tax reduction related to employee share-based award settlements under ASU 2016-09.

Balance sheet, liquidity, debt and capital

Total assets were $906.518 billion, up from $860.165 billion at year-end 2016. Financial instruments owned increased to $327.740 billion from $295.952 billion.
Cash and cash equivalents were $110.888 billion, down from $121.711 billion. Management reported Global Core Liquid Assets of $221.066 billion, versus $226.066 billion at year-end.
Total shareholders’ equity was $86.675 billion, compared with $86.893 billion. Book value per common share was $187.32; tangible book value per common share was $177.20.
Unsecured short-term borrowings were $42.966 billion and unsecured long-term borrowings were $203.647 billion, compared with $39.265 billion and $189.086 billion, respectively, at year-end. Total long-term borrowings, including secured financings, were $215.993 billion.
Deposits were $125.544 billion, broadly unchanged from $124.098 billion. Secured funding included in collateralized financings was $118.07 billion, versus $100.86 billion at year-end.
The applicable Basel III Advanced CET1, Tier 1 and total capital ratios were 12.5%, 14.4% and 16.9%, respectively, versus minimum requirements of 7.0%, 8.5% and 10.5%. The Tier 1 leverage ratio was 9.3%.
Six-month operating cash flow was negative $13.853 billion, investing cash flow was negative $6.942 billion, and financing cash flow was positive $9.972 billion. Cash and cash equivalents decreased by $10.823 billion.

Material changes versus comparable periods

Institutional Client Services was the principal Q2 weakness: revenue declined 17% to $3.051 billion and pre-tax earnings declined 34% to $650 million, mainly because low volatility and weak client activity reduced FICC revenue.
Investing & Lending was the principal earnings driver: Q2 pre-tax earnings rose 53% to $813 million; first-half pre-tax earnings were $1.527 billion versus $174 million, primarily due to gains on private and public equity investments.
Investment Management benefited from higher assets under supervision, incentive fees and transaction revenue. Assets under supervision reached $1.406 trillion, up from $1.310 trillion a year earlier, including $23 billion of Q2 inflows associated with the Verus acquisition.
Common share repurchases totaled $2.966 billion in the first half, including 12.8 million shares. The quarterly common dividend was $0.75 per share, up from $0.65 in Q2 2016.
Level 3 financial assets declined to $20.847 billion from $23.280 billion at year-end and represented 2.3% of total assets.

Outlook, commentary, risks and unusual items

Management did not provide formal quantitative full-year guidance in the supplied filing. Management described modestly improving global growth but persistently low volatility and low client conviction, which could continue to pressure market-making revenue. Investment Banking results remain sensitive to mergers and acquisitions and underwriting volumes; the transaction backlog increased from year-end, but transactions may be delayed, modified or cancelled.

Investment and lending results are exposed to declines in equity prices, wider credit spreads, weaker corporate performance and adverse company-specific events.
Liquidity and funding risks include reliance on secured and unsecured markets, collateral calls, derivative exposures, deposit withdrawals and potential credit-rating downgrades. A two-notch downgrade could have triggered approximately $1.385 billion of additional collateral or termination payments as of June 30, 2017.
Total commitments were $222.833 billion, including $125.089 billion of commitments to extend credit. These amounts are not necessarily future cash outflows because commitments may expire unused or be syndicated.
Legal proceedings remained significant. Management estimated the upper end of reasonably possible aggregate loss, for matters where estimable, at approximately $1.5 billion in excess of reserves. Mortgage-related repurchase exposure could not be meaningfully estimated.
The firm adopted the employee share-based payment standard in January 2017, producing the substantial tax benefit noted above. It expected the January 2018 adoption of ASC 606 to have no material initial impact, although some investment management fees may be recognized earlier and cost presentation may change.
Regulatory requirements continue to evolve, including higher capital buffers, supplementary leverage requirements, total loss-absorbing capacity, uncleared-swap margin rules and liquidity standards.

Most important facts for investors to verify

Whether low volatility and weak FICC client activity persist and further affect Institutional Client Services revenue.
How much of first-half earnings growth reflects the $485 million share-based compensation tax benefit and fair-value gains from private and public equity investments.
Changes in capital ratios as regulatory buffers phase in and the firm approaches the 2018 supplementary leverage and 2019 fully phased-in capital requirements.
Growth in unsecured long-term borrowings, collateralized funding, lending commitments and related refinancing or collateral-call risks.
Developments in mortgage-related matters, antitrust and trading litigation, regulatory investigations and the estimated $1.5 billion excess reasonably possible loss.
Progress and economics of the Verus acquisition, investment banking backlog and other business initiatives, recognizing that backlog is not guaranteed revenue.