GOLDMAN SACHS GROUP INC quarterly report, Q2 FY2021

Business Context and Reporting Period

The Goldman Sachs Group, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The firm operates through Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management, serving corporations, financial institutions, governments and individuals worldwide.

Key Financial Metrics

Metric	Three months ended June 30, 2021	Three months ended June 30, 2020	Six months ended June 30, 2021	Six months ended June 30, 2020
Total net revenues	$15.388 billion	$13.295 billion	$33.092 billion	$22.038 billion
Pre-tax earnings	$6.840 billion	$1.291 billion	$15.177 billion	$2.639 billion
Net earnings	$5.486 billion	$373 million	$12.322 billion	$1.586 billion
Net earnings applicable to common	$5.347 billion	$197 million	$12.058 billion	$1.320 billion
Diluted EPS	$15.02	$0.53	$33.64	$3.66
Annualized ROE	23.7%	1.0%	27.3%	3.3%
Operating efficiency ratio	56.1%	78.3%	54.6%	76.6%
Provision for credit losses	$(92) million	$1.590 billion	$(162) million	$2.527 billion

Second-quarter pre-tax and net margins were approximately 44.5% and 35.7%, respectively. Six-month pre-tax and net margins were approximately 45.9% and 37.2%, respectively.

Investment banking revenue increased to $3.450 billion in the second quarter and $7.016 billion for the first half, driven by financial advisory and underwriting activity.
Market-making revenue declined to $3.274 billion in the second quarter from $5.787 billion, reflecting lower volatility and less favorable trading conditions. First-half market-making revenue was $9.167 billion versus $9.469 billion.
Other principal transactions revenue increased to $4.297 billion in the second quarter and $8.191 billion for the first half, primarily from gains on private and public equity investments and other investments.
Net interest income increased 73% year over year in the second quarter to $1.629 billion and 38% for the first half to $3.111 billion, largely due to lower interest expense.
Operating expenses were $8.640 billion in the second quarter and $18.077 billion for the first half. Compensation and benefits were $5.263 billion and $11.306 billion, respectively.
Cash provided by operating activities was $15.284 billion for the first half, compared with cash used of $64.678 billion in the prior-year period. Investing activities used $11.708 billion and financing activities provided $80.871 billion.

Balance Sheet, Debt, Liquidity and Capital

Total assets were $1.388 trillion at June 30, 2021, up from $1.163 trillion at December 31, 2020. Cash and cash equivalents increased to $240.289 billion from $155.842 billion.
Total shareholders’ equity was $101.890 billion, including common shareholders’ equity of $92.687 billion. Book value per common share was $264.90 and tangible book value per common share was $251.02.
Loans were $130.537 billion, net of a $3.271 billion allowance. Gross loans increased to $133.808 billion from $119.989 billion at year-end. Nonaccrual loans declined to $2.883 billion from $3.552 billion.
Deposits were $306.142 billion, up from $259.962 billion. Unsecured short-term borrowings were $61.740 billion and unsecured long-term borrowings were $238.930 billion, for total unsecured borrowings of $300.670 billion.
Average global core liquid assets were $329.404 billion in the second quarter, up from $298.642 billion in the first quarter. Average daily liquidity coverage ratio was 138%, compared with a 100% minimum requirement.
Standardized and Advanced CET1 capital ratios were 14.4% and 13.4%, respectively. The Tier 1 leverage ratio was 7.3% and the supplementary leverage ratio was 5.5%.
During the first half, the firm issued $52.897 billion of unsecured long-term borrowings and repaid $23.136 billion. It also raised $46.334 billion through deposits and repurchased $3.700 billion of common stock.

Material Changes Versus Prior Comparable Period

Results benefited materially from the recovery in economic and financial market conditions compared with the COVID-19-affected second quarter and first half of 2020.
Asset Management net revenues increased to $5.132 billion in the second quarter from $2.101 billion, primarily from higher private equity gains. First-half net revenues increased to $9.746 billion from $2.005 billion.
Global Markets second-quarter net revenues declined 32% to $4.900 billion, although first-half net revenues were broadly unchanged at $12.481 billion.
Credit-loss provisions shifted from substantial expense in 2020 to net reserve releases in 2021, reflecting improved economic forecasts and lower expected losses, partially offset by portfolio growth.
Second-quarter 2020 included $2.96 billion of net provisions for litigation and regulatory proceedings; the comparable 2021 amount was $226 million. First-half amounts were $300 million in 2021 versus $3.14 billion in 2020.
The firm resumed share repurchases in 2021. It repurchased 2.85 million shares for $1.0 billion during the second quarter and increased the quarterly common dividend from $1.25 to $2.00 per share beginning in the third quarter.

Guidance, Outlook, Risks and Unusual Items

Management expects an approximately 21% effective tax rate for the remainder of 2021, excluding potential changes in U.K. tax rates. A U.K. deferred tax benefit of approximately $100 million was recognized in the second quarter.
The firm continues to target $1.3 billion of annual run-rate expense efficiencies by year-end 2022 and expects an additional $400 million beyond that date.
Management stated that the pace of benchmark debt issuance should moderate from the first half of 2021, although issuance may continue if non-bank funding is needed for attractive growth opportunities.
The firm’s investment banking backlog increased during the quarter and first half, but management cautions that transactions may be delayed, modified or cancelled.
Key operating risks include reduced market volatility and client activity, weaker investment banking volumes, declines in equity markets or alternative-asset values, inflation, geopolitical developments, higher interest rates, credit deterioration, and COVID-19 resurgence including the Delta variant.
The pending acquisition of the General Motors co-branded credit card portfolio generated $185 million of credit-loss provision in the first half. Closing was expected by the first quarter of 2022.
As of June 30, 2021, the estimated upper end of reasonably possible aggregate legal losses exceeded recorded reserves by approximately $1.8 billion for matters where a range could be estimated. The filing states that other matters could be material to a particular period.
The firm maintains a guarantee requiring the Government of Malaysia to receive at least $1.4 billion in 1MDB-related assets and proceeds by August 18, 2025. Approximately $220 million had been returned as of February 2021.
The firm must manage the transition from LIBOR to alternative reference rates. Most commonly used U.S. dollar LIBOR settings are scheduled to cease after June 30, 2023, with other settings ceasing after December 31, 2021.
On July 1, 2021, after the reporting date, GS Bank USA acquired Goldman Sachs Bank Europe SE. Group Inc. made a $33 billion cash capital contribution to GS Bank USA; subsequent dividends largely reflected the maturity or settlement of acquired assets.

Important Facts for Investors to Verify

Whether unusually high gains from private equity and other principal investments are recurring or market-dependent.
The sustainability of investment banking backlog, underwriting activity and fee-based asset-management inflows.
The effect of lower volatility and changing interest rates on Global Markets revenue and net interest income.
Credit quality trends in corporate, commercial real estate, consumer and credit-card portfolios, including the GM portfolio acquisition.
The adequacy of credit-loss reserves under adverse economic scenarios and the potential impact of COVID-19 variants, inflation and unemployment.
Progress toward expense-efficiency targets and the effect of compensation growth on future margins.
Capital requirements beginning October 1, 2021, including the lower 6.4% stress capital buffer and potential future G-SIB surcharge increases.
Legal, regulatory and 1MDB-related contingencies, including the approximately $1.8 billion excess reasonably possible legal-loss estimate and the Malaysia asset-recovery guarantee.
The effect of the July 2021 GS Bank USA and GSBE transaction on capital, liquidity, deposits, earnings and regulatory restrictions on subsidiary dividends.