Goldman Sachs Group Inc. — Q1 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 filing presents unaudited U.S. GAAP results for the three months ended March 31, 2012, with comparisons to March 31, 2011 and December 31, 2011 balance-sheet amounts.
Reportable segments are Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues | $9.949 billion | $11.894 billion | Down 16% |
| Pre-tax earnings | $3.181 billion | $4.040 billion | Down 21% |
| Net earnings | $2.109 billion | $2.735 billion | Down 23% |
| Net earnings applicable to common shareholders | $2.074 billion | $908 million | Up substantially, due primarily to the Q1 2011 Series G preferred-stock dividend |
| Diluted EPS | $3.92 | $1.56 | Up from the unusual Q1 2011 preferred dividend charge |
| Dividend declared per common share | $0.35 | $0.35 | Unchanged during the quarter |
| Effective tax rate | 33.7% | 28.0% | Higher |
Net revenue mix included investment banking revenue of $1.160 billion, investment management revenue of $1.105 billion, commissions and fees of $860 million, market-making revenue of $3.905 billion, other principal transactions revenue of $1.938 billion and net interest income of $981 million.
Operating expenses were $6.768 billion, down 14% year over year. Compensation and benefits were $4.378 billion, or 44.0% of net revenues, while non-compensation expenses were $2.390 billion. The firm reported 32,400 total staff at quarter-end, down from 35,400 a year earlier. Management stated that approximately $1.4 billion of targeted annualized compensation and non-compensation cost reductions had largely been implemented.
| Segment | Q1 2012 net revenues | Q1 2012 pre-tax earnings | Year-over-year revenue change |
|---|---|---|---|
| Investment Banking | $1.154 billion | $288 million | Down 9% |
| Institutional Client Services | $5.709 billion | $1.826 billion | Down 14% |
| Investing & Lending | $1.911 billion | $953 million | Down 29% |
| Investment Management | $1.175 billion | $185 million | Down 8% |
Balance sheet, liquidity, debt and capital
- Total assets were $950.932 billion, up from $923.225 billion at December 31, 2011. Financial instruments owned at fair value increased to $385.506 billion from $364.206 billion.
- Total liabilities were $879.276 billion, compared with $852.846 billion at year-end. Shareholders’ equity increased to $71.656 billion from $70.379 billion.
- Cash and cash equivalents were $57.138 billion, compared with $56.008 billion at December 31, 2011.
- Customer deposits were $50.874 billion. Short-term borrowings totaled $74.049 billion, including $48.721 billion of unsecured short-term borrowings. Long-term borrowings totaled $179.403 billion, including $171.592 billion of unsecured long-term borrowings.
- Management reported $170.851 billion of Global Core Excess liquidity at March 31, 2012. Average Global Core Excess was $167.224 billion during the quarter.
- The adjusted leverage ratio increased to 9.0x from 8.6x, while the debt-to-equity ratio declined to 2.4x from 2.5x.
- Basel 1 Tier 1 capital was $64.534 billion and total capital was $78.093 billion. The Tier 1 capital ratio was 14.7%, the total capital ratio was 17.8%, the Tier 1 leverage ratio was 7.1%, and the Tier 1 common ratio was 12.9%.
- Gross derivative fair values were substantially reduced by enforceable netting and collateral. Net derivative assets were $71.258 billion and net derivative liabilities were $51.350 billion.
Cash flow and margins
- Operating activities provided $3.538 billion of cash, compared with $1.900 billion in Q1 2011.
- Investing activities used $240 million, compared with $112 million provided in Q1 2011.
- Financing activities used $2.168 billion, compared with $883 million provided in Q1 2011, primarily reflecting debt repayments and share repurchases.
- Cash and cash equivalents increased by $1.130 billion during the quarter.
- Pre-tax margin was approximately 32.0%, compared with 34.0% in Q1 2011. Net margin was approximately 21.2%, compared with 23.0%.
- Annualized return on average common shareholders’ equity was 12.2% in both periods as reported. Excluding the $1.643 billion Series G preferred-stock dividend recognized in Q1 2011, Q1 2011 diluted EPS was $4.38 and annualized ROE was 14.5%.
Material changes versus comparable periods
- Revenue declined across all four business segments. Investment Banking was affected by lower equity and leveraged-finance underwriting activity, while Institutional Client Services reflected weaker results in fixed income, currency and commodities client execution.
- Investing & Lending revenue declined primarily because Q1 2011 benefited from stronger gains on equities and debt securities and loans. Q1 2012 nevertheless included a $169 million gain on ICBC shares, $891 million of gains on other equity investments and $585 million of gains and net interest on debt securities and loans.
- Investment Management assets under management declined to $824 billion from $828 billion at year-end and $840 billion a year earlier. The quarter included $26 billion of net outflows, partly offset by $22 billion of market appreciation.
- Net interest income fell 28%, primarily because of higher interest expense on long-term borrowings and lower average yields on financial instruments owned at fair value.
- Q1 2012 included $116 million of impairment charges related primarily to commodity-related assets and consolidated investments, compared with approximately $220 million of impairment charges in Q1 2011 related principally to Litton Loan Servicing assets.
- Net provisions for litigation and regulatory proceedings were $59 million, compared with $24 million in Q1 2011.
- During Q1 2012, the firm repurchased approximately 3.3 million common shares for $362 million. On April 16, 2012, the Board increased the quarterly common dividend to $0.46 per share from $0.35, subject to the stated payment schedule.
- The firm adopted accounting updates concerning repurchase agreements and fair-value disclosures on January 1, 2012; management stated that the adoptions did not materially affect the financial statements.
Guidance, outlook, commentary and risks
- The filing does not provide formal earnings or revenue guidance. Management stated that results remain highly dependent on global financial markets, economic conditions, market volumes, volatility, asset prices, credit spreads and client activity.
- Management viewed Q1 market conditions as improved, citing tighter credit spreads, higher global equity prices, better liquidity and central-bank actions. However, client sentiment remained fragile because of European sovereign-debt risk, U.S. economic uncertainty, emerging-market growth concerns and regulatory uncertainty.
- Management stated that lower market activity, declining asset prices, weaker investment performance or continued client outflows could pressure investment banking, market-making and investment management revenue.
- Regulatory changes under Dodd-Frank, the Volcker Rule, Basel 2.5 and Basel 3 were expected to increase capital requirements and constrain proprietary investing, hedge-fund and private-equity activities. The firm redeemed approximately $250 million of hedge-fund interests during the quarter and expected further redemptions to comply with the Volcker Rule.
- The firm was subject to significant legal and regulatory matters, including mortgage-related litigation and investigations, auction-rate securities arbitrations, research and trading-practice investigations, and other financial-crisis-related proceedings. Management estimated aggregate reasonably possible losses for certain proceedings at approximately $2.7 billion, while noting that many matters could not be estimated.
- Mortgage-related exposure remained uncertain. The firm stated that it could not meaningfully estimate potential exposure from future repurchase claims based on alleged breaches of representations and warranties.
- A two-notch downgrade could have required approximately $2.207 billion of additional collateral or termination payments as of March 31, 2012. Moody’s had placed the firm’s long- and short-term debt ratings under review for downgrade, and S&P’s outlook was negative.
- Credit, liquidity, market, operational, legal, regulatory and reputational risks remain material. The firm also depends on funding and capital flows from regulated subsidiaries that may be restricted by law or regulators.
Important facts investors should verify
- Whether revenue and earnings trends improved or deteriorated after March 31, 2012, particularly in Fixed Income, Currency and Commodities Client Execution and Investing & Lending.
- The sustainability of cost reductions and whether the 44.0% compensation-to-revenue ratio remains achievable under weaker markets.
- Actual liquidity available at the parent company versus regulated subsidiaries, including restrictions on upstreaming capital and cash.
- The effect of pending Basel, Dodd-Frank and Volcker Rule requirements on capital ratios, business mix, returns and asset levels.
- Developments in mortgage-related litigation, regulatory investigations, repurchase claims and the approximately $2.7 billion estimated reasonably possible legal-loss range.
- Credit-rating actions, related collateral calls and refinancing requirements, including the $5.51 billion of FDIC-guaranteed short-term debt maturing by June 15, 2012.
- Performance and valuation sensitivity of level 3 assets, private equity, distressed loans, mortgage-related positions, derivatives and other less-liquid inventory.