Fitch Affirms Goldman Sachs' Long-Term IDR at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed The Goldman Sachs Group, Inc.'s (Goldman) Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'A/F1', and its Viability Rating (VR) at 'a'. The Rating Outlook is Stable.

The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs).

KEY RATING DRIVERS

IDRs, VR AND SENIOR DEBT

Fitch's affirmation of Goldman's ratings and the maintenance of the Stable Outlook reflect the company's strong franchise, good capital ratios, improving liquidity position and strong risk management culture.

Despite current market headwinds, Goldman's investment banking franchise continues to be very strong and has consistently ranked near the top of league tables. Fitch believes that this positioning garners the company small price premiums in what is a very competitive marketplace.

After posting strong investment banking results over the course of much of 2015, the latter half of 2015 and the first part of 2016 have been more challenging. In the first quarter of 2016 (1Q16), for example, Goldman's advisory net revenue declined as did its equity underwriting net revenue amid a dearth of initial public offerings (IPOs) due to challenging market conditions. However, this was partially offset by strength in debt underwriting as Goldman generated strong net revenue in investment grade (IG) issuance partially offset by continued weakness in leveraged finance.

However, given Goldman's reported strong advisory backlog, Fitch would expect advisory as well as debt and equity underwriting net revenue to improve to the extent that market conditions allow for the closing of more transactions and their associated financings. Additionally, Fitch expects that Goldman will seek to continue to grow its market share in debt underwriting, which will help further balance the revenue contribution from investment banking on the firm's overall results.

Goldman's trading businesses have shown more volatility over the past year than the investment banking businesses, driven largely by marketwide weakness in the Fixed Income, Currency, and Commodities (FICC) segment. While Fitch views favorably Goldman's efforts to reduce costs in its FICC businesses as well as to utilize various technology solutions to drive efficiencies and improve customer interfaces, we expect performance from the various businesses housed in this segment to remain challenging over a near- to medium-term time horizon.

Fitch acknowledges that Goldman has continued to do a good job of controlling overall compensation and benefits expenses amid variable net revenues; however, these efforts only partially offset the impact to profitability of lower net revenues. Goldman's annualized return on equity (ROE) in 1Q16 was 6.4%, which is better than some peer institutions but lower than Goldman's long-term averages as well as Fitch's estimate of Goldman's hypothetical cost of equity of 10% to 12%.

Recent performance pressure also highlights the degree to which Goldman's capital markets revenues are influenced by market conditions and client confidence to transact, implying a higher inherent cyclicality to Goldman's core activities relative to some other more broadly diversified peer institutions, which provides some limitation on Goldman's upward rating potential.

Despite the challenging conditions, Goldman's capital ratios remained good, with the company's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach (Goldman's binding constraint) at 12.2% at 1Q16, unchanged from YE2015. Reported CET1 is higher than peer level medians, which Fitch views as appropriate and supportive to the ratings.

Goldman's ratings also incorporate the company's more significant reliance on wholesale funding than other GTUBs, whose funding profiles are typically core in nature and skewed to a larger proportion of low-cost and sticky retail deposit funding. Fitch would note, however, that in April 2016 Goldman closed on the purchase of General Electric's online deposit platform, which added $16 billion of deposits to the balance sheet and should provide an avenue for future deposit growth. That said, as of 1Q16, deposits constituted only 13.2% of total liabilities, below the proportion of many peer institutions.

Nevertheless, Goldman has maintained its liquidity position at conservative levels, which Fitch views as appropriate. To this end, Goldman's Global Core Liquid Assets (GCLA) increased to a solid $196 billion, or 22.3% of total assets at 1Q16 from $199 billion or 23.1% of total assets at YE2015.

SUBSIDIARIES AND AFFILIATED COMPANIES

The Long-Term IDR of Goldman Sachs Bank USA (GSBUSA) benefits from an institutional Support Rating of '1', which indicates Fitch's view of the propensity of the parent company to provide capital support to the operating subsidiaries is extremely high.

Additionally, the Long-Term IDRs for the material U.S. operating entities, GSBUSA and the main broker dealer Goldman Sachs & Co. (GSCO) are rated one-notch above Goldman's Long-Term IDR to reflect Fitch's belief that the U.S. single point of entry (SPOE) resolution regime, the likely implementation of total loss absorbing capacity (TLAC) requirements for U.S. global systemically important banks (G-SIBs), and the presence of substantial holding company debt reduce the default risk of these domestic operating subsidiaries' senior liabilities relative to holding company senior debt.

Additionally, the 'F1' Short-Term IDR of GSBUSA is at the lower of the two potential Short-Term IDRs which map to an 'A' Long-Term IDR on Fitch's rating scale, in order to reflect the company's greater reliance on wholesale funding than more retail-focused banks. Goldman's main broker-dealer, GSCO's Short-Term IDR of 'F1' reflects the view that there is less surplus liquidity at this entity, given its greater reliance on the holding company for liquidity.

The senior secured debt ratings of GSCO are equalized with the IDR of each entity as Fitch does not have on-going visibility into the collateral underlying the notes, and as such has equalized the debt ratings with the IDRs of those entities.

MATERIAL INTERNATIONAL SUBSIDIARIES

Goldman Sachs International (GSI) and Goldman Sachs International Bank (GSIB) are wholly owned subsidiaries of Goldman whose IDRs and debt ratings are aligned with the bank holding company's ratings because of their core strategic role in and integration into Goldman.

Fitch's Positive Outlooks for these material international operating subsidiaries reflect the likelihood of internal TLAC as required by the Financial Stability Board (FSB) becoming available to support these entities. The Positive Outlook reflects the agency's belief that the internal TLAC of material international operating companies will likely be large enough to meet and exceed Pillar 1 capital requirements and will then be sufficient to recapitalize them.

A one-notch upgrade of GSI and GSIB is likely once Fitch has sufficient clarity on additional disclosure on the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. Sufficient clarity may, however, take longer to come through than the typical Outlook horizon of one to two years.

Specific factors that Fitch seeks additional clarity on before resolving the Rating Outlook and potentially upgrading the subsidiary ratings will include host country clarification on internal TLAC, the quantum of internal TLAC, and whether it will be pre-positioned. The quantum is relevant because per Fitch's criteria, the agency will look to the sufficiency of the amount of capital available to that subsidiary to recapitalize it.

If the amount of TLAC is sufficient for recapitalization in Fitch's opinion and is pre-positioned, we will likely upgrade the subsidiary ratings. Conversely, if home and host country regulators reach agreements where pre-positioning is not required, the rating will not be upgraded and the Outlook will be revised to Stable.

If clarity on host country internal TLAC proposals is further delayed beyond the next six months, Fitch will likely revise the subsidiary Outlooks to Stable until there is further clarity on these proposals.

The senior secured debt rating of GSI is equalized with the IDR of each entity as Fitch does not have on-going visibility into the collateral underlying the notes, and as such has equalized the debt ratings with the IDRs of those entities.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating (SR) and Support Rating Floor (SRF) for Goldman reflect Fitch's view that senior creditors cannot rely on receiving extraordinary support from the sovereign in the event that Goldman becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation has now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors to participate in losses, if necessary, instead of or ahead of the company receiving sovereign support.

As previously noted, GSBUSA has a SR of '1', which reflects Fitch's view of an extremely high probability of institutional support for the entity. GSBUSA does not have a VR at this time, given Fitch's view of its more limited role within the group structure.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by Goldman are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile, which vary considerably. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by Goldman, reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in Goldman.

Goldman's subordinated debt is rated one-notch below Goldman's VR, its preferred stock is rated five notches below the VR (which encompasses two notches for non-performance and three notches for loss severity), and its trust preferred stock is rated four notches below the VR (encompassing two notches for non-performance and two notches for loss severity).

DEPOSIT RATINGS

U.S. deposit ratings of GSBUSA are one-notch higher than senior debt ratings of GSBUSA reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S.

GSIB's deposit ratings are at the same level as their senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference.

RATING SENSITIVITIES

IDRs, VR AND SENIOR DEBT

In Fitch's view, Goldman's VR is solidly situated at its current rating level, and has limited upward potential given Goldman's business focus on the capital markets and reliance on wholesale funding sources. However, to the extent that the company is able to further improve both its returns on equity and the stability of its earnings profile while at the same time further reducing its reliance on wholesale funding and maintaining above-peer-level capital ratios, there could be some longer-term upside to the company's ratings, albeit likely still within the 'A' rating category.

Downward pressure on the VR could result from a material loss, significant increase in leverage, or deterioration in funding and liquidity levels. Similarly, any unforeseen outsized or unusual fines, settlements or charges levied could also have adverse rating implications, particularly if permanent franchise damage is incurred as a result. Additionally, any sizable risk management failure could result in negative pressure on Goldman's ratings.

Additionally, and while not expected, to the extent that the company's operating performance as measured by return on equity remains challenged and if it is below peers for an extended period, the company's historical averages, and Fitch's hypothetical estimate of the company's cost of equity noted above, this could ultimately lead to negative ratings pressure over a longer-term time horizon.

Fitch notes that Goldman's long-term IDR and senior debt are equalized with the VR at the holding company. Thus Goldman's IDR and senior debt ratings would be sensitive to any changes in Goldman's VR.

SUBSIDIARIES AND AFFILIATED COMPANIES

As noted, GSBUSA carries an institutional support rating of '1', as Fitch believes support from the parent would be extremely highly likely. Thus GSBUSA's rating would be sensitive to any change in Fitch's view of institutional support as well as any change to the VR of the parent company.

Additionally, GSBUSA and GSCO's long-term IDRs are rated one-notch higher than the parent holding company's IDR because each subsidiary benefits from the structural subordination of holding company TLAC, which effectively supports senior operating liabilities of each subsidiary. Any change in Fitch's view on the structural subordination of TLAC with respect to GSBUSA and GSCO could also result in a change to each entity's long-term IDR.

MATERIAL INTERNATIONAL SUBSIDIARIES

A one-notch upgrade of GSI and GSIB is likely once Fitch has sufficient clarity as to additional disclosure on the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. However, sufficient clarity may take longer to come through than the typical Outlook horizon of one to two years

GSI and GSIB's ratings are sensitive to the same factors that might drive a change in Goldman's VR.

SUPPORT RATING AND SUPPORT RATING FLOOR

SRs and SRFs would be sensitive to any change in Fitch's view of support. However, since these ratings were downgraded to '5' and 'No Floor', respectively, in May 2015, there is unlikely to be any change to them in the foreseeable future.

GSBUSA's institutional support rating of '1' is sensitive to any change in Fitch's views of potential institutional support for this entity from the parent company.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid ratings are primarily sensitive to any change in Goldman's VR.

DEPOSIT RATINGS

GSBUSA's deposit ratings are sensitive to any change in the entity's long-term IDR which is sensitive to any change in the VR of the parent company given the institutional support rating of '1'. Thus, deposit ratings are ultimately sensitive to any change in Goldman's VR or to any change in Fitch's view of institutional support for GSBUSA.

GSIB's deposit ratings are sensitive to any change in its Long-Term IDR which is sensitive to any change in the VR of the parent company given that Fitch has equalized the long-term IDR of GSIB with that of the parent company given its core nature in Goldman's operations.

Fitch has affirmed the following ratings:

Goldman Sachs Group, Inc.

--Long-term IDR at 'A' with a Stable Outlook;

--Long-term senior debt at 'A';

--Viability Rating at 'a';

--Short-term IDR at 'F1';

--Commercial paper at 'F1';

--Support at '5';

--Support Floor at 'NF';

--Market linked securities at 'Aemr';

--Subordinated debt at 'A-';

--Preferred equity at 'BB+';

--GS Finance Corp senior unsecured medium-term note program, series E at 'A'.

Goldman Sachs Bank, USA

--Long-term IDR at 'A+' with a Stable Outlook;

--Long-term senior debt at 'A+';

--Long-term deposits at 'AA-';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Short-term deposits at 'F1+';

--Support Rating at '1'.

Goldman, Sachs & Co.

--Long-term IDR at 'A+' with a Stable Outlook;

--Short-term IDR at 'F1';

--Long-term senior debt at 'A+';

--Short-term debt at 'F1';

--Senior secured long-term notes at 'A+'.

--Senior secured short-term notes at 'F1'.

Goldman Sachs International

--Long-term IDR at 'A' with a Positive Outlook;

--Short-term IDR at 'F1';

--Senior secured long-term notes at 'A';

--Senior secured short-term notes at 'F1';

--Short-term debt at 'F1';

--Long-term senior debt at 'A'

Goldman Sachs International Bank

--Long-term IDR at 'A' with a Positive Outlook;

--Short-term IDR at 'F1'

--Long-term deposits at 'A';

--Short-term deposits at 'F1'.

Goldman Sachs AG

--Long-term IDR at 'A' with a Stable Outlook;

--Short-term IDR at 'F1'.

Goldman Sachs Bank (Europe) plc

--Long-term senior secured guaranteed debt at 'A';

--Short-term senior secured guaranteed debt at 'F1';

--Short-term debt at 'F1'.

Goldman Sachs Paris Inc. et Cie.

--Long-term IDR at 'A' with a Stable Outlook;

--Short-term IDR at 'F1'.

Ultegra Finance Limited

--Long-term senior debt at 'A';

--Short-term debt at 'F1'.

Goldman Sachs Financial Products I Limited

--Long-term senior unsecured at 'A'.

Goldman Sachs Capital I

--Trust preferred at 'BBB-'.

Goldman Sachs Capital II, III

--Preferred equity at 'BB+'.

Murray Street Investment Trust I

--Senior guaranteed trust securities at 'A'.

Vesey Street Investment Trust I

--Senior guaranteed trust securities at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006055

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006055

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com