Fitch: Strong 3Q16 Earnings for Goldman Sachs

CHICAGO--()--Goldman Sachs Group Inc.'s (GS) third quarter 2016 (3Q16) earnings were strong driven in large part by solid results in its markets businesses, according to Fitch Ratings.

GS's overall annualized return on average equity in 3Q16 was a good 11.2%, and for the first nine months of the year was 8.7%, which includes the comparatively challenging first quarter of the year.

This quarter's sequential results, particularly in the markets businesses, are generally in line with peer banks that have reported thus far. Most have benefited from improving trading activity in the credit and mortgage areas of their Fixed Income, Currency, and Commodities (FICC) businesses as well as improved debt underwriting net revenue due to higher investment grade issuance levels across the industry.

For GS, net revenue in its FICC businesses were $1.96 billion, 2% higher than the sequential quarter and 34% higher than the year-ago quarter. If the debt valuation adjustment (DVA) of $147 million in the year-ago quarter had been included in other comprehensive income as it is this quarter, the year-over-year increase would have been a still strong 49%.

The higher net revenues in FICC on a year-over-year basis were driven by improved results in rates, credit products, and mortgages partially offset by weaker results in currencies and commodities.

Net revenue in Equities was $1.78 billion in 3Q16, 2% higher than the sequential quarter and 2% higher than the year-ago quarter. This was driven by higher net revenues in derivatives partially offset by significantly lower net revenues in cash equities.

GS's overall investment banking net revenue was down 14% from the sequential quarter and essentially flat from the year-ago quarter. Advisory net revenue, which has been a bright spot for several years, was down 17% relative to the linked quarter and 19% relative to the year-ago quarter as mergers & acquisition (M&A) activity declined industry-wide. This is not overly surprising given that Fitch believes the industry is in the later innings of an M&A cycle.

Net underwriting revenue was down 11% from the sequential quarter but up 18% from the year-ago quarter. The sequential comparisons in debt underwriting were down in part due to unfavorable comparisons to a strong sequential quarter. Relative to the year-ago comparisons, this was due to the growth in industry volumes. Equity issuance remains slightly more challenging amid low industry initial public offering (IPO) activity levels across the industry.

GS's Investing and Lending (I&L) segment as well as its Investment Management (IM) segment both had net revenue improvements during the quarter. I&L benefited from higher net revenues from investments in equities amid higher global equity prices, as well as continued growth in net interest income. IM benefited from improved performance fees amid stronger markets during the quarter.

GS recently launched its consumer lending platform, Marcus by Goldman Sachs as noted in Fitch's comment dated Oct. 16, 2016, 'Fitch: Goldman's Online Lender Seeks to Link Fintech and Banking.' As noted, Fitch expects that initially it will be a more nascent part of GS's overall suite of businesses.

Overall expenses were down 3% from the sequential quarter but up 10% from the year-ago quarter, both reflecting positive operating leverage for the company. The ratio of compensation and benefits to net revenues, inclusive of net interest income, was 39.2% in 3Q16, and 41% for the first nine months of the year.

Fitch notes that the relative stability of this ratio does indicate some scalability in GS's business model as the compensation ratio has remained stable while net revenue has been more variable.

In Fitch's view, GS's capital ratios and liquidity metrics remain consistent with the rating category (Viability Rating of 'a') given the agency's assessment of the inherent variability of many of GS's businesses.

The company's transitionally phased-in Basel III Common Equity Tier 1 ratio under the advanced approach was 12.4%, and under the standardized approach was 14.0% at 3Q16.

GS's fully phased-in enhanced supplementary leverage ratio (SLR) was up to 6.3% at the end of 3Q16 compared to 6.1% at 2Q16.

Additionally, GS's Global Core Liquid Assets were $214 billion at the end of 3Q16, or 24.6% of total assets, relative to $211 billion at the end of 2Q16, or 23.5% of total assets and, $196 billion at 1Q16, or 22.3% of total assets.

Additional information is available at www.fitchratings.com.

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or
Nathan Flanders
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or
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Contacts

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Nathan Flanders
Managing Director
+1-212-908-0872
or
Media Relations:
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com