Fitch: Goldman Weathers FICC Pressure, Reduces Balance Sheet
NEW YORK--(BUSINESS WIRE)--Second quarter 2014 (2Q'14) net revenues for The Goldman Sachs Group, Inc. (Goldman) exceeded Fitch Ratings' expectations, driven by solid investment banking revenues which offset a 22% decline in fixed income, currency and commodities (FICC) trading revenues. The $56 billion, or 6%, decline in assets in the quarter was also notable, reflecting the on-going optimization of the bank's activities to better align with the regulatory environment.
Goldman's total assets declined 6% to $860 billion at 2Q'14, reflecting on-going optimization of lower return activities, most notably including matched book secured financing which was down approximately $25 billion in the quarter. Fitch views the balance sheet reduction positively, as it demonstrates proactive management of assets.
Net revenues (excluding DVA) decreased 2% sequentially to $9.1 billion at 2Q'14, driven by continued low volatility affecting client activity and risk appetite. Compensation expenses were down 2% sequentially and represented 43% of net revenues at 2Q'14, unchanged from 1Q'14. Non-compensation expenses increased 4% quarter-over-quarter (QoQ) primarily due to higher provisions for legal and regulatory matters. Goldman reported a return on average equity of 10.9% which, although still below the firm's historical average, compares favorably to a number of peers.
Institutional Client Services net revenues (excluding DVA impact and the sale of the reinsurance business in 2013) declined 13% from 1Q'14 and was down 8% from 2Q'13. FICC net revenues (excluding DVA) fell 22% sequentially due to a lackluster trading environment and subdued client activity. The decline was driven by significantly lower revenues in the commodities business, as compared to a strong 1Q'14. Equities net revenues decreased from 2Q'13 (excluding the sale of Goldman's reinsurance business) due to lower derivatives business and lower trading volumes domestically and in Asia. Trading value at risk (VaR) was $77 million at 2Q'14, down from $82 million at 1Q'14, with reduced equity risk as the largest driver of the decline.
Investment banking revenues of $1.8 billion were flat as compared with 1Q'14. Underwriting revenues rose 16% QoQ, with debt underwriting revenues up 11% to a record $730 million due to an increase in high yield and merger related activity. Equity underwriting revenues increased 25% sequentially and 47% year-over-year as a result of a higher level of IPO activity consistent with industry volumes. Advisory revenues declined 26% sequentially reflecting a decline in completed M&A transactions during the quarter, but the backlog for investment banking remains strong, and Goldman should benefit from increased activity, particularly given its continued standing in the league tables.
Investment and lending revenues were positively impacted by mark-to-market gains. Private equity investments reflecting company specific events increased $551 million to $1.3 billion at 2Q'14. Debt securities continued to benefit from higher net interest income and gains on investments. Investment management revenues decreased 8% QoQ to $1.4 billion. Assets under supervision increased to a record $1.14 trillion, due to net inflows and market appreciation.
Global core excess liquidity, including unencumbered, highly liquid securities and cash, was a solid $170 billion or 20% of total assets and averaged $173 billion during 2Q'14. Liquidity continues to be managed at conservative levels, which is consistent with Goldman's current ratings.
Goldman estimated that its Tier 1 common ratio under the Basel III advanced approach at 2Q'14 was 11.4% on a transitional basis, comfortably above the 8.5% minimum and above Goldman's target of 9.5%. Goldman estimated that its supplementary leverage ratio (SLR) under the rules recently proposed by the Federal Reserve was approximately 4.5% for the holding company, below the minimum threshold of 5%. Fitch believes that Goldman will be able to meet the supplementary leverage minimums ahead of the required timeframe in 2018.
As part of Goldman's share repurchase program, $1.25 billion of common shares were repurchased during 2Q'14 under the recent CCAR authorization. Fitch views this level of share repurchase activity as manageable given current capital levels.
Additional information is available at 'www.fitchratings.com'.