Fitch Affirms The Goldman Sachs Group, Inc.'s Ratings at 'A/F1'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed The Goldman Sachs Group, Inc.'s (Goldman) Issuer Default Rating (IDRs) at 'A/F1', Support Rating at '1', Support Rating Floor (SRF) at 'A' and Viability Rating (VR) at 'a'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this rating action commentary.

The rating actions have been taken as part of a periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. On balance, Fitch's outlook for the sector is stable. The 12 banks have continued to strengthen their balance sheets in 9M14. Capitalisation has improved materially over the past two years and liquidity remains sound. This strengthening balances continued pressure on earnings, particularly in securities businesses, and remaining material but unpredictable exposure to conduct and regulatory risks.

Fitch forecasts weak growth in the eurozone during 2015 while growth in the US and UK is expected to be somewhat stronger, which should help the GTUBs with a significant presence in these regions. Spikes in market volatility, most recently in October 2014, show that uncertainty remains over how expectations of rising interest rates in the US will affect financial markets. Our expectation is that rises in interest rates will be gradual and would follow improved prospects for the economy, which should help business volumes. Sharp and unexpected hikes in US interest rates would likely result in increased market volatility and, consequently, additional pressure on banks' earnings, although we believe that the GTUBs' risk appetite has declined.

Lower risk appetite should help the banks avoid material losses on trading positions but an adverse operating environment could result in a change of our outlook if earnings prospects suffer materially. For eurozone-focused banks, a prolonged deflationary scenario would put pressure on earnings and could result in a changed outlook.

KEY RATING DRIVERS - IDRs, VR AND SENIOR DEBT

Goldman's IDRs, VR and senior debt continue to be supported by its leading investment banking franchise, solid liquidity position, better-than-average capital position, and strong risk management. The ratings are constrained by Goldman's focus on capital market activities and relatively higher level of wholesale funding.

Goldman has higher reliance on capital market operations than many global trading and universal banks (GTUBs). Fitch recognizes that capital market revenues are inherently volatile and susceptible to declines in difficult market periods. Concerns over this inherent volatility are offset by management's successful track record in managing through difficult periods.

The company's results have not been significantly impacted by litigation expenses and the slowdown in mortgage origination that affected it larger U.S. peers.

Fitch believes that Goldman has a comparatively strong risk management organization and systems to manage and monitor risk as demonstrated by its ability to manage risk during periods of market stress.

Goldman has consistently maintained liquidity at conservative levels, which is viewed as appropriate given the company's reliance on wholesale funding. At third quarter 2014 (3Q'14), unencumbered highly liquid securities and cash were $180 billion (21% of total assets). Goldman's reliance on unsecured short-term funding continues to be modest and the weighted average maturity of secured funding improved during 2014.

Goldman's total assets declined 5% to $869 billion from year-end 2013 (YE13), reflecting on-going optimization of lower return activities, most notably including matched book secured financing which was down approximately $28 billion, primarily reflecting a decline in the matched book of approximately $50 billion over this timeframe. Fitch views the balance sheet reduction positively, as it demonstrates proactive management of assets.

Goldman's capital position continues to improve and remains comparatively strong. Fitch Core Capital to risk-weighted assets remained higher than the GTUB average. At 3Q'14, Goldman's Tier I common ratio under the Basel III advanced approach was approximately 11.8% on a transitional basis (in line with the average of U.S. GTUBs). Goldman reported that as of 3Q'14, the supplementary leverage ratio (SLR) for the holding company was approximately 4.9%, just below the minimum threshold of 5%. Fitch believes that Goldman will be able to meet the SLR threshold prior to the required timeframe.

In August 2014, Goldman settled with the Federal Housing Finance Agency (FHFA) related to the selling of private-label mortgage securities to Fannie Mae and Freddie Mac. A number of large securities firms have recently settled similar lawsuits, generally resulting in sizeable pay-outs. The face value of the securities sold by Goldman was $11.1 billion. Goldman agreed to pay $3.5 billion to repurchase MBS from Fannie Mae and Freddie Mac, which will make them whole in their investments. The economic value of the settlement is estimated at $1.2 billion, which reflected the difference between the $3.15 billion cash payment and the GSEs net carrying value of the securities repurchase, which Goldman was permitted to sell following the repurchase.

RATING SENSITIVITIES - IDRs, VR AND SENIOR DEBT

Goldman's IDRs, VR and senior debt continue to be underpinned by its leading investment banking franchise, solid operating profitability, strong risk management, comfortable liquidity position and better-than-average capital position. The ratings factor in Fitch core capital is in line with current levels and the management of capital comfortably above Basel III capital minimums. The IDRs, VR and senior debt have limited upward potential, given Goldman's business focus on the capital markets.

Downward pressure on the VR could result from a material loss, significant increase in leverage or deterioration in liquidity levels. Similarly, any unforeseen outsized or unusual fines, settlements or charges levied could also have adverse rating implications. Goldman's long-term IDR could be negatively pressured if both its financial profile deteriorates (reflected in the VR) and Fitch's view of support of U.S. G-SIFIs change.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATIING FLOOR

Goldman's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government (rated 'AAA'/Outlook Stable by Fitch) if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to Goldman, our view of support likelihood is based mostly on its systemic importance in the U.S., its global interconnectedness given its size and operations in global capital markets, and its position as a key provider of financial services to the U.S. economy. Goldman's IDRs and senior debt ratings do not benefit from support because Goldman's VR is equal to its SRF.

However, in Fitch's view, there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks fall afoul of solvency assessments.

KEY RATING SENSITIVITIES - SUPPORT RATING AND SRF

The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). A key hurdle that remains is whether sufficient contingent capital exists at the holding company to recapitalize without requiring government assistance.

Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise Goldman's Support Rating to '5' and its SRF to 'No Floor' likely during the first half of 2015.

A revision of the SRF to 'No Floor' would result in no change to Goldman's Long-term IDR and debt ratings because Goldman's viability rating is equal to the current SRF.

RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by Goldman and by various issuing vehicles are all notched down from Goldman's VR in accordance with Fitch's assessment of each instrument's respective nonperformance and relative Loss Severity risk profiles. Their ratings are primarily sensitive to any change in Goldman's VR.

RATING DRIVERS AND SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

Goldman's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. However, Goldman's uninsured deposits outside of the U.S. do not benefit from rating uplift because they do not typically benefit from the U.S. depositor preference unless the deposit is expressly payable at an office of the bank in the United States. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get the rating uplift.

The ratings of long and short-term deposits issued by Goldman and its subsidiaries are primarily sensitive to any change in Goldman's IDR.

RATING DRIVERS AND SENSITIVITIES - HOLDING COMPANY AND OPERATING SUBSIDIARY

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. This may result in a possible downgrade of Goldman's holding company rating, an upgrade of operating company ratings, or no changes to ratings if Fitch's views the long-term debt requirement assigned to Goldman as providing an insufficient amount of bail-in capital at the operating company level.

RATING DRIVERS AND SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANIES

IDRs of major rated operating subsidiaries are equalized with Goldman's IDR reflecting Fitch's view that these entities are core to Goldman's business strategy and financial profile.

Goldman is a top global bank with four business segments: investment banking, institutional client services, investment management, and investing and lending. Goldman, in September 2008, converted to a bank holding company regulated by the Federal Reserve Board. Goldman is designated as a G-SIFI by the Financial Stability Board.

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 '1';

--Support Floor at 'A';

--Market linked securities at 'Aemr';

--Subordinated debt to 'A-';

--Preferred equity at 'BB+';

--Senior unsecured Chilean Bond Issuance Programme at 'AAA(cl)'.

Goldman Sachs Bank, USA

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

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

--Long-term deposits at 'A+';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Short-term deposits at 'F1';

--Support 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 debt at 'A'.

Goldman Sachs International

--Long-term IDR at 'A' with a Stable 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'.

Goldman Sachs International Bank

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

--Senior secured guaranteed debt at 'A';

--Short-term 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'.

Global Sukuk Company Limited

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

--Short-term senior unsecured 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 'A'.

Vesey Street Investment Trust I

--Senior Guaranteed Trust Securities 'A'.

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

Applicable Criteria and Related Research:

--Global Financial Institutions Rating Criteria (Jan. 31, 2014)

--Securities Firms Criteria (Jan. 31, 2014)

--Assessing and Rating Bank Subordinated and Hybrid Securities (Jan. 31, 2014)

--Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)

--The Evolving Dynamics of Support for Banks (Sept. 11, 2013)

--Bank Support: Likely Rating Paths' (Sept. 11, 2013)

--Sovereign Support for Banks: Update On Position Outlined In 3Q13 (Dec. 10, 2013)

--U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 2014)

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Bank Support: Likely Rating Paths

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001

Sovereign Support For Banks: Rating Path Expectations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741975

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934975

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Tara Kriss, +1-212-908-0369
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Justin Fuller, CFA, +1-312-368-2057
Senior Director
or
Committee Chairperson:
Gordon Scott, + 44 20 3530 1075
Managing Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Tara Kriss, +1-212-908-0369
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Justin Fuller, CFA, +1-312-368-2057
Senior Director
or
Committee Chairperson:
Gordon Scott, + 44 20 3530 1075
Managing Director
or
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com