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Fitch: Mixed 1Q17 Earnings for Goldman Sachs
April 19, 2017 / 1:00 PM / 8 months ago

Fitch: Mixed 1Q17 Earnings for Goldman Sachs

(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) The Goldman Sachs Group Inc. (GS) reported mixed results for the first quarter of 2017 (1Q17), according to Fitch Ratings. GS's net income was down 4% from the sequential quarter due to lower net revenue in the company's Fixed Income, Currencies, and Commodities (FICC) businesses. However, net income rose by 99% from the year ago quarter, due to broad based improvements across most of the firm's businesses and a favorable tax impact from a new accounting treatment related to the settlement of employee share-based awards. Excluding the tax benefit, which reduced the tax provision by $475 million, net income would have been $1.78 billion for a 24.2% decrease relative to the sequential quarter but a 56.8% increase relative to the year-ago quarter. GS's annualized return on average equity (ROAE) was 11.4% in 1Q17, which is unchanged from the sequential quarter but up from 6.4% in the year-ago quarter. Excluding the tax benefit GS's ROAE would have been 8.9% this quarter. GS's ROAE this quarter is lower than its historical results, as the comparatively weaker FICC results were only partially offset by strong debt and equity underwriting net revenue. The firm's underwriting results benefited from an increase in industry-wide leveraged finance activity. Total investment banking net revenue increased 15% from the sequential quarter and 16% from the year-ago quarter. Relative to the year-ago quarter, strength in equity and debt underwriting offset a small decline in advisory net revenue. GS indicated that its investment banking backlog has decreased since the end of the year. The company's Institutional Client Services (ICS) businesses had weaker performance. Total net revenue in ICS was down 7% relative to the sequential quarter on lower FICC results due largely to weaker results in currencies and commodities trading. Credit trading also declined despite healthy issuance and tighter credit spreads. Interest rate trading was relatively flat, and mortgage trading improved significantly given tighter spreads. Total net revenue in ICS was down only 2% from the year-ago quarter as a 1% increase in FICC net revenues offset a 6% decline in equities trading net revenue. GS's Investing and Lending (I&L) segment performed well this quarter with equity securities generating $798 million of net revenues, while net revenues from debt securities and loans were $666 million, including approximately $350 million related to net interest income (NII). Fitch expects NII for GS to continue to grow as a percentage of the I&L segment's net revenue over time as the company continues to add more loans to its balance sheet. GS applied for and received a five-year extension on the Volcker Rule for substantially all of its remaining covered funds so that they could continue an orderly liquidation of those portfolios on behalf of clients. As of 1Q17 covered funds totalled approximately $6 billion. Net revenue in GS's Investment Management (IM) business was down 7% sequentially but up 12% relative to the year-ago period. Incentive fees drove the change in net revenue and were down $103 million from the sequential quarter but up $75 million year-over-year. As of 1Q17, GS's assets under supervision (AUS) were $1.37 trillion down only $6 billion from the prior quarter as market appreciation and $5 billion of long-term net inflows nearly offset a seasonal $35 billion of net outflows from liquidity products. Operating expenses increased 15% from both the sequential and year-ago quarters primarily due to higher compensation and benefits expense as well as slightly higher litigation costs. Despite the higher compensation expenses the ratio of accrued compensation to net revenues was 41% at 1Q17, down modestly from 42% in the year-ago period. The relative stability of this ratio indicates some operating leverage in GS's business model as the compensation ratio has remained stable while net revenue has been more variable. Market risk as measured by daily average Value-at-Risk (VaR) was $64 million in 1Q17, up from $61 million in the sequential quarter but down from $72 million in the year-ago quarter. Fitch continues to believe that this VaR measurement is at cyclically low levels. Capital ratios and liquidity metrics remain consistent with the rating category (Viability Rating of 'a') given Fitch's'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 12.9% at 1Q17, down from 13.1% in YE16. GS's fully phased-in enhanced supplementary leverage ratio (SLR) was 6.4% at 1Q17 unchanged from YE16. During the quarter, the firm repurchased $1.5 billion worth of common stock, and on April 17, 2017 the Board of Directors increase the firm's quarterly dividend to $0.75 per share from $0.65 per share. Additionally, GS's Global Core Liquid Assets were $222 billion, or 24.8% of total assets, at 1Q17 relative to $226 billion, or 26.3% of total assets, at 4Q16. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Meghan Neenan, CFA Managing Director +1-212-908-0121 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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