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Fitch: Goldman's 4Q16 Earnings Benefit From Higher Activity, Cost Management.
January 18, 2017 / 10:39 PM / 10 months ago

Fitch: Goldman's 4Q16 Earnings Benefit From Higher Activity, Cost Management.

(The following statement was released by the rating agency) CHICAGO, January 18 (Fitch) The Goldman Sachs Group Inc.'s (GS) fourth quarter 2016 (4Q16) net income was up 12% from the sequential quarter, benefiting from elevated market activity in the quarter and on-going operating expense control, according to Fitch Ratings. Net income was up substantially from the year-ago quarter which included a large settlement related to legacy residential mortgage backed securities (RMBS). On a full-year basis, net income was up 22% due to the settlement noted above as well as good cost management throughout 2016. GS's overall annualized return on average equity (ROAE) of 11.4% in 4Q16 was up from 11.2% in the prior quarter. On a full-year basis, GS's ROAE was 9.4% in 2016, which reflects the comparatively more challenging first half of the year. GS's overall results have generally been consistent with peer banks that have reported thus far, though GS delivered comparatively stronger results in debt underwriting offset by comparatively weaker results in equities trading. Weaker equities trading results were due to softer results in cash products particularly in Asia as well as lower net revenues in derivatives. Total investment banking net revenue was down 3% from the sequential quarter and 4% from the year-ago quarter. Sequentially, the decline was attributable to lower debt and equity underwriting net revenue partially offset by higher net revenue in financial advisory given higher levels of closed M&A transactions during the quarter. On a year-over-year basis, higher leveraged finance activity contributed to stronger debt underwriting net revenue but was offset by lower advisory and equity underwriting net revenue as the initial public offering market remained relatively muted. The company's Institutional Client Services (ICS) businesses benefited from improved net revenue within the Fixed Income, Currency and Commodities (FICC) businesses. In 4Q16, which tends to be seasonally slow, FICC net revenue was 2% higher than the prior strong quarter and 78% higher than a relatively soft year-ago quarter. This was driven by improvements across all FICC businesses, but particularly strong results in rates and credit products. GS's Investing and Lending segment continued to grow relative to both the sequential and year-ago quarters as did the Investment Management (IM) segment which typically benefits from higher incentive fees realized in the last quarter of the year. On a full-year basis, however, net revenue declined in the IM segment as incentive fee realizations were significantly less in 2016 than they were in 2015. GS's expense management over the course of the year helped to buoy its earnings performance. In 4Q16, total operating expenses declined 10% from the sequential quarter and 23% from the year-ago quarter, which included the RMBS settlement. On a full-year basis, operating expenses declined 19% from the prior year. Notwithstanding, the RMBS settlement, other expense declines included an 8% decline in compensation expenses as well as lower professional fees. The ratio of compensation and benefits expense to net revenues for 2016 was 38.1% compared with 37.5% in the prior year. Fitch notes that 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. 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 13.1% in 4Q16, relative to 12.4% in the sequential quarter. GS's fully phased-in enhanced supplementary leverage ratio (SLR) was 6.4% in 4Q16 relative to 6.3% at the end of 3Q16. Additionally, GS's Global Core Liquid Assets were $226 billion, or 26.2% of total assets, at 4Q16 relative to $214 billion at the end of 3Q16, or 24.3% of total assets. In December 2016, Goldman's previous President and Chief Operating Officer (COO) Gary Cohn left to join the Trump administration as Director of the National Economic Council. Going forward, the co-President and co-COO role will be split by current Investment Banking co-head David Solomon and current Chief Financial Officer (CFO) Harvey Schwartz. Replacing Schwartz as CFO in April 2017 will be current Chief Information Officer R. Martin Chavez. On Goldman's 4Q16 earnings call, Chavez stated that he is currently shadowing Schwartz and intends to maintain emphasis on risk management and conservative funding, while bringing his mathematical or technology-based expertise to the role. Fitch views the articulation of consistent financial risk management stance positively, although potential changes associated with the new senior management roles will need to be evaluated over a longer time horizon. Contact: Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Nathan Flanders Managing Director +1-212-908-0872 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available at ''. 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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