Fitch: FICC, Underwriting Weigh on Goldman's 4Q'14 Results

The Goldman Sachs Group, Inc. (Goldman) reported relatively weaker net revenue in 4Q'14, with declines in fixed income, currencies and commodities (FICC) and underwriting outpacing strong performance in financial advisory and equity sales and trading, according to Fitch Ratings.

While Goldman's overall financial performance was down quarter-over-quarter (QoQ), consistent with its U.S. global trading and universal bank peers, Fitch believes the company's 'A/F1' ratings remain well positioned, reflecting strong capital and liquidity levels, above peer average returns on equity and well-established market positions across its business lines.

Looking towards 2015, Goldman, along with many peers, has cited a growing pipeline of financial advisory business, which could continue to support investment banking performance. Conversely, Fitch believes continued uncertainty around interest rates, currencies and energy prices, among other variables, could reduce client confidence to transact, amplify potential trading losses and impact FICC profitability.

OVERALL RESULTS

Adjusted total net revenues, excluding a debt valuation adjustment of $82 million, were down 5.5% QoQ to $7.6 billion. Compensation expenses were essentially flat on a full year basis, resulting in a full-year compensation ratio of 36.8% for 2014 versus 36.9% in 2013. Non-compensation expenses decreased 4% for the full year, primarily due to lower provisions for legal and regulatory matters. Goldman reported returns on average equity of 11.1% and 11.2% for the quarter and the full year, respectively, which remain below the firm's historical average, but above peer averages.

INSTITUTIONAL CLIENT SERVICES

Institutional Client Services adjusted net revenues of $3.1 billion declined 10.7% QoQ and 15.1% year-over-year (YoY). Within this segment, FICC adjusted net revenues were most pressured, down 41.1% QoQ, with challenging conditions in credit, mortgages and rates, more than offsetting strength in commodities and currencies. Conversely, Equities adjusted net revenues increased 30.4% QoQ driven primarily by increasing equity prices and increased client activity. Trading value at risk was down slightly to $63 billion from $66 billion in the prior quarter, as risk reduction offset increased volatility.

INVESTMENT BANKING

Investment Banking revenues of $1.4 billion were only down 1.6% QoQ, but underlying the overall performance was offsetting strength in financial advisory (up 16.5% QoQ) and pressure on debt and equity underwriting (down 8.6% and 19.7% QoQ, respectively). Fitch believes these competing dynamics could continue given the increased transaction backlog supporting financial advisory and potential decreasing debt issuance activity impacting underwriting.

INVESTING AND LENDING AND INVESTMENT MANAGEMENT

Investing and Lending revenues of $1.5 billion declined 9.5% QoQ and 25.6% YoY, as a result of lower levels of gains on equity and debt securities and lower net interest income. During the quarter, Goldman announced the sale of Metro International Trade Services, its former metals warehouse unit, which fell under the Investing and Lending segment. The unit only contributed $325 million (4.7%) in full year revenue and an immaterial amount on a pretax basis.

In terms of Investment Management, total revenue of $1.6 billion was up 7.4% QoQ on increased assets under supervision and increased management and incentive fees. Assets under supervision increased 2% QoQ to $1.18 trillion.

CAPITAL AND LIQUIDITY

Goldman estimated that its Tier 1 common ratio under the Basel III advanced approach was 12.2% on a transitional basis at 4Q14, up from 11.8% the prior quarter. However, the company noted that a portion of the capital improvement was attributable to reduced client activity and could reverse in future quarters. Goldman also noted that its supplementary leverage ratio was 5% for the holding company, up from 4.9% the prior quarter. Fitch views Goldman's capital levels as appropriate given its current rating and the risk profile of its business model.

Goldman continues to manage liquidity at conservative levels, with global core excess liquidity, including unencumbered, highly liquid securities and cash, at $183 billion, or 21% of total assets of $856 billion.

As part of Goldman's share repurchase program, $1.25 billion of common shares were repurchased during 4Q14, equal to the amount purchased the prior quarter. Fitch views this level of share repurchase activity as manageable given current capital levels.

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

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