Fitch: Goldman 4Q'13 Revenues Rebound From a Weak 3Q'13, But Flat on a Full Year Basis

The Goldman Sachs Group, Inc.'s (Goldman) net revenues for fourth quarter 2013 (4Q'13) were stronger for the quarter but flat for the full year benefiting from an improvement in fixed income, currency and commodities trading, following a weak 3Q'13, and strong investment banking revenues. Results for 4Q'13 were dampened by elevated non-compensation expenses primarily due to higher legal and regulatory matters. Return on equity (ROE) of 11% for 2013 is below Goldman's historical average but generally favorable relative to peers and their cost of capital.

The firm reported quarterly net revenues of $8.8 billion, an increase of 31% from a weak 3Q'13, driven by higher client activity and slightly improved macroeconomic conditions. On a full year basis, net revenues remained flat at $34.2 billion. Full year 2013 net earnings of $8 billion were 8% higher than 2012.

Compensation expenses continued to decline in 4Q'13, down 8% sequentially, and represented 36.9% of net revenues for the year. Non-compensation expenses, however increased 40% quarter over quarter (QoQ) driven by higher provisions for legal (primarily mortgage-related) and regulatory matters; and de minimis impairment charges. The increase in litigation expenses is not unique to Goldman, and is an area Fitch is watching for the industry, although Goldman's smaller mortgage activities relative to banking peers suggest the impact may more limited.

For Institutional Client Services, net revenues (excluding DVA impact, and the sale of the reinsurance and hedge fund businesses) increased 23% sequentially, but were down slightly from 4Q'12. Fixed income improved from a weak 3Q'13, supported by tighter credit spreads although market activity was relatively subdued. For 2013, fixed income net revenues (excluding DVA impact) were 13% lower than 2012, primarily due to sharply lower net revenues in interest rate products and mortgages. Equities increased 5% sequentially, and increased 12% from 4Q'12 (excluding the sale of Goldman's reinsurance business and hedge fund businesses). Trading VaR declined modestly from the prior quarter and on a full year basis, reflecting a lower contribution from interest rates and currencies partially offset by a higher contribution from equity.

Investment banking revenues of $1.7 billion were 47% higher than 3Q'13 driven by a robust market for IPOs and increased M&A activity. Underwriting revenues were strong, with equities up more than two-fold QoQ and year over year (YoY) due to higher client activity. Debt underwriting revenues were up 9% from 3Q'13, however down 14% from 4Q'12. The backlog for investment banking remains strong and Goldman should benefit from increased activity. On a full year basis, investment banking revenues increased 22% to $6 billion. Total underwriting revenues were a record $4 billion, due to positive momentum from both debt and equity underwriting.

Investment and lending revenues increased significantly QoQ due to mark-to-market gains in private equity investments and higher net interest income on fixed income securities. Asset management revenues were 31% higher than the prior quarter. Assets under supervision reached a record high of $1.04 trillion, driven by substantial net inflows and market appreciation.

Goldman's liquidity profile remains solid with $184 billion (20% of assets) of unencumbered, highly liquid securities and cash. Over the past several years, liquidity has been consistently maintained 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 was 9.8%, unchanged from the prior quarter. The ratio continues to be above the 8.5% minimum and above Goldman's target of 9.5%. Goldman estimated that its supplementary leverage ratios (under the Federal Reserve's methodology) were approximately 5% and 6% at the holding company and Goldman Sachs Bank USA, respectively. Both continue to be in line with proposed regulatory requirement. As part of Goldman's share repurchase program, during 4Q'13 and full year 2013, $1.4 billion and $6.2 billion of common shares were repurchased, respectively. Fitch views this level of share repurchase activity as manageable given current capital levels.

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