DBRS Ratings Unchanged After Q1 Earnings of Goldman Sachs – Senior at A (high)

DBRS has today commented that its ratings of The Goldman Sachs Group, Inc. (Goldman or the Company) remain unchanged after the Company’s Q1 2009 earnings announcement. DBRS rates the Issuer & Senior Debt at A (high) with a Negative trend. Goldman reported net earnings of $1.8 billion for the quarter, a significant turnaround from a net loss of $2.1 billion in Q4 2008, and up from net earnings of $1.5 billion in Q1 2008. Having changed its fiscal year end to December from November, Goldman also reported earnings for the month of December, a “stub period”. Simultaneously to the earnings release, Goldman also announced a $5 billion public offering of common equity.

Considering the difficult operating environment, DBRS views Goldman’s positive Q1 2009 earnings as a demonstration of the power of the Company’s diversified franchise. The strong earnings were largely driven by a record quarter in Fixed Income, Currency and Commodities (FICC). After the turbulence of Q4 2008, the other businesses held their own, except for Principal Investments, which showed a loss. The stub period of December 2008, was a net loss of $780 million, primarily driven by $2.7 billion of negative fair value adjustments.

Revenues in FICC in Q1 2009 rebounded dramatically to a positive $6.6 billion, compared to negative net revenues of $3.4 billion in Q4 2008. FICC provided the major boost to revenues on a linked quarter basis, as the Company’s client-driven activities benefited from wider margins, higher volatility, and an evolving competitive environment which were advantageous to the Company’s client-driven activities. Within FICC, interest rate products and commodities recorded record revenues in Q1 2009, while currencies were solid but lower when compared to the year-ago quarter. The Equities Trading and Equities Commissions businesses continued to produce solid results, though lower on a linked quarter basis, with net revenue decreases of 22% and 26%, respectively, attributable to lower volumes and activity levels.

Goldman proved its strength in Investment Banking quarter-over-quarter through stable Financial Advisory and an uptick in Debt Underwriting, but Equity Underwriting revenues were off with low activity. Overall, Investment Banking revenues were $823 million for the quarter, down 20% versus the prior quarter and 30% when compared to Q1 2008.

Asset Management continued to provide the Company with a stable revenue source, achieving revenues of $949 million in Q1 2009, about flat versus Q4 2008 but down from Q1 2008. The decline was due to lower fees and reduced assets under management (AUM). While this AUM decline was partially due to asset depreciation, there were also net asset outflows of $11 billion in Q1 2009, a reversal from net asset inflows of $6 billion in Q4 2008. On a linked quarter basis, Securities Services revenues declined 37% to $503 million, with lower customer balances.

While most of Goldman’s businesses contributed positively to total net revenues, Principal Investments was a drag on the Company’s performance with negative net revenues of $1.4 billion. While this was an improvement from the prior quarter, in which Principal Investments recorded a loss of $3.6 billion, DBRS views this loss as indicative of the still challenging environment.

While DBRS views Goldman’s strong Q1 2009 results as an indication of the strength of the Company’s franchise and its ability to generate sustainable earnings, the Negative trend reflects DBRS’s concern that the Company faces a challenging environment in which to adapt its diverse businesses, sustain its revenues and cope with the potential impact of adverse market movements on its remaining legacy positions. DBRS views positively the Company’s continued reduction of its legacy or “stalled” assets from a peak of $77.6 billion in Q4 2007 to approximately $15 billion in the current quarter. Losses on tightening credit spreads related to Goldman’s own debt had a limited impact of around $200 million in Q1 2009, as the Company has relatively moderate issuance of structured debt subject to such marks.

In light of the difficult operating environment and the market premium placed on protecting liquidity and capital, DBRS views positively the steps that Goldman has taken to strengthen its position. It reduced its assets significantly (22% year-over-year to $925 billion), substantially enhanced its liquidity and bolstered its capitalization. Goldman’s capital position benefited from the injection of TARP capital in Q4 2008. Following the completion of the regulators’ stress assessment, if permitted by supervisors and if supported by the results of the stress assessment, the Company intends to use the capital raised through its announced $5 billion public common stock offering to redeem its TARP capital. With a current Tier 1 ratio of 16% under Basel II, DBRS sees this redemption as having a relatively modest impact on the Company’s substantial cushion over the regulatory minimums to be well capitalized. Moreover, it would bolster the Company’s capital structure to the extent that the newly raised common equity would replace preferred equity.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Securities Firms Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.