DBRS Confirms Ratings of Goldman Sachs Following Q2 Earnings – A (high), Trend Remains Negative

DBRS has today confirmed the ratings for The Goldman Sachs Group, Inc. (Goldman or the Company), including its Issuer & Senior Debt rating of A (high) and short-term rating of R-1 (middle), following net earnings of $3.4 billion in Q2 2009. This follows net earnings in the prior quarter of $1.8 billion and a Q4 2008 net loss of $2.1 billion. The trend on all ratings remains Negative, except for the Short-Term Instruments rating and Debt Guaranteed by FDIC, which have a Stable trend.

The ratings confirmation reflects the demonstrated strength of Goldman’s franchise, its earnings resiliency and its consistent risk management processes that are evident in the Q2 2009 results. Underpinning the current ratings level are Goldman’s formidable global Investment Banking (IB) franchise, powerful diverse global Fixed Income, Currency and Commodities (FICC) and Equities business segments, as well as the added diversity from its successful Asset Management and Securities Services businesses. Again this quarter, with about half its revenues generated outside the United States, the Company showed the benefit of a successful, diverse franchise with a global reach. While DBRS views Goldman as capable of sustaining these earnings, a return to more stressed markets could impact earnings and funding costs. In terms of liquidity and capital, Goldman has strengthened its position and maintains a substantial capital cushion above regulatory minimums.

Retention of the Negative trend considers the risks facing the Company, given that its businesses are intertwined with financial markets that continue to face significant challenges. Though risks remain, Goldman’s continued success means that DBRS’s next rating action is now much more likely to be a reversion to a Stable trend. Such an action is more probable to the extent that Goldman continues to demonstrate the strength of its franchise and skilful risk management, and financial markets show increased health rather than fragility. While DBRS views positively the Company’s second consecutive quarter of strong earnings, Goldman remains exposed to another period of potential financial turmoil that could again lead to unforeseen movements in fragile markets, disrupted activities, and concerns about the viability of large financial institutions. While governments have demonstrated a willingness to support their financial sectors, the burden of the global economic downturn is impacting their finances, which could constrain their ability to provide support and take coordinated action within their financial sectors should the need arise. Among major capital markets competitors, Goldman has been one of the most successful in weathering the downturn, but did not avoid problems, having experienced a substantial loss in Q4 2008. The Company continues to experience write-downs that reflect its now much reduced exposure to some of the stressed segments in the market, such as commercial real estate.

Despite the fragile operating environment, Goldman produced robust earnings, largely driven by record results in FICC, Equities and Equity Underwriting. The Company focused on market making and significant underwriting activity to achieve this level of performance. Demonstrating the power of its diversified client-driven activities in FICC, especially in more liquid products, Goldman generated strong performances in credit products, interest rate products and currencies. FICC revenues of $6.8 billion topped the prior quarter record and were almost triple the Q2 2008 pace. Equities were robust with revenues of $3.2 billion, up 59% from Q1 2009, reflecting increased prices, volatility declines and strong client-driven activity.

Goldman’s IB franchise also demonstrated its diversity in rebounding from Q1 2009. Equity Underwriting generated record revenues of $736 million, up 19% year-over-year. Debt Underwriting generated a 25% year-over-year increase to $336 million, with higher net revenues from investment-grade and municipal activity. Helped by these underwriting revenues, total IB net revenues were a solid $1.4 billion, as Financial Advisory revenues lagged with low activity levels industry-wide. Volatility was evident in Principal Investments, as revenues were positive again in Q2 2009 with revenues of $811 million mainly due to a gain on its investment in ICBC, after negative net revenues of $1.4 billion in Q1 2009. Asset Management, which adds stability to the franchise, delivered almost the same revenues as in Q1 2009, although still down year-over-year.

In the quarter, Goldman repurchased preferred shares issued to the U.S. Treasury through the TARP Capital Purchase Program (TARP), demonstrating the Company’s ability to raise capital and manage its risk profile. The Company bolstered its capital with a $5.75 billion public offering of common equity during the quarter. With a current Tier 1 ratio of 16.1% under Basel II, it has a substantial cushion over the regulatory minimums to be well capitalized. Goldman also has substantial liquidity through its global core excess pool ($171 billion at Q2 2009) and access to the Fed’s discount window, as well as other programs.

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.