DBRS Confirms Ratings of Goldman Sachs, Revises Trend to Stable – Senior at A (high)

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 Instruments rating of R-1 (middle). The trend on all long-term ratings has been revised to Stable from Negative, while the trend on all short-term ratings remains Stable. This action reflects another strong quarterly performance with Goldman reporting net earnings of $3.2 billion in Q3 2009. This follows net earnings of $1.8 billion in Q1 2009 and $3.4 billion in Q2 2009. With the exception of a loss of $2.1 billion in Q4 2008, the Company has performed well during this sustained downturn. DBRS notes that despite the loss, Goldman remained solidly profitable for the full year 2008.

In revising the trend to Stable, DBRS is taking into account the strength of Goldman’s diversified franchise that has proven resilient during this extended period of financial turmoil, as well as factoring in the receding levels of stress in the financial markets. The Company’s strong performance across its diverse businesses during a difficult year demonstrates the resiliency of its earnings. The Company’s risk profile has improved, as it has reduced its exposure to illiquid assets most affected by the market disruptions through sales and write-downs. The Company has also strengthened its capitalization and enhanced its liquidity. Now a bank holding company, Goldman has taken advantage of its commercial banking capabilities to strengthen its funding profile for certain capital markets activities. Nevertheless, given the continued weakness in economies globally, Goldman remains exposed to the potential recurrence of financial turmoil that could again lead to disrupted activities, reduced revenues and diminished investor confidence, which could particularly affect the Company as a largely wholesale funded institution. While DBRS views the Company as still facing certain risks given that its businesses are intertwined with financial markets that continue to face significant challenges, Goldman has demonstrated its ability to cope with a stressed environment.

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. Showing the global reach of its diverse franchise, about half of the Company’s revenues were generated outside the United States, reflecting its significant presence in Europe and Asia.

Goldman produced robust earnings in Q3 2009, with strong results across the board. Evident again this quarter was the ability of the Company’s businesses to take advantage of changing client focus and shifting patterns of client activity across product segments to generate revenues from client flows. As in prior quarters, revenues were driven by the Company’s strong customer flow business and its willingness to put its risk appetite to work where it sees a commensurate reward. These crucial characteristics of its franchise strength are not readily emulated. Demonstrating the earnings power of its multifaceted FICC business, Goldman’s revenue drivers shifted from high levels of activity in macro businesses, such as interest rate products, currencies and commodities, in H1 2009 to increased activity in credit products beginning in Q2 2009 and mortgage activity in the current quarter. While spreads are narrowing, the spreads remain wider than normal contributing to Goldman’s strong revenues in the quarter. Goldman’s equity business produced revenues in line with the prior quarter, as higher equity prices were offset by lower customer volumes. DBRS notes that the Company is benefiting from the disrupted competitive landscape that has seen several competitors disappear and other competitors distracted by integrations or other internal issues.

Goldman’s IB franchise continued to generate solid revenues, though down from Q2 2009, with reduced client activity and seasonal slowdown in some business lines. Looking forward, DBRS views positively the significantly increased M&A and Underwriting backlogs, which bode well for earnings in IB and continued recovery in financial markets. Volatility in Principal Investments continued in Q3 2009, with a gain in this quarter from the Company’s direct investment in corporate debt and equity. Positively, Goldman did not reveal any large real estate losses in the quarter as these substantial write-downs had been absorbed in prior quarters. DBRS views the Company’s mark-to-market policies as conservative, evidenced by the current marks on stressed asset classes such as commercial real estate. Asset Management, which adds stability to the franchise, delivered almost the same revenues as in the prior two quarters of 2009.

Strong capitalization metrics continue to improve. Even with the high pace of activity, assets of $882 billion were down slightly from Q2 2009. One indicator of market risk, VaR, was down from Q2 2009, particularly in the interest rates category due to decreased volatility. The Company is also maintaining its liquidity resources at a high level with its average core excess liquidity at $167 billion, double the level it had a year ago. DBRS views this strong liquidity and enhanced capitalization as providing Goldman with increased capacity to weather another period of market turmoil.

While there are signs of improvement in the economies in the U.S. and globally, as well as reduced stress in the financial markets, the extent of the economic downturn has left a legacy of credit problems that continues to take a major toll on the economy, the flow of financial resources and the condition of many financial institutions. While expecting continued improvement, DBRS sees substantial risks in the still fragile financial sector and weakened economies in many countries.

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.