DBRS Ratings Unchanged After Q4 and FY 2009 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 Q4 and full year 2009 earnings announcement. DBRS rates the Issuer & Senior Debt at A (high) with a Stable trend. Goldman reported net earnings of $4.8 billion for Q4 2009 following net earnings of $3.0 billion in Q3. For the full year, the Company reported net earnings of $12.2 billion following $2.0 billion for FY 2008. The boost in earnings quarter-over-quarter is largely attributable to the negative compensation expense accrual in Q4 of $519 million versus $5.4 billion in Q3, as revenues were down 22%. For FY 2009, the improvement versus FY 2008 can be attributed to the revenue generation capabilities of Goldman’s diverse global franchise that delivered strong results in a difficult environment that improved during the year.

Underlying net revenue trends were indicative of the resiliency of the Company’s businesses, with full-year revenues jumping 103% year-over-year to $45.2 billion, a return to 2007 levels. Revenues in FY 2009 were largely driven by the rebound in Fixed Income, Commodities, and Currencies (FICC), which contributed to just over 50% of total revenues. The first half of the year generated record results in FICC, driven by wider margins and higher volatility in the market. Revenues then shifted from high levels of activity in macro businesses (i.e. interest rate products, currencies and commodities) to other FICC businesses in the latter half of the year, such as credit and mortgage products, while commodities remained strong through Q4. Equity markets had a pick up mid-year, so that Equities contributed to 22% of total Company revenues. Goldman also generated strong Investment Banking results in FY 2009, even in a year with reduced client activity, while Asset Management and Securities Services continued to be stable revenue generators. In DBRS’s view, Goldman demonstrated its ability to leverage its franchise to take advantage of changing client focus and shifting patterns of client activity across product segments in generating revenues from customer flows. Central to this ability is Goldman’s willingness to put its risk appetite to work where it sees commensurate rewards.

Also in evidence in 2009 were the ebbs and flows across Goldman’s businesses. In Q4 2009, when FICC revenues declined 34% quarter-over-quarter, Investment Banking (IB) revenues picked up, increasing 82% over the same time period. In Q4, IB contributed to almost 20% of total firm revenues as compared to just 9% of the total in Q1 2009 when FICC was at record levels. The Company’s strong performance across its diverse businesses during a difficult year illustrates the underpinnings of the resiliency of its earnings.

Goldman reduced its compensation expense to 35.8% of net revenues for FY 2009, down from 48% in FY 2008, adjusted for severance payments, which is more typical. Goldman reiterated that its compensation level reflects its bottoms up approach to compensation; its improved performance is reflected in the higher level of its compensation, which is up 48% from FY 2008. In DBRS’s view, Goldman’s ability to adjust its compensation highlights the benefit of variable compensation for financial institutions in adjusting to market cycles. In the current environment, it may also enable institutions to adjust to the likely increased need for capital and the demands of shareholders and other capital providers for increased returns where they perceive more risk. Current compensation levels also reflect competition for talent, which remains subdued.

Goldman maintained non-compensation expenses at a normalized run-rate. The Company did not have any major acquisitions or divestitures in FY 2009, nor did it have significant management changes. That brought the benefit of organizational stability. The Company continued to demonstrate success in controlling costs and generating growth organically.

The Company continues to maintain strong capitalization with high liquidity. With an estimated Tier 1 ratio of 15.0%, Goldman Sachs has significantly reduced its assets, which were down by 24% to $849 billion year-over-year. Reflecting significant low-risk assets, risk-weighted assets were approximately $432 billion, or approximately 50% of total assets. DBRS views as appropriate the Company’s actions to bolster its liquidity as indicated by its average liquidity pool of $163 billion, or 20% of total assets, in Q4 2009.

The Stable trend takes into account the strength of Goldman’s diversified franchise, strong performances across its various businesses during a difficult year, and its improved risk profile, solid capitalization and bolstered liquidity. 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, including increased regulatory uncertainty, Goldman has demonstrated its ability to adapt to a stressed environment.

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.