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

DBRS, Inc. (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 ratings is Stable. Goldman’s Intrinsic Assessment (IA) is A (high), while its Support Assessment remains SA3.

The ratings confirmation reflects Goldman’s substantial franchise with strong market positions across businesses, which contributes to a strong core earnings capacity that enables the Company to generate above-peer average returns. Additionally, Goldman’s strong risk management and operational capabilities, a consistent strategy and culture support the current rating level. Also considered in the ratings are the current evolving regulatory environment, which requires significant investments in order to adhere to more stringent requirements, at a time when headwinds continue to impact capital markets revenues. DBRS also notes that Goldman’s exposure to wide ranging capital markets activities contributes to a notable level of market risk. While these activities support the franchise value, the related exposure elevates the Company’s risk profile. With a balance sheet that is largely mark-to-market, the Company is exposed to potential large market movements and market disruptions. Goldman’s willingness to take risk where it sees commensurate reward is also factored into the current rating level.

Goldman’s franchise is supported by its top-tier positioning within the global capital markets, with trading businesses within Institutional Client Services (ICS) that are extensively diversified across products, markets and client segments. Its dominance within Financial Advisory provides a strong cornerstone to its Investment Banking (IB) franchise, with Goldman consistently ranking #1 in global M&A league tables. It also has a strong position in equity underwriting and a growing market share in debt underwriting. A well-entrenched IB franchise provides an entryway through which clients engage with other product and service offerings at Goldman. The Company’s trading businesses benefit from significant breadth and diversity, as well as connectedness with its other businesses. DBRS views Goldman as well-positioned to reap the benefits of a more substantial global economic recovery.

Goldman’s franchise also benefits from its other business segments, which add further diversity. Specifically, Investment Management (IM), which includes asset management and private wealth management businesses, is a sizable segment that contributes to the stability of overall earnings. As the 10th largest asset manager globally, the Company has a broad and deep product offering to a significant client global base with a scalable platform. Additionally, Investing & Lending (I&L) has synergies with Goldman’s broader set of businesses, and adds important competitive capabilities as the Company invests and lends to facilitate client needs. At the same time, these activities add risk and volatility to the Company’s earnings.

Goldman has been successful in making continuous adjustments that allow it to remain a nimble organization that is highly responsive to its client base. In 2016, the Company launched an online consumer lending platform, which offers unsecured consumer loans. DBRS sees this as an opportunity for Goldman to expand its client base while leveraging its expertise in technology and risk management. DBRS also notes that challenges associated with lending to mass market consumers are different than those associated with institutional and high-net-worth client lending, and there could be some growing pains. DBRS would have concerns if any reputational issues were to become apparent as a result of this expansion outside its current client footprint.

In 2016, Goldman generated net income of $7.1 billion on net revenues of $31 billion, representing a return on average common equity (ROE) of 9.4%. Earnings are being supported by cost control efforts, with expenses down 19% year-over-year (YoY) compared to a 9% decline in net revenues. The revenue generating environment continues to be challenging, particularly in the trading businesses where activity levels remain at relatively low levels. In 1Q17, Goldman generated net income of $2.2 billion and an ROE of 11.4%.

Given its track record of adjusting to various market movements and economic cycles, DBRS views Goldman as having a strong ability to continually adjust to the evolving operating environment. Critical to Goldman’s success is its strong operational infrastructure, which supports risk management, compliance and control functions, as well as its cost-efficient execution capabilities. Also important is the Company’s persistent culture that permeates the organization, having been cultivated through Goldman’s organic growth with limited acquisitions and a consistent senior management team.

Further underpinning the rating, Goldman has a sound financial profile. While the Company has a higher reliance on wholesale funding than its global peer group, Goldman dedicates significant time and resources to aligning the characteristics of its funding sources with those of the assets being funded. Funding sources for less liquid assets are focused on those that are stable and term, such as deposits, long-term debt, and equity. Funding for shorter-term assets utilize committed lines and other secured borrowings for better alignment. The Company also maintains a significant level of liquidity with average Global Core Liquid Assets of $218 billion in 1Q17, or about 24% of total assets. Goldman reported a strong level of capitalization, with a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio under the advanced approach of 12.5%, and a Supplementary Leverage Ratio of 6.4% at 1Q17.

RATING DRIVERS
DBRS sees Goldman’s rating as well-placed at the current level with upward pressure constrained by various factors, including the still evolving regulatory environment with its potential impact on Goldman’s franchise, as well as the Company’s business model, which generally runs with a higher level of risk than higher-rated institutions. Over the longer-term, upward ratings movement could potentially be driven by further business diversification that contributes to growth of more stable, consistent revenue sources.

Negative rating action could arise, if investor confidence is adversely impacted in a Goldman-specific scenario, which could particularly affect the Company given its sizable reliance on wholesale funding. Any indications of significant weakening in Goldman’s franchise, significant risk management deficiencies, or Goldman’s ability to generate sustainable earnings could also pressure ratings.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski, Senior Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: July 31, 1998
Last Rating Date: July 26, 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.