DBRS, Inc. (DBRS Morningstar) confirmed the ratings of The Goldman Sachs Group, Inc. (Goldman or the Company), including the Company’s Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (middle). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for Goldman is AA (low), while its Support Assessment remains SA3. The Company’s Long-Term Issuer Rating is positioned one notch below the IA.
KEY RATING CONSIDERATIONS
The ratings confirmation reflects Goldman’s leading market positions across all of its major businesses, as well as its preeminent risk management, global peer-leading returns and strong balance sheet fundamentals. Goldman has historically been successful in adapting to evolving operating conditions. The Company has embarked on a number of strategic initiatives, including building out a transaction banking business, growing its third-party alternatives business and scaling its consumer banking, high net worth and mass affluent offerings to drive more durable earnings.
Goldman also plans to reduce operating expenses by $1.3 billion and generate $1 billion in cost savings from its funding optimization strategy within three years. Overall, the Company is targeting a return on equity of at least 13% over the medium term. Despite the significant amount of operational risks associated with the execution of a large-scale strategic evolution and the more challenging operating environment, we consider these targets achievable. Supporting this view is Goldman’s strong operational infrastructure, top-notch talent and persistent culture that permeates the organization, having been cultivated through the Company’s organic growth with limited acquisitions.
The ratings also consider Goldman’s exposure to a wide range of trading and investing activities that are integral to the value of its franchise, but also contribute a notable level of market risk that characterizes the Company’s risk profile. Furthermore, the unprecedented economic disruption caused by the Coronavirus Disease (COVID-19) pandemic and related extraordinary support measures implemented to mitigate the fallout have been factored into our ratings assessment. We see potential risks in leveraged lending, unsecured consumer exposures, and illiquid investments which could be more adversely impacted than expected given the abruptness of the downturn. We will continue to monitor this developing situation and its impact on Goldman’s overall credit profile.
Given the current economic environment, an upgrade is unlikely in the near to intermediate term. Over the long term, successful execution of the Company’s strategic initiatives, including delivering on its financial targets would result in an upgrade.
Conversely, a prolonged adverse economic downturn resulting in a sustained deterioration of earnings or balance sheet fundamentals would result in a downgrade. Any indications of significant weakening in Goldman’s franchise due to operational missteps related to the Company’s strategic initiatives, reputational issues or risk management deficiencies would also result in a downgrade.
Goldman’s core franchises remain very strong. The Company’s powerful Investment Banking (IB) franchise includes a dominant Financial Advisory business that is consistently top-ranked in worldwide completed M&A and a global-leading Equity Underwriting platform. In addition, Goldman has made significant market share gains over the past decade within Debt Underwriting, establishing a top-five position globally. Notably, Goldman’s strong relationships with its investment banking clients provide recurring advisory and underwriting fees, as well as generating additional follow-on business throughout the rest of the firm.
The Company remains one of the leading global players within Fixed Income, Currency and Commodities (FICC) and Equities. While these businesses are capital intensive and contribute a notable amount of market risk and revenue volatility, they can still generate a substantial amount of revenue even during adverse market conditions, as evidenced in Goldman’s recent results. In 1Q20, FICC net revenues totaled almost $3 billion, which reached its highest level in five years, while Equities had its second best quarter in five years, with $2.2 billion in net revenues. Goldman’s top 10 global active Asset Management business and leading ultra-high net worth Wealth Management business provide revenue diversification.
Overall, Goldman generated $8.7 billion of total net revenue in 1Q20, which was essentially flat compared to the prior year quarter, demonstrating the benefits of its diversified business model. While earnings were negatively impacted by a substantially elevated provision for credit losses and higher operating expenses, we view Goldman’s 5.7% ROE in 1Q20 as solid in the context of the challenging operating environment.
Providing further support to the ratings, Goldman is entering this downturn in a considerably stronger financial position compared to prior periods of stress. Specifically, the Company’s capitalization has more than doubled versus pre-crisis levels, global core liquid assets are roughly four times higher and deposits now represent more than 30% of total funding sources. While Goldman’s CET1 ratio of 12.3% at the end of 1Q20 was down more than 100 basis points sequentially, it was driven primarily by balance sheet growth to accommodate clients, including $19 billion of corporate and relationship lending drawdowns. However, this activity was still in line with the Company’s stress scenario expectations and below the amount pre-funded in the liquidity pool. Global core liquid assets averaged $243 billion during 1Q20, representing 23% of total assets.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
The Grid Summary Grades for Goldman are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalization – Strong.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations,
DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020): https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the Global Methodology for Rating Banks and Banking Organisations was utilized to evaluate the Issuer, while the DBRS Morningstar Criteria: Guarantees and Other Forms of Support was used to rate the subsidiary guaranteed by the Issuer.
The last rating action on this issuer took place on June 24, 2019, when all ratings were confirmed.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: October 29, 1999
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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