OREANDA-NEWS. Goldman Sachs Group Inc.'s (GS) second quarter 2016 (2Q16) earnings were better relative to the sequential quarter and year-ago quarters due to broad based improvements across most of the company's businesses, according to Fitch Ratings.

GS's overall annualized return on average equity (ROE) was 8.7% in 2Q16, up from 6.4% in the sequential quarter and 4.8% in the year-ago quarter, which did include a $1.45 billion litigation charge. Fitch notes that this quarter's results also benefited from a more favorable tax rate this quarter due to some one-time tax benefits.

While this quarter's results were an improvement, GS's ROE remains below the company's long-term average as well as Fitch's estimate of GS's cost of equity assumption of between 10% to 12%.

This quarter's results were generally in-line with peer banks that have reported thus far. Most have benefited from greater trading volatility, particularly within the Fixed Income, Currency, and Commodities (FICC) businesses. Despite challenges in FICC over the last year, each firm's results did benefit from favorable quarter-over-quarter and year-over-year comparisons.

Net revenue in GS's FICC segment increased 16% from the sequential quarter and 20% from the year-ago quarter due to higher net revenues in currencies and credit products amid increased volatility over the course of the quarter. The affirmative BREXIT vote towards the end of the quarter likely helped boost currency trading results.

GS's equities net trading revenue was more mixed. Equities net trading revenue was up 25% from the sequential quarter, which was more challenging, but down 25% from the year-ago quarter. This decline was due to lower net revenue from cash products and derivatives in Asia. Commissions and fees in the equities business were down 15% relative to the sequential quarter and 3% relative to the year-ago quarter. Securities services net revenues, which are primarily comprised of GS's prime brokerage business, had slight net revenue declines of 2% relative to 1Q16 and 5% relative to 2Q15.

Investment banking net revenue was also mixed improving 22% relative to the sequential quarter but down 11% relative to the year-ago quarter. A highlight for GS was improved debt underwriting net revenue which was 42% higher relative to the sequential quarter, and up 20% relative to the year-ago quarter.

Growing net revenue in debt underwriting has been a focus for GS over the last couple of years, and Fitch believes this quarter's results are indicative of the firm's strategy gaining further traction. The debt underwriting results were higher due to increased asset-backed activity and to a lesser extent more leveraged finance issuance.

Despite good markets and continued fund flows pushing GS's overall Assets Under Supervision (AUS) up to $1.3 trillion, net revenue in the Investment Management segment was up only 1% relative to the sequential quarter and down 18% relative to the year ago quarter both due to lower incentive fees. Incentive fees for GS tend to be market dependent, so they can cause some volatility in GS's overall investment management net revenue.

GS noted it will be launching its consumer lending platform in the fall of 2016. Fitch expects that initially it will be a more nascent part of GS's overall suite of businesses.

GS continued to actively control expenses during the quarter. The compensation ratio in 2Q16 was 42%, unchanged from 1Q16. The company has reduced headcount over the first part of the year, with total employees declining 5% relative to 1Q16. GS believes these efforts will result in $700 million of annual run-rate savings going forward.

In Fitch's view, GS's capital ratios and liquidity metrics remain consistent with the rating category (Viability Rating of 'a') given the agency's assessment of the inherent cyclicality of GS's business model.

The company's transitionally phased-in Basel III Common Equity Tier 1 ratio under the advanced approach (GS's binding constraint) was 12.2%, and under the standardized approach was 13.7% at 2Q16.

GS's fully phased-in enhanced supplementary leverage ratio (SLR) was up to 6.1% at the end of 2Q16 compared to 6.0% at 1Q16.

Additionally, GS's Global Core Liquid Assets was $211 billion at the end of 2Q16, or 23.5% of total assets, compared to $196 billion at 1Q16, or 22.3% of total assets. Fitch notes that the balance sheet did grow modestly to $897 billion of total assets at 2Q16, up from $878 billion at 1Q16 primarily due to the GE deposit acquisition completed in 2Q16.