Fitch: Volatile Markets Weigh on Goldman's 1Q16 Earnings
OREANDA-NEWS. The Goldman Sachs Group Inc.'s (GS) first quarter 2016 (1Q16) earnings were significantly impacted by volatile and challenging markets, according to Fitch Ratings. The weak macro environment largely kept clients on the sidelines, contributing to sequential and year-over-year net revenue declines. Overall the company's annualized return on average equity was 6.4%, well below GS's long-term averages and Fitch's cost of equity assumption for the company.
We would note, however that this quarter's results were generally in line with peer banks that have reported thus far. JP Morgan posted more favorable results, given its diverse set of businesses, Morgan Stanley and Citigroup reported similar results, and Bank of America reported less favorable results amid higher energy related provisioning and weak trading.
Investment banking net revenue at GS was down 5% from the sequential quarter and 23% from the year-ago quarter. This was driven by lower financial advisory net revenue, as fewer transactions closed during the quarter. GS indicated that it believes its M&A backlog remains strong, so to the extent that markets improve over the balance of the year, advisory net revenue could improve.
Given the dearth of initial public offerings during the quarter, GS's equity underwriting net revenue also declined relative to both the sequential and year-ago quarters. Partially offsetting this decline, and a bright spot for GS during the quarter, was strong debt underwriting results as a result of strong investment-grade issuance despite the drag from lower leveraged finance issuance.
The company's Institutional Client Services businesses performed satisfactorily, in Fitch's opinion, when taken in the context of the challenging market backdrop. Fixed Income Currency & Commodities (FICC) net revenue was down 47% from the year-ago quarter but up 48% sequentially based on the typical boost the FICC business experiences during the first quarter of the year. Equities client net revenue declined both sequentially and from a year-ago, though commission and fees did both increase. Similarly, net revenue in securities services, which encompasses GS's prime brokerage business, was flat sequentially and up 10% relative to the year-ago quarter.
Net revenue in the company's Investing and Lending segment was down significantly from both the sequential and year-ago quarters due to lower global equity prices and challenging corporate performance. Debt securities and loans were also down, due in part to higher provisioning in the quarter.
Despite continued good fund flows, GS's Investment Management net revenue was dragged down compared to both the sequential and year-ago quarters due to lower incentive fees.
Fitch notes that GS actively controlled it expenses during the quarter in the challenging revenue environment. The compensation ratio in 1Q16 was 42%, unchanged from 1Q15. Fitch believes this demonstrates the flexibility of GS's business model.
In Fitch's view, GS's capital ratios and liquidity metrics remain consistent with the rating category (Viability Rating of 'a') given our 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 13.4% at 1Q16.
GS's fully phased-in enhanced supplementary leverage ratio (SLR) was up to 6.0% at the end of 1Q16 compared to 5.9% at YE2015.
Additionally, GS's Global Core Liquid Assets was $196 billion at the end of 1Q16, or 22.3% of total assets. Fitch notes that the balance sheet did grow modestly to $878 billion of total assets at 1Q16, up from $861 billion at YE2015.
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