OREANDA-NEWS. Goldman Sach's (GS, rated 'A/F1', Stable Outlook) first quarter 2015 (1Q'15) reported earnings of \$2.84 billion were strong, in Fitch Ratings' view, led by increased capital markets activity in its Institutional Client Services (ICS) business line, continued improvement in other business lines, and controlled compensation expenses. .

Fitch calculated pre-tax profits which excluded CVA/DVA adjustments and various other gains/losses, amounted to \$4 billion, or a 1.84% return on ending assets. These are the strongest result GS has delivered in the last several quarters, and Fitch believes it is evidence of the company's strong franchise in the capital markets and good operating leverage, supported by an improving economic backdrop.

While GS's business model, efficient capital allocation and franchise are clearly supporting the improved performance, the ability to sustain the momentum will also be influenced by market conditions and client confidence to transact, which reflect the inherent cyclicality of GS's activities. These offsetting dynamics are reflected in Goldman's ratings and Stable Outlook.

The key driver of GS's strong results was much higher net revenues in the company's ICS businesses. ICS net revenue was 23% higher than the year-ago quarter and 73% higher than the sequential quarter, which was due to some seasonality.

Nevertheless, the year-over-year comparison was strong, in Fitch's view. Higher net revenue in the company's Fixed Income, Currency, and Commodities (FICC) business benefited from higher volatility in foreign exchange (FX) and interest rate products which also helped drive client activity levels. This was partially offset by lower net revenues in credit products, commodities, and mortgages. There was also solid year-over-year improvement in the Equities businesses, both derivatives and cash.

With the increase in volatility in FX and rates, GS's average daily Value-at-Risk (VaR) measurement increased to \$81 million in 1Q'15 from \$63 million sequentially, and relatively unchanged from \$82 million in the year-ago quarter. However, relative to the year-ago quarter, VaR, excluding diversification impacts, was slightly higher due to higher currency VaR. Should volatility remain moderately above current levels, Fitch would likely expect continued strong revenue from GS's ICS businesses.

Investment banking net revenue was 7% higher than the year-ago quarter and 32% higher sequentially, which was due to some seasonality. The improvement, however, was largely due to strong financial advisory revenue, as several M&A deals in GS's backlog closed in 1Q'15. Not surprisingly, the investment banking transaction backlog decreased as a result of this activity sequentially, but still remains good year-over-year, in Fitch's view.

Partially offsetting the year-over-year increase in financial advisory revenue was a decrease in underwriting net revenues, as a decline in leveraged finance activity more than offset by an improvement in equities underwriting.

GS also was able to slightly decrease total expenses, as increases in compensation and benefits expense amid the stronger revenue performance were offset by reductions in overall non-compensation expenses. Additionally, due to the higher net revenue the ratio of compensation and benefits to net revenue remained relatively steady at 42% in 1Q'15, indicating the strong operating leverage in GSs' business model.

Fitch continues to view GS's capital and liquidity position as good. As of 1Q'15, GS transitionally phased-in Basel III Common Equity Tier 1 ratio under the standardized approach was 11.4% and under the advanced approaches was 12.6%. In addition, the company's Global Core Liquid Assets (GCLA) was relatively unchanged at \$175 billion as of 1Q'15.