Fitch Affirms Goldman Sachs' Ratings at 'A/F1'
The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.
As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.
KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
Today's rating action and Stable Outlook are reflective of Goldman's strong franchise, higher-than-peer average capital ratios, and strong risk management culture.
Goldman's franchise continues to be supported by a leading advisory business that has ranked at the top of league tables. Advisory net revenues in the third quarter of 2015 (3Q15) were up a strong 36% from the year-ago quarter, and down slightly relative to the sequential quarter. Additionally, Goldman's advisory backlog remains strong, and Fitch would expect strong advisory net revenue growth in 2016.
Underwriting net revenue has been slightly more variable given recent challenging market conditions that led to reduced transaction activity during 3Q15. Despite this volatility, Fitch would expect some of these transactions to come back to market during the balance of 2015 or in early 2016, and Fitch would also expect Goldman to continue to grow its market share in debt underwriting.
Goldman's trading businesses have shown more volatility over the past year, which incorporated strong results in the first half of the year, partially offset by weaker results in 3Q15, as clients generally disengaged from the markets on an industrywide basis.
This was most pronounced in the Fixed Income, Currency & Commodities (FICC) segment, where 3Q15 net revenues were down 33% from the year-ago quarter and 9% from the sequential quarter. This, as well as some legal charges, dropped Goldman's annualized return on equity (ROE) to 7.0% in 3Q15 and 8.8% for the first nine months of 2015, both of which are below Fitch's assumed cost of equity range for GTUBs.
Fitch notes that Goldman did a very good job keeping a lid on compensation and benefits expenses amid variable net revenues; however, these efforts could not completely offset the impact to profitability of lower net revenues. Year-to-date performance also highlights Fitch's view that Goldman's ability to sustain the momentum in the capital markets is influenced by market conditions and client confidence to transact, which Fitch believes implies an inherent cyclicality to Goldman's core activities relative to some other peer institutions, which provides some limitation on upwards rating potential.
Despite the challenging conditions, Goldman's capital ratios remained good, with the company's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach (Goldman's binding constraint) at 11.7% at 3Q15. Reported CET1 is higher than peer level medians, which Fitch views as appropriate - and supportive to the ratings.
Goldman's ratings incorporate its more significant reliance on wholesale funding than other GTUBs, whose funding profiles are typically core in nature and skewed to a larger proportion of low-cost and sticky deposit funding. Nevertheless, Goldman has maintained its liquidity position at conservative levels, which Fitch views as appropriate. To this end, Goldman's amount of Global Core Liquid Assets (GCLA) increased to a solid $193 billion, or 22% of total assets at 3Q15.
SUBSIDIARIES AND AFFILIATED COMPANIES
Fitch notes that the VRs remain equalized between Goldman and its material operating subsidiaries. The common VR of Goldman and its operating companies reflects the correlated performance, or potential failure rate between Goldman and these subsidiaries.
However, the Long-Term IDRs for the material U.S. operating entities are one notch above Goldman's Long-Term IDR to reflect Fitch's belief that the U.S. single point of entry (SPE) resolution regime, the likely implementation of total loss absorbing capacity (TLAC) requirements for U.S. global systemically important banks (G-SIBs), and the presence of substantial holding company debt reduces the default risk of domestic operating subsidiaries' senior liabilities relative to holding company senior debt.
Additionally, the 'F1' Short-Term IDRs of Goldman's bank subsidiaries are at the lower of the two potential Short-Term IDRs which map to an 'A' Long-Term IDR on Fitch's rating scale, in order to reflect Goldman's greater reliance on wholesale funding than more retail-focused banks. Goldman and its non-bank operating companies' Short-Term IDRs of 'F1' reflect Fitch's view that there is less surplus liquidity at these entities than at the bank, particularly given their greater reliance on the holding company for liquidity.
The senior secured debt ratings of Goldman Sachs & Co. and Goldman Sachs International (GSI) are equalized with the IDR of each entity as Fitch does not have on-going visibility into the collateral underlying the notes, and as such has equalized it with the IDRs of those entities.
MATERIAL INTERNATIONAL SUBSIDIARIES
GSI and Goldman Sachs International Bank (GSIB) are wholly owned subsidiaries of Goldman, whose IDRs and debt ratings are aligned with the bank holding company's ratings because of their core strategic role in and integration into Goldman.
Fitch's Positive Outlook for Goldman's material international operating subsidiaries reflects the likelihood of internal TLAC as required by the Financial Stability Board (FSB) becoming available to support these entities. The Positive Outlook reflects the agency's belief that the internal TLAC of material international operating companies will likely be large enough to meet and exceed Pillar 1 capital requirements and will then be sufficient to recapitalize them.
A one-notch upgrade of GSI and GSIB is likely once Fitch has sufficient clarity on additional disclosure on the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. Sufficient clarity may, however, take longer to come through than the typical Outlook horizon of one to two years.
Specific factors that Fitch seeks additional clarity on before resolving the Rating Outlook and potentially upgrading the subsidiary ratings will include host country clarification on internal TLAC, the quantum of internal TLAC, and whether it will be pre-positioned. The quantum is relevant because per Fitch's criteria the agency will look to the sufficiency of the amount of capital available to that subsidiary to recapitalize it.
If the amount of TLAC is sufficient for recapitalization in Fitch's opinion and is pre-positioned, Fitch will likely upgrade the subsidiary ratings. Conversely, if home and host country regulators reach agreements where pre-positioning is not required, the rating will not be upgraded and the Outlook will be revised to Stable.
If clarity on host country internal TLAC proposals are further delayed beyond the next six months, Fitch will likely revise the subsidiary Outlooks to Stable until there is further clarity on these proposals.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor for Goldman reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that Goldman becomes non-viable. In Fitch's view, implementation of the Dodd Frank Orderly Liquidation Authority legislation is now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors participating in losses, if necessary, instead of or ahead of the company receiving sovereign support.
Goldman Sachs Bank, USA (GS Bank) has a Support Rating of '1', which is reflective of Fitch's view of institutional support for the entity. GS Bank does not have a VR at this time, given Fitch's view of its more limited role within the group structure.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by Goldman are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated debt issued by the operating companies is rated at the same level as subordinated debt issued by Goldman, reflecting the potential for subordinated creditors in the operating companies to be exposed to loss ahead of senior creditors in Goldman. This is also supported by the FSB's proposal to have internal TLAC rank senior to regulatory capital at the operating company.
Goldman's subordinated debt is one notch down from Goldman's VR, its preferred stock is five notches down from the VR (which encompasses two notches for non-performance and three notches for loss severity), and its trust preferred stock is four notches down from the VR (encompassing two notches for non-performance and two notches for loss severity).
DEPOSIT RATINGS
U.S. deposit ratings are one notch higher than senior debt ratings reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. Goldman's international subsidiaries' deposit ratings are at the same level as their senior debt ratings because their preferential status is less clear and disclosure concerning dually payable deposits makes it difficult to determine if they are eligible for U.S. depositor preference.
RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
In Fitch's view, Goldman's VR is solidly situated at its current rating level, and has limited upward potential given Goldman's business focus on the capital markets and reliance on wholesale funding sources. However, to the extent that the company is able to further improve both its returns on equity and the stability of its earnings profile while at the same time further reducing its reliance on wholesale funding and maintaining above peer-level capital ratios, there could be some longer-term upside to the company's ratings.
Downward pressure on the VR could result from a material loss, significant increase in leverage or deterioration in liquidity levels. Similarly, any unforeseen outsized or unusual fines, settlements or charges levied could also have adverse rating implications. Additionally, any sizable risk management failure could result in negative pressure on Goldman's ratings.
Goldman's long-term IDR and senior debt are equalized with the VR at the holding company, and are notched up by one notch from the VR at the material operating companies. Thus ratings would be sensitive to any changes in Goldman's VR.
SUBSIDIARIES AND AFFILIATED COMPANIES
All U.S. bank subsidiaries carry a common VR, regardless of size, as U.S. banks are cross-guaranteed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Thus subsidiary ratings would be sensitive to any change in Goldman's VR.
MATERIAL INTERNATIONAL SUBSIDIARIES
A one-notch upgrade is likely once Fitch has sufficient clarity as to additional disclosure on the pre-positioning of internal TLAC and its sufficiency in size to cover a default of senior operating company liabilities. Sufficient clarity may, however, take longer to come through than the typical Outlook horizon of one to two years
GSI and GSIB's ratings are sensitive to the same factors that might drive a change in Goldman's VR.
SUPPORT RATING AND SUPPORT RATING FLOOR
Support Ratings and Support Rating Floors would be sensitive to any change in Fitch's view of support. However, since the Support Ratings and Support Rating Floors were downgraded in May 2015, there is unlikely to be any change to support ratings in the foreseeable future.
GS Bank's Institutional Support Rating of '1' is sensitive to any change in Fitch's views of potential institutional support for this entity.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid ratings are primarily sensitive to any change in Goldman's VR.
DEPOSIT RATINGS
Goldman's deposit ratings are sensitive to any change in the IDRs which are sensitive to any change in the VRs. Thus, deposit ratings are ultimately sensitive to any change in the VR.
Fitch has affirmed the following ratings:
Goldman Sachs Group, Inc.
--Long-term IDR at 'A' with a Stable Outlook;
--Long-term senior debt at 'A';
--Viability Rating at 'a';
--Short-term IDR at 'F1';
--Commercial paper at 'F1';
--Support at '5';
--Support Floor at 'NF';
--Market linked securities at 'Aemr';
--Subordinated debt at 'A-';
--Preferred equity at 'BB+';
--GS Finance Corp Senior Unsecured Medium-Term Note Program, Series E at 'A'.
Goldman Sachs Bank, USA
--Long-term IDR at 'A+' with a Stable Outlook;
--Long-term senior debt at 'A+';
--Long-term deposits at 'AA-';
--Short-term IDR at 'F1';
--Short-term debt at 'F1';
--Short-term deposits at 'F1+';
--Support Rating at '1'.
Goldman, Sachs & Co.
--Long-term IDR at 'A+' with a Stable Outlook;
--Short-term IDR at 'F1';
--Long-term senior debt at 'A+';
--Short-term debt at 'F1';
--Senior secured long-term notes at 'A+'.
--Senior secured short-term notes at 'F1'.
Goldman Sachs International
--Long-term IDR at 'A' with a Positive Outlook;
--Short-term IDR at 'F1';
--Senior secured long-term notes at 'A';
--Senior secured short-term notes at 'F1';
--Short-term debt at 'F1';
--Long-term senior debt at 'A'
Goldman Sachs International Bank
--Long-term IDR at 'A' with a Positive Outlook;
--Short-term IDR at 'F1'
--Long-term deposits at 'A';
--Short-term deposits at 'F1'.
Goldman Sachs AG
--Long-term IDR at 'A' with a Stable Outlook;
--Short-term IDR at 'F1'.
Goldman Sachs Bank (Europe) plc
--Long-term senior secured guaranteed debt at 'A';
--Short-term senior secured guaranteed debt at 'F1';
--Short-term debt at at'F1'.
Goldman Sachs Paris Inc. et Cie.
--Long-term IDR at 'A' with a Stable Outlook;
--Short-term IDR at 'F1'.
Ultegra Finance Limited
--Long-term senior debt at 'A';
--Short-term debt at 'F1'.
Goldman Sachs Financial Products I Limited
--Long-term senior unsecured at 'A'.
Goldman Sachs Capital I
--Trust preferred at 'BBB-'.
Goldman Sachs Capital II, III
--Preferred equity at 'BB+'.
Murray Street Investment Trust I
--Senior Guaranteed Trust Securities at 'A'.
Vesey Street Investment Trust I
--Senior Guaranteed Trust Securities at 'A'.
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