Fitch: Goldman's Performance Remains Solid

Second quarter 2013 (2Q'13) operating profits for The Goldman Sachs Group, Inc. (Goldman) were generally in line with Fitch Ratings' expectations: moderately lower than a strong 1Q'13 but still favorable. Goldman maintained conservative liquidity and posted a moderately higher Basel III capital ratio. These latest results have no rating implications (idrs:'A/F1' Stable Outlook). As expected, total revenues decreased from a robust 1Q'13 level, but compared favorably year-over-year. Revenues in 1Q'13 benefitted from positive market conditions in both the fixed income and equities combined with seasonal strength. As 2Q'13 progressed, market dynamics remained generally favorable in April and May, but deteriorated in June. The last month of 2Q'13 was characterized by higher interest rates and credit spreads combined with a downturn in equities. Consequently, client activities slowed and negative inventory marks affected results. Institutional client services remained the largest contributor to revenues at 50% of total. Within this segment, fixed income activities were affected the most by tougher markets in June. The currency business benefited from greater volatility (particularly in Asia) and the equities business remained steady compared to 1Q'13. Trading VaR ticked up sequentially in view of higher currency volatility, but remained well contained particularly in view of more volatile markets generally in June. Investment banking revenues remained in line with 1Q'13 thanks to continued strength in debt underwriting activities combined with steady advisory revenues. Going forward, debt underwriting activities could weaken if the higher interest rates and credit spreads are sustained. In addition, activities tend to slow down in the summer months. Revenues in the investing and lending segment remained quite positive for the quarter, but declined from a robust 1Q'13. A highlight was the sale of Goldman's remaining stake in ICBC. The contribution from this area tends to be volatile from quarter to quarter depending on moves in equity markets and credit spreads. Asset management revenues were moderately higher on a linked quarter basis and in line with year ago levels. Global core excess liquidity, including unencumbered, highly liquid securities and cash, stood at a healthy $183 billion (20% of total assets) and averaged $180 billion during the latest quarter versus $181 billion in 1Q'13. Liquidity has been consistently maintained at these conservative levels in recent years. Under Basel III, Goldman's Tier I common ratio was approximately 9.3% compared with approximately 9% at end-1Q'13. This ratio benefited from the sale of a majority stake in the reinsurance business, which was less capital efficient under Basel III. This estimated ratio is comfortably above the 8.5% minimum (7% plus the 1.5% G-SIFI buffer) and well within reach of Goldman's 9.5% target. Fitch believes Goldman is comfortably positioned to meet the new proposed supplementary leverage ratio both at the holding company and at Goldman Sachs Bank USA.