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Fitch Affirms Goldman Sachs' Long-Term IDR at 'A'; Outlook Stable
September 28, 2017 / 9:15 PM / 18 days ago

Fitch Affirms Goldman Sachs' Long-Term IDR at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 28 (Fitch) Fitch Ratings has affirmed The Goldman Sachs Group, Inc.'s (Goldman) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A'/'F1', and Viability Rating (VR) at 'a'. The Rating Outlook is Stable. The rating affirmations have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs). KEY RATING DRIVERS IDRs, VR, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY Goldman's ratings and Stable Outlook reflect the company's strong franchise, differentiated risk management culture, strong capital ratios, and solid liquidity position. Rating constraints include Fitch's view of the cyclicality of the company's business model and higher reliance on wholesale funding than some peer institutions. Goldman's investment banking franchise continues to be very strong and has consistently ranked near the top of league tables. Goldman's ratings benefit from a strong market share in advisory, though future results may be softer than in prior years due to continued policy uncertainty. Additionally, Fitch expects underwriting net revenue to remain solid, particularly as Goldman continues to focus on growing its market share in debt underwriting. While Goldman has a strong market position in many trading businesses, it is also noteworthy that results from trading have been variable. Over the last year Goldman's trading businesses have exhibited variability driven largely by low market volatility, which has adversely impacted Goldman's Fixed Income, Currency, and Commodities (FICC) segment more so than peer banks during the first two quarters of 2017. For example, in 2Q17, FICC net revenue was 40% lower than last year's second quarter due to significantly lower net revenues in interest rate products, commodities, credit products, and currencies only partially offset by higher net revenues in mortgages. Goldman's annualized return on equity (ROE) through the first half of 2017 was 10.1%; however, excluding the benefit of a $485 million reduction in the provision for taxes, Goldman's annualized ROE through the first half of 2017 would have been 8.8%, still a good result, but below the company's long-term averages. Goldman has identified significant revenue opportunities to grow revenue by $5 billion over the next three years. The biggest driver of this strategy is additional lending and financing efforts, followed by improvements in its FICC business and investment management business. Depending on how well it is able to execute on its lending and financing strategy as well as its investment management strategy, Goldman could reduce a small proportion of the variability in the company's operating results. Goldman's capital ratios remain good, with the company's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches at 12.2% at 2Q17. Goldman's Fitch Core Capital (FCC) ratio as of 2Q17 was 12.5%. Goldman's reported CET1 is in-line with GTUB peer medians, which Fitch views as appropriate and supportive to the ratings. Goldman's ratings also incorporate the company's more significant reliance on wholesale funding than most other GTUBs, which have funding profiles that are typically core in nature and skewed to a larger proportion of low-cost and sticky retail deposit funding. Fitch would note, however, that in April 2016 Goldman closed on the purchase of General Electric's online deposit platform, which has provided an avenue for future deposit growth. Total deposits have grown over the last year and as of 2Q17 amount to $125.5 billion, or 14% of total assets and 22% of total funding. However, this proportion of deposit funding is below that of many peer institutions. Notably, Goldman is using some of its growing deposit funding for its corporate lending portfolio as well as its recently launched consumer lending platform, "Marcus By Goldman." This product, while much smaller than the corporate loan portfolio, is Goldman's first foray into consumer lending, although Fitch expects the level and growth of these consumer loans to be very measured. Fitch does not expect this segment to be a meaningful rating driver for some time given its small size. Fitch views Goldman's overall liquidity position as conservative. Goldman's Global Core Liquid Assets (GCLA) was a solid $221 billion, or 24.4% of total assets. DERIVATIVE COUNTERPARTY RATING Fitch's derivative counterparty rating (DCR) on Goldman's parent company, its main U.S. broker-dealer Goldman Sachs & Co. (GSCO), and its main international broker-dealer Goldman Sachs International (GSI), is equalized with Goldman's IDR for each entity, reflecting Fitch's view that derivative counterparties to Goldman will rank equally to other senior unsecured creditors. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Goldman are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile, 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. Goldman's subordinated debt is rated one-notch below Goldman's VR, its preferred stock is rated five notches below the VR (which encompasses two notches for non-performance and three notches for loss severity), and its trust preferred stock is rated four notches below the VR (encompassing two notches for non-performance and two notches for loss severity). LONG- AND SHORT-TERM DEPOSIT RATINGS U.S. deposit ratings of Goldman Sachs Bank USA (GSBUSA) are one-notch higher than senior debt ratings of GSBUSA, reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. Goldman Sachs International Bank's (GSIB) 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. SUBSIDIARY AND AFFILIATED COMPANY GSBUSA's Long-Term IDR benefits from an institutional Support Rating of '1', which indicates Fitch's view that the propensity of the parent company to provide capital support to the operating subsidiaries is extremely high. Additionally, the Long-Term IDRs for the material U.S. operating entities, GSBUSA and the main broker dealer, Goldman Sachs & Co. (GSCO), are rated one-notch above Goldman's Long-Term IDR to reflect Fitch's belief that the U.S. single point of entry (SPOE) 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, reduce the default risk of these domestic operating subsidiaries' senior liabilities relative to holding company senior debt. Additionally, GSBUSA's 'F1' Short-Term IDR is 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 the company's greater reliance on wholesale funding than more retail-focused banks. GSCO's 'F1' Short-Term IDR reflects the view that there is less surplus liquidity at this entity, particularly given its greater reliance on the holding company for liquidity. GSCO's senior secured debt ratings are equalized with the IDR of the entity as Fitch does not have on-going visibility into the collateral underlying the notes. MATERIAL INTERNATIONAL SUBSIDIARIES Goldman Sachs International (GSI) and GSIB are wholly-owned subsidiaries of Goldman. Goldman's IDRs and debt ratings are aligned with the bank holding company's ratings because of their core strategic role in and integration into Goldman. GSI's senior secured debt rating is equalized with the IDR of the entity as Fitch does not have on-going visibility into the collateral underlying the notes. SUPPORT RATING AND SUPPORT RATING FLOOR Goldman's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that senior creditors cannot rely on receiving 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 has now sufficiently progressed to provide a framework for resolving banks that is likely to require holding company senior creditors to participate in losses, if necessary, instead of or ahead of the company receiving sovereign support. As previously noted, GSBUSA has a SR of '1', which reflects Fitch's view of an extremely high probability of institutional support for the entity. GSBUSA does not have a VR at this time, given Fitch's view of its more limited role within the group structure. RATING SENSITIVITIES VR, IDRs, SENIOR DEBT, AND DERIVATIVE COUNTERPARTY RATING In Fitch's view, Goldman's VR is solidly situated at its current rating level and there is limited ratings upside. However, if the company is able to further improve both its returns on equity and the stability of its earnings profile while 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, though not expected could result from a material loss and significant increase in leverage, or deterioration in funding and liquidity levels. Similarly, any unforeseen outsized or unusual fines, settlements or charges levied could also have adverse rating implications, particularly if permanent franchise damage is incurred as a result. Additionally, any sizable risk management failure could result in negative pressure on Goldman's ratings. Additionally, and while not expected, if the company's operating performance, as measured by return on equity, is below peers or the company's historical averages for an extended period, this could ultimately lead to negative ratings pressure over a longer-term time horizon. Fitch notes that Goldman, GSCO, and GSI's Long-term IDRs, senior debt and DCR are equalized with the VR at the holding company. Thus, Goldman's IDR, senior debt ratings and DCR would be sensitive to any changes in Goldman's VR. DERIVATIVE COUNTERPARTY RATING DCRs are primarily sensitive to changes in the respective issuers' Long-Term IDRs. In addition, they could be upgraded to one notch above the IDR if a change in legislation creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUBSIDIARIES AND AFFILIATED COMPANIES As noted, GSBUSA carries an institutional support rating of '1', as Fitch believes support from the parent would be extremely highly likely. Additionally, GSBUSA and GSCO's Long-term IDRs are rated one-notch higher than the parent holding company's IDR because each subsidiary benefits from the structural subordination of holding company TLAC, which effectively supports senior operating liabilities of each subsidiary. Any change in Fitch's view on the structural subordination of TLAC with respect to GSBUSA and GSCO could also result in a change to each entity's Long-Term IDR. MATERIAL INTERNATIONAL SUBSIDIARIES GSI and GSIB's ratings are sensitive to the same factors that might drive a change in Goldman's VR. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid ratings are primarily sensitive to any change in Goldman's VR and secondarily to a change in Fitch's recovery expectations for such instruments. LONG- AND SHORT-TERM DEPOSIT RATINGS GSBUSA's deposit ratings are sensitive to any change in the entity's Long-Term IDR, which is sensitive to any change in the VR of the parent company given the institutional support rating of '1'. Thus, deposit ratings are ultimately sensitive to any change in Goldman's VR or to any change in Fitch's view of institutional support for GSBUSA. GSIB's deposit ratings are sensitive to any change in its Long-Term IDR, which is sensitive to any change in the VR of the parent company given that Fitch has equalized GSIB's Long-Term IDR with that of the parent company given its core nature in Goldman's operations. SUPPORT RATING AND SUPPORT RATING FLOOR SRs and SRFs would be sensitive to any change in Fitch's view of support. However, since these ratings were downgraded to '5' and 'No Floor', respectively, in May 2015, there is unlikely to be any change to these ratings in the foreseeable future. GSBUSA's institutional support rating of '1' is sensitive to any change in Fitch's views of potential institutional support for this entity from the parent company. Fitch has affirmed the following ratings: Goldman Sachs Group, Inc. --Long-Term IDR at 'A'; Stable Outlook; --Long-term senior debt at 'A'; --Derivative Counterparty Rating at 'A(dcr)'; --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+'; Outlook Stable; --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+'; Outlook Stable; --Derivative Counterparty Rating at 'A+(dcr)'; --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'; Outlook Stable; --Derivative Counterparty Rating 'A(dcr)'; --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'; --Senior market linked notes at 'Aemr'. Goldman Sachs International Bank --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR at 'F1' --Long-term deposits at 'A'; --Short-term deposits at 'F1'. Goldman Sachs AG --Long-Term IDR at 'A'; Outlook Stable; --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'F1'. Goldman Sachs Paris Inc. et Cie. --Long-Term IDR at 'A'; Outlook Stable; --Short-Term IDR 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+'. Goldman Sachs Finance Corp International LTD --Senior debt program at 'A'. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Meghan Neenan, CFA Managing Director +1-212-908-9121 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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