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Fitch Affirms Goldman Sachs' Long-Term IDR at 'A'; Outlook Stable
December 13, 2016 / 10:00 PM / a year ago

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

(The following statement was released by the rating agency) CHICAGO, December 13 (Fitch) Fitch Ratings has affirmed The Goldman Sachs Group, Inc.'s (Goldman) Long-Term and Short-Term Issuer Default Ratings (IDRs) at 'A/F1', and its 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 Fitch's affirmation of Goldman's ratings and the maintenance of the 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. In addition, Fitch has assigned Derivative Counterparty Ratings (DCRs) to Goldman Sachs Group and to Goldman Sachs & Co., and Goldman Sachs International as the entities have material derivatives activities as part of its roll out of DCRs to significant derivative counterparties in Western Europe and the U.S. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The DCR of each entity is equalized with each entity's Long-Term IDR. Goldman's investment banking franchise continues to be very strong and has consistently ranked near the top of league tables. Fitch believes that this positioning garners the company small price premiums in what is a very competitive marketplace. Goldman's ratings benefit from a strong market share in advisory though results may be slower than in prior years. Additionally, Fitch expects underwriting net revenue to remain good, 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 are variable in nature. For example, over the last year Goldman's trading businesses have exhibited volatility driven largely by marketwide weakness in the Fixed Income, Currency, and Commodities (FICC) segment during the first two quarters 2016. However, in the third quarter of 2016 (3Q16), Goldman and other peer banks benefited from higher volumes in many of their FICC businesses, which drove improved results. This volatility has been in part mitigated by cost reduction measures over the last year. Goldman's annualized return on equity (ROE) in 3Q16 was 11.2% due to the factors noted above; pulling up the company's annualized ROE over the first nine months of the year to 8.7%, which is still below Goldman's long-term averages. Performance over the course of this past year highlights the degree to which Goldman's capital markets revenues are influenced by market conditions and client confidence to transact, implying a higher inherent cyclicality to Goldman's core activities relative to some other more broadly diversified peer institutions, which creates some limitation on Goldman's upward rating potential. Goldman's capital ratios remain good, with the company's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio at 11.9% at 3Q16. Goldman's Fitch Core Capital (FCC) ratio as of 3Q16 was 12.3%. Goldman's reported CET1 is inline 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, whose funding profiles 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 added $16 billion of deposits to the balance sheet and should provide an avenue for future deposit growth. That said, as of 3Q16, deposits constituted only 15.7% of total liabilities, below the proportion of many peer institutions. Notably, Goldman is using some of its growing deposit funding for its recently launched consumer lending platform, "Marcus By Goldman." This product 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) increased to a solid $214 billion, or 24.3% of total assets at 3Q16 up from $199 billion or 23.1% of total assets at year-end (YE) 2015. DERIVATIVE COUNTERPARTY RATING Fitch has assigned a derivative counterparty rating (DCR) to Goldman's parent company, its main U.S. broker-dealer Goldman Sachs & Co. (GSCO) and its main international broker-dealer Goldman Sachs International (GSI). The DCR for the parent, GSCO, and 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 The Long-Term IDR of GSBUSA 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, the 'F1' Short-Term IDR of GSBUSA 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. Goldman's main broker-dealer, GSCO's Short-Term IDR of 'F1' reflects the view that there is less surplus liquidity at this entity, particularly given its greater reliance on the holding company for liquidity. The senior secured debt ratings of GSCO 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 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 revised the entities' Positive Outlooks to Stable since further clarity on host country internal TLAC proposals continues to be delayed. At this time, it remains unclear whether the IDRs will benefit from sufficient junior debt buffers at these entities. The senior secured debt rating of GSI 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 The Support Rating (SR) and Support Rating Floor (SRF) for Goldman 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. 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. That said, ratings are likely limited to the 'A' rating category reflecting the cyclicality of many of Goldman's business activities and its primary reliance on wholesale, confidence-sensitive funding sources. Downward pressure on the VR could result from a material loss, 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, to the extent that 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 IDR, 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 (for example as recently proposed in the EU) 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 Following the Rating Outlook revision to Stable, 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 the long-term IDR of GSIB 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' 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 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'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'. Fitch has affirmed the following ratings and revised the Rating Outlook to Stable from Positive: Goldman Sachs International --Long-term IDR at 'A' Outlook revised to Stable from Positive; --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 revised to Stable from Positive; --Short-Term IDR at 'F1' --Long-term deposits at 'A'; --Short-term deposits at 'F1'. Fitch assigns the following rating: Goldman Sachs Group, Inc. Goldman Sachs International --Derivative Counterparty Rating 'A(dcr)'. Goldman, Sachs & Co. --Derivative Counterparty Rating 'A+(dcr)'. 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