Goldman Sachs Case Study
Professor Alistair Milne
23rd November 2017
“Explain the role of the Goldman Sachs Group in the financial system. Assess its exposure and performance from 2009-2016, after the global financial crisis, including a comparison with peers. How well did it do?”
1. Goldman Sachs Group, Inc. The Goldman Sachs Group, Inc. is a leading global finance firm that provides services in investment banking, investment management and security markets. Founded in 1869, the firm is based in New York but maintains branches in other international financial centres, including London, Frankfurt, Tokyo and Hong Kong (Goldman Sachs, 2017). The firm is listed on the New York Stock Exchange. As of 2017, the …show more content…
• UBS: competes on trading, asset management and investment banking.
Table 3 shows 2016 ratios for Goldman Sachs and its competitors. Goldman Sachs performed slightly better than most observed competitors in 2016, with a return on equity (ROE) of 8.48%. Only JPMorgan did better, with a ROE of 9.86%. The 6.03% average ROE was skewed due to Deutsche Bank’s bad performance. Goldman Sachs owed its performance to its efficient cost structure: its cost to income ratio, 63.27%, was only surpassed in efficiency by JPMorgan’s 58.63%.
With an equity to assets ratio of 10.16%, Goldman Sachs showed a relative high capital base compared to the 7.94% group average. This was confirmed by the firm’s tier 1 ratio, that is the ratio of equity capital to risk-weighted assets: with a value of 16.10% Goldman Sachs would be classified as well-capitalised according to Basel III regulation (Bis.org, 2011).
In terms of assets quality, Goldman Sachs’ ratios raised some concerns in 2016. Impaired loans to gross loans ratio was the group highest at 4.26%. Furthermore, loan loss reserve appeared to be inadequate, being only 23.81% of impaired loans, compared to a group average of …show more content…
The firm’s post-crisis recovery showed a sound pattern over the observed period. Return on equity rose 3.92% from 2011 to 2012 and then remained stable averaging 10.31% until 2015, when it dropped to 7.14%. Given the similarity between 2014 and 2015 total net revenues (cf. Table 1), the reasons behind the ROE fall are to be found in the cost to income ratio, which rose 10.49% in 2015. This rise was due to increased operational expenses, mostly caused by a $3.4bn litigation provision to the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (Goldman Sachs, 2015). ROE returned to grow in 2016, although only slightly because of weaker operating results (cf. Table