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Goldman Sachs’ Ratings Affirmed by Moody’s, Outlook Stable

Zacks

Ratings of The Goldman Sachs Group GS and its subsidiaries have been affirmed by the Moody's Investors Service. The outlook for the parent holding company has remained stable. Also, the company’s senior debt rating has been affirmed at A3.

However, outlook on the operating subsidiaries has been lowered from stable to negative. Ratings of deposits at Goldman Sachs Bank USA and Goldman Sachs International Bank has been affirmed at A1 while senior debt of Goldman Sachs International has been rated A1. The rating agency had also upgraded the baseline credit assessment of Goldman Sachs International Bank to baa2 from baa3.

Reasoning Behind the Ratings

The ratings affirmation is indicative of Goldman Sachs consistent quarterly performance despite pressure on revenues and wise decision-making measures. Capital ratios declined further in late 2017 due to the impact of tax reform as a result of which the company would be repurchasing lesser shares in the first six months of 2018 than what was authorized as part of its 2017 Capital Plan. Per Moody’s, this is likely to benefit the capital ratios.


On the other hand, negative outlook on the subsidiaries is reflective of the revenue challenges it faces in its Institutional Client Services segment (contributed 37% of revenues in 2017) due to low volatility in capital markets. Though efforts to control expenses, increasing revenues in other segments along with growth in loans balance had offset the negatives to some extent, Moody’s feels that Goldman Sachs’ loan growth strategy would have an impact on the stability of its earnings.

Further, Moody’s downgraded the outlook due to a decline in Goldman Sachs’ share of revenues in the sales and trading business among its peers, owing to a lesser diversified client base. However, the rating agency feels the decline is temporary. It expects that increase in volatility will boost trading volumes among its active investor clients and Goldman Sachs’ initiatives to build client base.

The outlook for the parent holding company has been left unchanged on the back of a potential benefit to its senior creditors of a lower severity of loss in the event of breakdown due to the significant increase in the company’s debt outstanding over the last two years. The larger amount of debt would provide greater loss absorption capacity at such times.

Per Moody's advanced loss-given-failure analysis, this will benefit the holding company’s senior creditors and could provide an additional uplift if it is sustained, going forward. While the increased loss absorption capacity would also benefit creditors of the operating subsidiaries, these ratings already receive the maximum uplift of three notches from the baseline credit assessment allowed under Moody's Banks rating methodology.

What Could Make Moody's Change the Ratings?

Ratings of Goldman Sachs' operating subsidiaries are not likely to be ungraded in absence of a significant reduction in the firm's dependence on earnings from its capital markets business. However, the rating outlook on the operating subsidiaries could return to stable from negative if loan growth slows and it recovers its lost market share in sales and trading without significantly increasing market risk. If, at the same time, the level of the holding company’s debt is sustained at current levels as a proportion of tangible banking assets, then its senior debt could be upgraded one notch.

On the flip side, Goldman Sachs' ratings could be downgraded if it is unable to recover the temporary loss of market share in its sales and trading businesses or continues to grow its loans aggressively at the same rate as it did in 2017. Also, if the firm fails to strengthen its capital ratios above the level reported at 2017 end, or if there are any indications of control or risk management failures, a marked increase in risk appetite, any deterioration in its liquidity profile, or a decline in profitability, ratings can be lowered.

The company’s shares have rallied 20% in the past six months, underperforming 28.9% gain of the industry.

The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

E*TRADE Financial Corporation ETFC has witnessed an upward estimate revision of nearly 1% in the last 30 days. Additionally, the stock has rallied more than 57% in the past year. It carries a Zacks Rank #2 (Buy).

Interactive Brokers Group’s IBKR earnings estimates for the current year have been revised nearly 1% upward over the last 60 days. Its shares have gained 92.5% in the past year. It sports a Zacks Rank of 1.

Moelis & Company MC witnessed an upward earnings estimate revision of 4.2% for the current year, over the last 30 days. The company’s shares have soared around 38.6% in a year’s time. It also carries a Zacks Rank of 2.

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