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Goldman Sachs (GS) Ratings Placed Under Review by Moody's

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The Goldman Sachs Group’s (GS - Free Report) A3 senior unsecured debt and issuer ratings and the Prime-2 short-term ratings have been placed on review for upgrade by the Moody's Investors Service. Also, other ratings of Goldman Sachs and its rated subsidiaries have been affirmed by the ratings agency.

Notably, the outlook of Goldman has changed to rating under review from stable, while the outlook for the group's rated operating subsidiaries remains stable.

Ratings Rationale

Per Moody’s article, Goldman’s ongoing and expected future shift in business mix, improvements in regulatory oversight and resolution planning post 2008 financial crisis, and developments in resilience and transparency of the capital markets infrastructure made the ratings agency consider its decision to reduce at-failure asset loss rate assumption in the advanced loss given failure (LGF) analysis.

Also, Moody’s noted that one of the points while reviewing Goldman Sachs' ratings would be its exposure to capital markets activities and the confidence-sensitivity of these activities. This is because it can lead to employee attrition and client desertion in case the company experiences distress.

In case Moody’s finds LGF to be lower than Goldman’s peers, senior unsecured debt and issuer ratings of the parent holding company could be upgraded by a notch to reflect the improved measure of asset recovery values at failure that would accrue to this class of creditors. Another point to consider while reviewing is likely future level of debt outstanding.

Further, affirmation of all other ratings and assessments of Goldman and its rated subsidiaries, including the baa1 Baseline Credit Assessment for Goldman Sachs Bank USA, is reflective of the firm's stronger capital ratios. It also reflects its resilient profitability aided by strong cost discipline and an expected gradual reduction in its reliance on wholesale funding as it continues to grow its deposit business.

Also, per Moody’s, the stable outlook for Goldman's rated operating subsidiaries reflects the ratings agency’s expectation that the firm will continue to report solid profitability and capital ratios above most of its peers and will maintain its improved funding profile. Also, its robust risk management and controls framework and strong client relationships will allow the firm to continue to generate lower earnings volatility than at many of its peers.

Factors Leading to Change in Ratings

The ratings agency might upgrade Goldman Sachs' A3 senior unsecured debt and issuer ratings and Prime-2 short-term ratings if Moody's concludes its review by lowering 13% at-failure asset loss rate assumption for the firm.  Also, if it concludes that a significant fall in debt outstanding is less likely in the medium term, it may raise ratings.

Also, ratings can be placed for upgrade if the firm's tangible common equity ratio were likely to remain above 14% of advanced approaches risk-weighted assets, its reliance on market funds were to fall below 40% of tangible banking assets, and its net income were to exceed 1% of tangible assets, all on a sustainable basis. The ratings could also be raised if the firm's strategic initiatives succeed in enhancing its earnings stability and increasing its earnings diversification.

On the other hand, ratings can be downgraded if the firm's tangible common equity ratio declines below 12% or net income/tangible assets declines below 0.5%, and if the firm is unlikely to be able restore either over the near term. Also, significant increase in the firm's earnings volatility, if it suffers from a significant loss of clients or a material erosion of capital due to reputational or legal concerns, or if there are any indications of control or risk management failures, a marked increase in risk appetite, or any deterioration in liquidity profile can create downward pressure.

Shares of the company have gained 11.8% in the past six months compared with 22.9% growth registered by the industry.

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

In the past few months, Moody’s Investors Service has affirmed ratings and outlook for many finance sector companies. Amid the coronavirus pandemic and the resultant economic uncertainties, the rating agency has affirmed the ratings and maintained stable outlooks for Eaton Vance , FirstCash (FCFS - Free Report) and SLM Corporation (SLM - Free Report) .

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