Goldman Sachs' (GS - Free Report) long-term issuer and senior unsecured debt ratings have been affirmed at A3 by Moody’s Investors Service, the rating division of Moody’s Corporation (MCO - Free Report) . Notably, the company’s outlook has remained stable.
Further, ratings of deposits at the company’s subsidiaries – Goldman Sachs Bank USA, Goldman Sachs Bank Europe SE and Goldman Sachs International Bank – have been affirmed at A1, while senior debt of Goldman Sachs International has been rated A1. Also, the outlook on the subsidiaries has been upgraded to stable from negative.
Reasons for Affirmation
The ratings affirmation was primarily driven by Goldman’s robust capital ratios, prudent cost management, continued earnings stability and projected gradual decline in the company’s dependence on wholesale funding as “it continues to grow its deposit business.”
Additionally, the company’s strategic review (that began in 2018), which is looking to identify growth prospects and respond to pressure in certain capital markets businesses, will go a long way in supporting profitability. The primary objectives include increase in more stable revenue sources, strengthening operating efficiency and utilizing lower-cost deposit funding.
Per Moody’s, implementing these are expected to take significant time while achieving those will be a credit positive for the company.
Reiteration of outlook by Moody’s indicates the change in Goldman’s funding strategy. There has been a decline in amount of senior outstanding debt levels, which is expected to continue as the company plans to increase its funding from deposits.
Further, Moody’s took into consideration Goldman’s “strong risk management and controls” as a major credit positive. Despite the U.S. Department of Justice’s (“DOJ”) allegations that the company’s risk management controls were not in good shape following revelation of the issues at 1MDB, Moody’s noted that the company has undertaken several measures to “strengthen its local and global compliance functions.”
Further, the rating agency does not expect Goldman’s impending settlement (which may include fines/penalties) with the DOJ related to 1MDB matter to weaken its credit profile.
What May Lead to Change in Ratings?
Moody’s may upgrade Goldman’s baseline credit assessment (BCA) of baa1 if the company’s tangible common equity (TCE) ratio will likely remain above 13% and reliance on market funds were to decrease to below 40% of tangible banking assets. Also, success of its strategic review in strengthening earnings stability and earnings diversification could lead to BCA upgrade.
On the other hand, fall in TCE ratio below 12%, significant decline in profitability, rise in earnings volatility, deterioration in liquidity levels and/or decrease in capital base due to “reputational or legal concerns” may lead Moody’s to downgrade Goldman’s ratings.
Goldman’s well-diversified business and focus to capitalize on growth opportunities through strategic moves will strengthen the overall business. Further, the company’s cost-control efforts will continue to improve operating efficiency.
However, muted trading activities will likely hamper top-line growth. Also, legal hassles (mainly related to 1MDB matter) remain a major near-term headwind.
Shares of Goldman have rallied 19.2% so far this year, outperforming the industry’s rise of 7.6%.
Currently, Goldman carries a Zacks Rank #3 (Hold).
Stocks to Consider
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