Goldman Sachs International Business Environment - Essay Example

Goldman Sachs International of Goldman Sachs International Introduction Goldman Sachs International Company is afinancial service provider to clients across the globe. The company has its major operation in the region of Europe, Middle East and Africa. The present report illustrates about the business environment, operations and recent performance of Goldman Sachs in order to attain overview about the performance of the company within the industry. It provides a brief overview about the business environment focusing on the trends prevailing within the financial service industry. Moreover, the description about the operations with respect to fund management practices, risk management and revenues are discussed. Financial indicators of the company and industry are used to determine financial trend and performance of the company. Business environment Economic environment of the business was recorded mixed in the early period of 2014 globally. Market of the company was improved in the second quarter of 2014. The first quarter of 2014 was proved to be the declining period for emerging market assets. The assets were affected by the declining position of GDP in China (Mandis, 2013). Another perspective was the political tension going on in Ukraine and Russia. The two problems were significantly controlled in the second quarter of 2014. Real GDP of Japan was accelerated in the first quarter and shown in the report of second quarter. In all the cases the effort was shown in the second quarter of 2014 when there was a consumption tax hike on consumer spending (McEvoy, 2014). In the first quarter, it was noticed that global equity price was improved, interest rate fell down and the credit spreading was contracted. The levels of Volatility were noticed declining further. Equity and debt was strong in the first quarter of 2014. Industry-wide announced that the acquisitions and mergers had increased in the first three months but the situation was somehow opposite to that. The mergers and equity were decreased as compared to the period of first quarter of 2013 (The Goldman Sachs Group, Inc., 2014). Europe and Other Countries In the case of European countries, real GDP of the country was increasing to some extent in the first six months of 2014. The European Central Bank noticed inflation in the economy and reduces the rate of interest. Central bank of Europe also announced to increase lending to private sectors and includes targeted long term refinancing operations. The currency of Europe was depreciated by 1 percent because there was an increased in unemployment. The domestic demand in United States was low in the first quarter. The Bank of England fixed its rate at 0.5 % that could be adjusted by them because of the available capacity in their economy. The British pound was appreciated by 3 percent against US Dollar in the period of first three months of 2014. Euro Stocks 50 increased by 4 percent, DAX Index and CAC 40 Indexes increased by 3 percent in the first quarter of 2014. Operations of the Firm The operations of the firm include advices for acquisitions, underwriting services, assets management and acquisition and prime brokerage. Goldman Sachs Group Inc. is a multinational company in United States. It provides services in most of the parts of the world. The corporation is engaged in assets management and acquisition of securities along with a primary brokerage. The Firm regarding the purchase and sales of the securities also provides advisory services. Investment management of the Firm is strong and the brokerage and other transaction services to individuals and families are effective. The investment of the company is effective and its record shows that the individuals and families are deriving significant returns from the investment made in the Firm (Edlich, 2000). Products of the Firm The firm is engaged in investment banking, investment management and financial services with its clients. The firm has subsidiaries including GSI that provides the services of asset investments management and financial services in most part of the world (Labatt & White, 2003). Clients Its clients include corporations, governments, financial institutions and high-net-worth individuals. The firm is a primary dealer of securities in the market of United States. It is included in the list of investments banks all over the world. The firm is effective in assets management and acquisition of securities and provides services globally. The Firm has its customers in United States, China and Europe (Stowell, 2010). Partners of the Firm The firm has added 78 new partners to increase their business including individuals and corporations. There are now 467 partners engaged with the firm. The important partners of the firm include Acharya institute of Management & Sciences, American University in Cairo and others. Main competitors of the firm are JPMorgan Chase & Co., Merrill Lynch & CO., and Morgan Stanley. The regulators of the firm are Prudential Regulation Authority and Financial Conduct Authority (Ellis, 2009). Regulators of the Firm The regulators that regulate and manage the operations of the firm and ensure that the company is working according in the legal restrictions include its parental company. The parent company is The Gold Sachs Group, Inc. Group Inc. is a holding company and Board of Governors of Federal Reserve System regulates it. The regulators are responsible for the operations of the firm that are done by the Firm (Rachman, 2011). Operations Goldman Sachs International operates in the financial service industry. The main operations of the company involve the choices it provides to global clients and leading participants in global financial market. Goldman Sachs have four dominant business segments, that are, Investment Banking, Institutional Client Services, Investing and Lending and Investment Management (Alice C. Lee, 2009). Funding and Sources Since, Goldman Sachs is a financial services provider. The primary sources of company are its secured financing, intercompany unsecured borrowing and external unsecured borrowings. The company raises its funds by selling its different products and services to global clients. The following are the funding sources of Goldman Sachs: Collateralized Financing Debt Securities Issues including securitized derivative products. Intercompany unsecured loans from the group and the other affiliated financial services companies. The company raises its funds through selling these products itself of the third party distributors to its clients across the globe. In addition, the company make use of Secured Funding that are specifically used for the funding of securities but not for the inclusion of GCE that is obtained through collateralized financing and long and short term debt securities (Alice C. Lee, 2009). Moreover, Intercompany unsecured borrowings are also one of the major sources of revenues from the company. Goldman Sachs sources of revenues also involve external unsecured borrowing that includes debt securities, bank loans and overdraft (Baker & Powell, 2009). Revenues The company generates its revenues and profits mainly from the transaction from the third parties, foreign exchange, securities, fee and commissions, and other financial instruments. The fee from the financial advisor services varies market to market and involves brokerage, clearing and exchange fee. The volume of revenue generated from the different operational segment varies on the basis of the external environment (Alice C. Lee, 2009). The financials of the company depict that Investment Banking generate higher revenues as compared to investing and lending segment. In addition, the statement reflect that the company has generate profits on the taxes because of the increase in the pre-tax profits, decline in the effective tax rate and reduction in UK’s corporate tax rate (Bull, 2007). Sources of Revenues In the investment banking sector, the revenues are generate from financial advisory and Underwriting. The institutional client services generates revenues on the basis of the volume of transaction for the client from spread and fees obtained through fixed income, currency and commodities client execution (Labatt & White, 2003). The sources of revenues from the Investing and Lending segment are associated with the direct investments and investing services provided to the fund managed (Cadle, Paul, & Turner, 2010). In its investment management segment the revenues are generated from the wealth advisory services, portfolio management, financial counseling, brokerage and other transactions to the high net worth individuals and families. Risk Management Goldman Sachs operates in the different financial market, thus adherent variety of violation and external stimuli. The risk of the companies operating in the financial markets is relatively high. Goldman Sachs is exposed to market, liquidity, credit, operations, legal, regulation and reputation risks that are consistent time to time (Palepu & Healy, 2012). Liquidity risk management The companies operating in the financial services industry are exposed to higher volatility. The failure of the companies occurs because of insufficient liquidity. Goldman Sachs ensures comprehensive and conservative set of liquidity and funding policies that are implied for the company. Liquidity risk is managed on the basis of the excess liquidity, asset-liability management and contingency funding plan. The company implied these methods to sustain its liquidity measures. In addition, strict control and monitoring regarding credit ratings of the firm is done. Market Risk management Goldman Sachs manages market risk through keeping monitoring the changes in the inventory that are valued at its fair value and related gain and losses. The company makes use of interest rate risk, equity price risk, and currency risk, commodity price risk that are focused on the diverse exposures, control, position sizes and economic hedges. Credit Risk management Credit risk evolves on the basis of the deterioration prevailing in the industry that is subjected to the credit quality of the issuer, securities and instruments withheld by the organization. Goldman Sachs is concerned to maintain its credit ratings through developing parameters for its credit policies for the Group. The company manages its credit risk through developing high level of communication with its customers, countries, product and industries. It is mainly done through assessing he counterparty’s financial positioning and business profile and developing strong credit rating within the company. Operational Risk management The company is exposed to operational risks involves different internal and external events that involve, clients, products, business practices, process management, employment practices, business disruption, damages to physical assets, internal fraud and external fraud. The operational risks are managed through analyzing and assessing accurate information and control on the culture on daily basis (Abugri, 2008). Performance Sector Profitability ratios: Net Margin % 21.34 22.59 23.39 Return on Equity % 10.66 10.98 11.15 Return on Assets % 0.78 0.84 0.91 Changes in Net Revenue: Increase in net revenue of company reflects the higher net revenue in investment banking and investment banking. Net revenue from financial advisory was 37% higher than the half-year ended 30 June 2013, amounting to US$ 233 million. Net revenues in fixed income, currency, and commodity client execution were 4% lower than the half-year ended 30 June 2013. This was partially offset by higher net revenues in mortgages and interest rate products. Institutional client services generated 4% lower revenue as compared to half year ended 30 June 2013. This was mainly due to the reason that institutional client services operated in a challenging environment in first half of 2014 and volatility levels were low. Net revenue from investment banking in half year ended June 30 2014 were US$ 856 million, which is 45% higher than the half year, ended June 30 2013. Higher net revenues in equity under writing and debt under writing resulted in net under writing revenues of US$ 623 million which is 48% higher than the half year ended June 30 2013. Net revenue in equities was US$ 721 million, 7% lower than the half-year ended 30 June 2013. This was also partially offset by the higher fees and commissions and higher revenues in security services. Changes in direct cost of employment Administrative expenses primarily consist of direct cost of employment, which shows increase of approximately 18% in the year ended June 30 2014 as compared to year ended June 30 2013. This increase in cost of employment is consistent with the subsequent increase in net revenue. Also, company’s staff for the half year ended June 30 2014 was 5485, which is 1% higher than the half year ended June 30 2013. Changes in other administrative expenses Other administrative expenses for half year ended June 30 2014 were US$237 million, approximately 27.30% less than the administration expenses of half year ended June 30 2013 (US$ 326 million). This decrease was primarily due to the lower miscellaneous taxes, which were partially offset by the higher professional fees. Interest payable and similar charges on long term subordinated loans decreased significantly by 32% approximately in half year ended June 30 2014. This decrease was due to the reduction in lo n germ subordinate loans in half year ended June 2014 as compared to half year ended June 2013. Investment Ratios analysis: Earnings per Share USD 15.46 17.07 17.07 Dividends USD 2.25 2.05 2.25 Company Industry Dividend Yield (%) 1.30 1.60 Dividend Yield - 5 Yr. Avg. (%) 1.30 1.60 Dividend 5 Yr. Growth Rate (%) 20.71 27.68 The company announced in March 2015 that it intends to increase its quarterly common stock dividend and the issuance and redemption of other capital securities. The firm intends to increase its quarterly common stock dividends by 5 cents a share to $0.65 per share. This decision is subject to approval of board of directors. Summary of company’s Revenues and dividends for 3 fiscal years is given below: March 2014 2013 2012 Revenue $9,328(m) $10,090(m) $9,949(m) EPS 4.02 (3/31/2014) 4.29 (3/31/2013) 3.92 (3/31/2012) Dividends 0.55 0.5 0.35 June Revenue $9,125(m) $8,612(m) $6,627(m)  EPS 4.11 (6/30/2014) 3.7 (6/30/2013) 1.8 (6/30/2012) Dividends 0.55 0.5 0.46 September Revenue $8,387(m) $6,722(m) $8,351(m) EPS 4.56 (9/30/2014) 2.9 (9/30/2013) 2.85 (9/30/2012) Dividends 0.55 0.5 0.46 December (FYE) Revenue $7,688(m) $8,782(m) $9,236(m) EPS 4.38 (12/31/2014) 4.57 (12/31/2013) 5.56 (12/31/2012) Dividends 0.6 0.55 0.5 Totals Revenue $34,528(m) $34,206(m) $34,163(m)    EPS 17.07 15.46 14.13    Dividends 2.25 2.05 1.77 P/E ratio of Goldman is lower than the industry average, which shows that investors are expecting less earning growth in Goldman as compared to similar companies in the industry such as JP Morgan. Company’s P/E ratio earnings are ranked at number 12 in financial sector. However, it is number one in industry, which shows the moderate growth potential of a company. This fact can be seen below in the stability of P/E ratio of company for last 5 quarter. PE (TTM) Ratio: 11.09 10.39 10.59 10.74 11.09 Due to EPS decline of 4.78%, company’s P/E ratio has been increased to 11.09 as compared to III quarter 10.39. In last 5 years, Company’s P/E ratio has been significantly greater than the industry average. Below are the comparisons of P/E ratio of Company with industry average. Goldman Industry P/E High - Last 5 Yrs. 38.90 23.20 Conclusion From the above analysis, it can be concluded that the Goldman Sachs has remained efficient and profitable during the period (2012-2014). The comparative analysis of the company with respect to the industry’s trend depict that the company’s performance has remained satisfactory. The company deploys effective risk management strategies and cost management that has allowed the company to reduce its costs and increase its overall profits. In addition, the reduction in the global economic conditions and the consumer behavior has restored due to which the investment in the banking sector has significantly affected profits and revenues of the company. However, the overseas operations of the company are subjected to changes in the economical and political changes in emerging markets. Reference List Abugri, B. A. (2008). Empirical Relationship between Macroeconomic Volatility and Stock Return: Evidence from Latin American Markets. International Review of Financial Analysis , 17, 396-410. Alice C. Lee, J. C. (2009). Financial Analysis, Planning and Forecasting: Theory and Application. London: World Scientific. Baker, H. K., & Powell, G. (2009). Understanding Financial Management: A Practical Guide. Hoboken: John Wiley & Sons. Bull, R. (2007). 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