In its latest rating report for Goldman Sachs Group Inc., Dominion Bond Rating Service warns of rising compensation costs, hardy competition and possible lawsuits in the brokerage business.

Nevertheless, DBRS is confirming its ratings on Goldman Sachs, and the trends remain Stable. “The ratings are supported by Goldman’s globally diversified investment bank, particularly its leadership positions in equity trading, equity underwriting, and financial advisory, its favourable financial risk profile, its sizeable franchises in asset management, and its securities services,” the rating agency says.

“Improvements in equity capital market valuations in the U.S. have translated into substantial earnings growth in [the first half of] 2004. DBRS expects Goldman to generate further upside leverage when capital markets improve and to maintain reasonable fixed income performance if customer activity remains robust,” it notes.

DBRS says that Goldman’s challenges include pressure on compensation due to the better equity markets, a problem that many brokerages face. And, it says that now that many commercial banks have resolved their own credit quality problems, DBRS expects investment banking competition to intensify further.

It also warns that litigation risk remains a concern “as the legal environment in the United States has become more challenging over the past year”.

“While settlement agreements have occurred, it remains too early to predict the outcome of class action suits. DBRS continues to believe the ultimate settlement costs will not be of a magnitude that would impact ratings, but structural changes could impact profitability,” it notes.