The Goldman Sachs Group, Inc. (GS) Earnings Call Transcript & Summary

Thank you. Hello, good morning, everybody. I'm Susan Katzke. I cover the large-cap banks at Crédit Suisse. And on behalf of the financial services team here, I'd like to welcome you to our 21st Annual Financial Services Conference. Thank you all for joining us. We welcome the increase in investor and corporate participation. Our numbers are up double digits on both fronts, and we appreciate that. Over the next 2 days, we look forward to hosting 99 participating corporates, walking away with a clearer picture of prospects across the financial services industry, which is clearly quite dynamic at the moment. So there's clearly lots to talk about. In terms of logistics, all one-on-one and group meeting information is available at the corporate exits that's right out front. For those companies hosting breakout sessions, they will be held immediately following the presentations in Plaza 1 and Plaza 2, which are to the right outside of this room. So without further delay, let me introduce our first speaker, which is Goldman Sachs. Back again for almost as many years as, I think, we've hosted this conference, we're going to start things off with Goldman Sachs. And joining me today is CEO, David Solomon. David, you very -- you need very little in the way of introduction. I think we'd much rather hear you talk about the business. After Investor Day last month, the current environment is quite dynamic. So let's get started here.

Great.

We're going to do this as a fireside chat.

Great.

With no fire.

Good morning. I haven't said anything yet, how do you know there's no fire?

So -- we'll leave that to you.

Okay.

So let's talk about Investor Day a little bit. It's now a month behind us. You laid out a road map, and there was nothing shocking. It was an evolution, as we had all anticipated, with targets pretty much as expected. And now it's over and done. So what do you feel best about, other than the fact that it's over and done?

Well, first of all, thank you for having us, and glad to be here. I feel good about the fact that we did it, and it was a big -- it was a seminal transition for Goldman Sachs. We've never done an Investor Day before. And the firm, which has only been public for 20 years, has always run with a limited amount of transparency around the business. And one of the big things I'm trying to do through my leadership with the current leadership team we have is just make the business more transparent, more explainable. And so it was a lot of work to really lay this out in this way. And hopefully, investors and the investing community benefit from that level of transparency. And also in our road map for the next few years forward is to how we plan to grow returns, increase the fee base to more durable revenue mix that we'd like to drive toward over time. And by doing that, ultimately benefit our shareholders. I do think that there were a bunch of benefits that, I guess, intellectually I might have anticipated, but really seeing them come together, I felt very, very good about. The big thing is when you take a broad group of leadership, and there were a couple of hundred people in the firm that spent a lot of time on this and have been really focused on it, brings the leadership together, galvanizes everybody behind the mission, gives everybody a broader understanding of the difficulties that each business faces as they're making investments and they're pushing forward. And so there was really kind of coming together of the management team toward the plan, which, from a leadership perspective, is something you really want to try to drive when you're moving an organization forward.

And so when you look back at the targets that you put up there, what do you think are the most challenging elements within the plan?

Well, the -- I think there are 3 things that come across in this medium-term plan. There are some investments we're making that will create, we believe, revenue growth in the business. There is a shift in our funding strategy, in our funding mix, which creates real economic benefits, and we have a lot of control over that. And there's efficiency work that we're doing in the organization, which I think we also have a lot of control over. And I would expect over time, as we prove that we execute out, we'll get a lot of control for the forward ramp on both the efficiency cost work and also the funding shift as people are confident that we're delivering on that. I know there's more skepticism on the revenue from the investing community, but it's our job to deliver on that. We have a clear plan in our businesses, in each of our businesses and the things that we're going to do. And my expectation would be, over time, as we are able to deliver on that, that will come through in the process of what we're doing. Obviously, the environment that you operate in affects all that. And so when you look at a plan like this for a financial services company, you have to recognize that there'll be bumps on the road, but you're moving directionally down the path.

Fair enough. So one of the points of skepticism or pushback post-Investor Day, and I'll embrace this as some of my skepticisms as well, is that you're taking on a lot of new initiatives. You're doing a lot of things. So is Goldman trying to do too much at once?

Well, you and I have talked about this a little bit before, and so I appreciate the question. Because I -- when people have asked this question, there's a little bit of -- because when I step back, we're really doing -- we're running our core businesses, which I would hope everybody would give us credit for being able to do. But there are 4 things that we're principally doing, there are 4 areas where we're making investments to grow businesses. And if Goldman Sachs, with its resources, can't target 4 business areas and make investments and move those forward, then we shouldn't be running Goldman Sachs. So I feel very confident that while we have certain things we're doing, it's not too much. It's reasonable, and we're very focused on it. And actually, I'm a bit surprised that people have questioned some of that. It's certainly their prerogative, et cetera. But I look at our track record, just looking at 1 of those 4 things that we're doing, the 4 things we're trying to drive as growth initiatives for the firm is the transaction banking business, the expansion of our alternative asset management platform, the broadening of our wealth management business and then our digital consumer bank. But the digital consumer bank, we really started 3 years ago from 0. And in 3 years, we've gone from 0 to $60 billion of digital deposits. We have 5 million customers. We have $7 billion of loans. We built a brand-new credit card platform, the rollout of which has been very successful by any measure. Those are real tangible metrics that show in 3 years. We're executing on something pretty significant and yet still, there's going to be chatter. But I understand, it's on us to deliver over time, continue to put forward metrics and benchmarks that allow people to see our progress, and we're committed to trying to do that.

Fair enough. So the -- when you think about the other point of it, it's not really pushback, but you seem to get a lot of attention for turnover, right? A lot of hard...

We get a lot of attention for everything, unfortunately. The good and the bad.

So let's talk about the turnover a little bit and what was normal and what was not.

Sure. And I watch this very carefully. We, and I think it's one of -- at Investor Day, we talked about 4 core values of the firm, and 1 of those 4 core values, the first core value we talked about is partnership, which I think is something that's very unique about Goldman Sachs in the way we operate. There are 450 partners at Goldman Sachs and one of the things -- there's a lot of good that comes from that. One of the things that goes with that is every time any one of those 450 people, and those are the top 450 people at the firm, every time one of those 450 people leaves, there are articles in The Financial Times, Bloomberg, The Wall Street Journal, Business Insider, it gets written about. And so any time someone on the top 450 people of Goldman Sachs leaves, it gets written about. If someone on the top 250 people at any one of our competitors leaves, it does not get written about. If somebody in the top 10 does, or 15, sure. But whole teams in the top 450 can leave another firm, there's nothing written about it. So the first thing is the visibility is a different lens, and so I think you have to understand that perspective on it. We've said consciously that we are trying to manage the partnership to be a little bit tighter and a little bit more aspirational. And if you just look at the history of the Goldman Sachs partnership, it grew significantly. In 2007, we had $45 billion of revenue, and the partnership is about 375 people. In this cycle, these are 2-year partnership cycles, the 2009 to 2011, we also, in 2009, had $45 billion of revenue. But in that cycle, we grew the partnership, really, by almost 100 to kind of 450 to 475, and then it stayed there for the last 5 cycles or so. And at this point in time, we had gone off about 1.5 years ago as the partnership committee to really look at the size of the partnership, the size of our business, and we determined that we thought the right way forward for the size of the partnership was somewhere between 400, 410, 420 in that area. And we put together a plan to start to move in that direction. There are 2 levers you can pull. You could make fewer or you can retire a few more. And so we're executing on that plan. That will probably weed in this cycle, this 2-year cycle, which ends at the end of this year, so about 10 more partners to leave, then kind of what the running average has been for the last 5 cycles. But our partnership is a partnership that every cycle turns over about 80 people. This cycle will turn over probably about 10% more, but that's planned. And every year, people at Goldman Sachs are -- by the way, any of the firms that are here, someone wakes up and says, "I don't want to do this anymore," and they leave or they move on to something else. But there's nothing going on with respect to the partnership and attrition, that's not kind of in plan or an expectation, and we continue to have a very deep bench and are really comfortable with the team. But I would admit, it gets a lot of visibility, and I'm kind of surprised by how much visibility it gets.

Understood. So let's talk about your 4 key initiatives, because I think that talking through them and the progress points, again, will underscore just how deep that bench is. I'd like to start with transaction banking. To me, it's the most indicative of how transformed Goldman is in its thinking and will be over time with the addition of this business. So let's dig a little bit deeper in terms of kind of how you drive that 100 basis point increase in ROTE that I'm forecasting for this business over the next 3 to 5 years. And people seem to be very skeptical. Can Goldman really do this? Who are you competing with? How do you move the market share?

Yes. So let's talk a little bit about transaction banking and I think there are a bunch of things about it, and I laid this out at Investor Day. When we decide to go into another business or add a business, we're not just randomly picking a business. We start with, "Okay, what do we have at the firm that we think is a strategic advantage or an edge or an asset that we, in some way, shape or form, can expand upon or invest in?" And the assets here, and it runs through a bunch of things we do, is we have an incredible corporate franchise. I think people would agree, we have a very strong Investment Banking business. I don't think there's a lot of debate about the strength of the corporate relationships and the corporate franchise that we have across the firm. And so I think it's a big mistake that 5, 7, 10 years ago, when we became a bank, we didn't start thinking about the fact that we should be providing other services to corporations that we're deeply embedded with. This one is the most obvious for a variety of reasons. It brings -- a significant part of the benefit of the business is operating deposits that are left with you. But we have an interesting lens here. Besides having these corporate relationships, where we're a very significant lender and we're very engaged, we've been a big client of this service. And we've been a significant payer to the people who provide this service. And so we looked at the service and we said, "You know what, there are a bunch of things we don't like about this service." And we went out and talked to a bunch of our clients and they said, "What if you can improve on this? That would be something that would really resonate with us." So we have the kinds of relationships where we get that feedback. The thing that's interesting about the business -- and in the United States, it's about an $80 billion TAM, so it's bigger than investment banking. I think about the businesses that's interesting is the leader has about 6.5%, 7% share, and it's very fragmented, and most corporates use multiple providers. So we don't have to -- the leaders will continue to be the leaders, but it's a fragmented-enough business that if Goldman Sachs can put itself as 1 of 4 or 1 of 5 with certain clients and take a share of their business, we can build a very nice business. And over time, we'll grow it and expand it from there. And I think where people don't really see what we're doing is we're good at building platforms. And so we've now built a platform. We've cleared over $2 trillion, $2.5 trillion of our own stuff on the platform. It works. It's more digital. It gives better information. It's a more modern platform. And I think it's going to provide the removal of certain friction that exists in these services because it's an updated platform, that will be attractive to some clients. Not to all, but we're not looking to run the world. We're looking at a nice business that's adjacent and connected to our client base, and we think we can do that over time.

And best I can tell, you only need to pick up about 1% market share.

Well, if you pick up 1%...

To be significantly additive.

Yes. I mean if you pick up 1% market share, it's significantly additive. God forbid, over a longer period of time, we picked up 2% market share or something like that, then it would be even more additive. But the thing that -- somebody asked a question last night when we were talking, "Well, you've got all these great businesses. You're #1 in this, #1 in that." This is an extension of corporate investment banking. It's an extension. The way the world's evolved where there really aren't investment banks and banks. There are just banks, banks who provide investment banking services, banks who provide banking services. This is an extension of a franchise we have a very strong position in. And if we have a good product and service, we should, over time, be able to participate in that part of the business. I think we have a right, given our corporate relationships, to participate for a portion of that business.

So who's selling the business?

So it all goes through your relationship network. And I know that there's some skepticism. Well, our bankers sell these products. And so I told last night to a small group here, a story about the fact, part of the cash management business, it's kind of interesting. There's an escrow business around M&A. When people created -- when there's an M&A transaction, there's usually a cash escrow, and that cash escrow goes to a bank. We're the biggest M&A bank in the world. There's a value to that. That's a deposit on our balance sheet. And if we go out and we ask and say, this is important given our relationship and the work we're doing, we should be able to capture a share of that business. And it's a piece of business that we benefit from that we've never competed before. So to show you the way the competitive juices flow at Goldman Sachs, we said to the bankers, "Who's going to be first to do this?" And sure enough, a banker named Ryan Limaye, who's a serious banker, who's in our tech practice. He's been around for a long time, announced a merger in the last couple of weeks. I mean we put this out, there's only a handful of weeks since we started this. And he wanted to compete. He got the first piece of escrow business, so we sent him a toaster, and that's all it takes to motivate people at Goldman Sachs.

I hope there are a lot of toasters.

Like open a bank account, get a toaster. Get an M&A escrow, get a toaster. And now everybody wants a toaster. But it's -- look, it's fun to compete. But more than that, our bankers are extremely client-oriented and the way they think about the relationships. And they're charged with really helping CEOs, CFOs, treasurers, treasury staff. And what a great thing to be able to go show them something that's new, that's a technology platform, that adds value and to be able to talk about it. Even if they don't buy it, it gives you something to talk about. So I think if you really understand the way bankers interact with our clients, they're always looking for stuff to talk about that they think can add some value. And so I think that's actually the easier part of the process. The harder part is then getting the conversion. It's not getting the bankers to go talk about it.

Okay. So let's switch gears into the alternatives business for a minute. You've got a plan to raise $100 billion. Let's talk a little bit about where it's coming from, whether it's traditional, private equity or new verticals. Who's out there raising the money? And I think you're out there raising money right now. There was some skepticism with the turnover that, that wouldn't go smoothly. So maybe you'd like to comment.

Sure. So we've been in the alternatives business for 30 years. We've raised a lot of money in the alternatives business over 30 years. One of the reasons -- and we did it in different businesses in the firm. So the first thing that we did was we really organized it as a business. Instead of having 5 or 6 businesses doing this, we organized it as a business. And I think one of the things that's different about our alternatives business is that we've used our balance sheet, and a lot of the other people used no balance sheet, the pure alternatives firms, but were in all the products, private equity, growth equity, credit, infrastructure, real estate. We're in all the products at scale all over the world. And I think one of the things that shifted is the big capital allocators, the big institutional capital allocators want access to that. They want broad, deep, global. So for us, historically, a lot of the money we've raised for our alternatives businesses has been through our private wealth channel. It's not been through the big institutional pensions. We have had some pension money. We have had some sovereign wealth money, but it really hasn't been the focus. And so we've looked at that. We have relationships and do a lot of business with those people. And we feel there's no reason, given the size, scope and the footprint we have and the fact that that's what a lot of the large capital allocators want, the ability to partner with someone that has all the products and services all over the world, that we can go out, and over time, broaden those relationships and bring more capital in on that front. In order to facilitate that, we took 2 partners who have been focused on these relationships in different ways. One is Chris Kojima, who came out of the asset management business. One is Michael Koester, who was working in the merchant bank historically. And we put them together, and they're building a platform that we're calling alternative capital markets, which really is the sales function, the relationship-building function for all the large capital allocators all over the world. And we will go out and build those relationships. And hopefully, based on the 30-year track record of performance that we've had, we'll add to what we're doing and grow that business over time. And like anything else, the fact that people come and go, there are a lot of thing I'm worried about, but there's nothing about transitions in the firm that does not give me confidence that over time, we can grow our alternatives business.