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

Good morning, everyone. Welcome to the BofA Securities Future of Financials Virtual Conference. I'm Mike Carrier, the research analyst at BofA covering the brokers, asset managers and exchanges, and I hope you're all doing well. Our next company up is Goldman Sachs. With us today is Stephen Scherr, CFO. Steve is going to take us through a short presentation, and then we'll get into some Q&A. Towards the end, I'll also take some Q&A from the audience. You can submit your questions via the portal. Steve, thanks for being here today, and I'll turn it over to you.

Great. Good morning, Mike, and I appreciate the opportunity to be with you this morning, and I hope we find all of you safe and healthy. Let me begin with Slide 1, with an overview of our presentation. You'll recall on Investor Day, we laid out 3 pillars of our forward strategy. First, growing existing businesses; second, diversifying products and services; and third, operating more efficiently. We obviously did not expect 2020 to unfold the way it has, but we have adapted to its challenges and remain ever more committed to the objectives we set for ourselves: strengthening our core franchise; operating more efficiently so as to fund investments in new and expanding businesses; and moving to more durable fee-based revenues, thereby reducing more capital-intensive balance sheet activities. Today, I wanted to discuss how we are pursuing these objectives through 3 lenses. First, I'll begin with our expanded focus on clients. While we remain ever engaged with clients across the firm, the renewed focus on client coverage in global markets is 2 years old and showing progress, with the prospect of a sustainable position as a top 3 bank to the 100 most significant clients. Second, I will focus on our agile management of financial resources as essential to navigating challenging markets and maximizing shareholder return across our business mix. And the third lens, I want to spend time on the redefinition of our longstanding approach to engineering, where platforms drive client centricity, scale and effective risk oversight. Platforms are a commercial imperative to our success, particularly as the secular trend of digital transformation has intensified in the current environment. So let's begin with clients as foundational to performance. We posted our highest year-to-date revenue since 2009. In the third quarter, we reported quarterly EPS, which was a record. This is a product of a considerable market opportunity and increasing client wallet share. Global markets, by example, benefited from a market environment characterized by higher volatility and wider bid-ask spreads. Our performance demonstrates the ability of the firm to leverage its strong risk intermediation capabilities and to execute on an attractive opportunity set. Across global markets, we stepped in to serve clients, driving market share gains in the first half across asset classes and geographies. We also saw strong momentum across our other businesses, which contributed to our results. In Investment Banking, we remain the adviser of choice and maintained leading lead-table ranking in equity underwriting, amidst new record issuance activity this year. Also across both Asset Management and Consumer & Wealth, the firm continues to deliver a broader range of investing capabilities, providing advice to institutions and individuals. As in prior periods of market disruption, clients come to Goldman Sachs during times of market volatility for complex risk intermediation, financing, advice and thought leadership. This year has been no different. In Investment Banking, we experienced near record volumes in equity and debt underwriting. In equity underwriting, we gained 180 basis points of market share in global IPOs and saw robust activity in follow-ons and private transactions. On the debt side, we executed several structured transactions among clients impacted by COVID. These transactions reflected market knowledge and structuring expertise. For example, the United Airlines' $7 billion financing was the first financing backed by a U.S. airline loyalty program. Thereafter, we did a similar transaction for Delta Air Lines for $9 billion, which was the largest capital markets offering by an issuer in the aviation sector. Across global markets, we have witnessed robust trading volumes and risk intermediation, including strong participation on our electronic market making platforms. These platforms, which are sticky, an evidence in ability for Goldman Sachs to execute on low-touch and high-touch activity, facilitated nearly $75 billion in portfolio trading volume year-to-date. Additionally, our prime client balances have grown to near-record levels, as client focus in global markets took priority. In Asset Management, we experienced organic long-term assets under supervision inflows of $25 billion year-to-date. In alternatives, we expect to complete $25 billion of fundraising this year, which notably includes our new West Street Strategic Solutions Fund. Our Asset Management franchise offers a full spectrum of capabilities from liquidity to alternatives. Few firms can speak to that breadth and depth. In Wealth Management, year-to-date, we have seen significant bilateral referrals between PWM and PFM, as we integrated United Capital. In the aggregate, there have been 700 referrals, totaling $2.5 billion of asset opportunity. Turning to Slide 4 and staying with global markets for a moment. We recognize that the question of sustainability has been in focus. Of course, we cannot predict the opportunity set and what our revenues will look like in coming quarters, and this slide is not intended to be an indication of the forward. It is important to note, however, that these are businesses that had each generated about $2 billion in average quarterly revenues over the last 5 years. There's no question, there is seasonality in performance, particularly in FICC. But if you look at volatility in these businesses, expressed as revenues, excluding DVA, beyond one standard deviation from the mean, over 23 quarters, FICC trends 3:1 positive from the mean and equities trends 3:2 or 60% positive relative to the average. Simply put, volatility is more often driven by revenue upside than downside. What's more, total revenue volatility for the business on the back of higher share and lower risk is 500 basis points lower in the last 5 years than it was in the prior 5. Goldman Sachs has long been known for client centricity in businesses like investment banking, but to a lesser extent, across our global markets franchise. Over the past 2 years, we have made an intentional pivot from a transaction-oriented approach to a client-focused in global markets. Jim, Ashok and Mark have looked at the top 100 clients across the industry with a focus on strengthening relationships and improving wallet share, with the same rigor historically applied in investment banking. This has led to tangible progress. We talked about market share gains across asset classes in the first half of 2020. Our wallet share has grown 100 basis points year-to-date versus the last 10 years on average. Moreover, as clients value best-in-class execution, particularly through our electronic platforms, which we believe will lead to increased stickiness and share gains. In cash credit alone, we have seen 140 basis points of market share gains in the last 2 years, a business that consumes less balance sheet and shows higher inventory turnover. This is reflective of our ability to play both high touch and low touch across a more stable client base. On the second lens, risk and resource management, I turn to Slide 5. Our strategic priorities are underpinned by a deep culture of risk management and the actual deployment of resources. We not only went into this crisis with a significantly improved risk profile compared to 2008, but we have further strengthened our financial profile through the volatile period this year, and we are well positioned to deploy our resources strategically to serve our clients. Turning to Slide 6. I'd like to touch on the firm's dynamic management of risk and resources across various dimensions, both during the peak of the volatility brought on by COVID-19, but equally on the forward. As a first step, we quickly transitioned to 98% of our workforce working remotely and provisioned 11,000 work kits to our employees to ensure a smooth transition. Now we are focused on helping people return to the office gradually and safely. The pandemic has also accelerated our strategy of having a larger proportion of our workforce working from strategic locations, which will yield cost savings to the firm. This year, we have managed both liquidity and capital to meet market volatility as well as increase capital requirements under the SCB regime and have done so without impinging the performance of our businesses. Strategically, we will look to accelerate the move to fund-driven investing over balance sheet-intensive activities. The reduction of the stress loss intensity of our business mix is essential. As I've mentioned on prior calls, we announced $4 billion in private equity gross asset sales this year, which will release $2 billion in capital. Lastly, as I noted at our Investor Day, we are keen to dynamically deploy financial resources, to serve clients and capture high returns for our shareholders. We actively engage with our businesses to tactically deploy balance sheet, RWAs and capital towards accretive activities to meet client demand. Moving balance sheet to global markets this year to capture attractive returns proved accretive to shareholders, as our global markets businesses produced robust returns. Turning to Slide 7 and market risk. Our agile management of resources and emphasis on high balance sheet turnover has helped facilitate large intermediation volumes with limited inventory risk this year. We tightly managed positions and directional risk, even in times of stress in March and April. We will continue to further invest in enhancing our risk systems to strengthen scenario analysis, stress testing and risk monitoring capacity. Finally, on credit risk, prudent underwriting, structuring and collateralization, along with active client dialogue, help manage risk across clients where we saw the initial impact of the crisis. On the forward, we believe we're well reserved on both the wholesale and consumer side, and we'll continue to monitor trends closely. Overall, we maintain a robust financial position and remain ready to serve clients and deploy resources. Final point on resource management on Slide 8. Our longstanding focus on expense control and the pay-for-performance culture has also driven enhanced earnings stability versus our peers. Here, I reiterate something I highlighted at Investor Day. Though our firm-wide revenue volatility has historically been in line with our peer set, our earnings volatility is much lower than the group, as we have consistently managed expenses dynamically, both compensation and noncompensation. We're also making meaningful progress on our $1.3 billion medium-term expense plan. I look forward to providing an update in January. Lastly, our continued shift to more durable fee-based revenues should continue to drive lower earnings volatility. Let me now turn to Slide 9 and focus on the third lens of engineering, which is critical to the execution of our strategy. As a firm, we are focused on both growth and operating efficiency, with engineering at the core of facilitating both. The role of engineering in driving business growth can be thought of in 2 dimensions. First, our core businesses are being broadened through engineering. Consider global markets, where Marquee gives us a new way to engage with our clients and developers. It is modern, efficient and meets client needs for more programmatic interaction; or Atlas, which allows us to better serve the significant client segment. In both examples, technology extends our platforms for engagement with clients. Alongside our electronic trading platforms, we are meeting clients where they want to transact and using technology to enhance client experience. Second, our new businesses are fundamentally enabled and delivered through technology, allowing us to participate in new addressable markets that would have been difficult, if not impossible, to access without the benefit of modern technology. For example, we created a leading consumer business without physical infrastructure and now deliver a superior customer experience. Our cloud-based feature-rich credit card offering was built in 18 months. In the corporate space, our engineers work to build a disruptive and differentiated transaction banking business in a similar time frame. Likewise, the role of engineering in driving efficiency is twofold. First, we are focused on streamlining and centralizing platforms across the firm to build products that operate at scale. Second, we continue to drive automation to replace manual processes across the firm. Operating with a single data source on a common payments platform, with single identity access and centralized risk reports are all examples of driving automation to achieve efficiency. Turning to Slide 10. Unifying theme across all of these efforts is the role of platforms. By adopting and transitioning to consolidated modern platforms, which are built in the cloud and utilizing API design, we reduce complexity and the redundant costs and equally invite clients to engage by using our tools in a way that further binds them to the firm. We also focus on strengthening of our engineering ranks to accelerate the build of platforms. The addition of our co-CIO, Marco Argenti from AWS; and our CTO, Atte Lahtiranta from Verizon, speak to our commitment to this strategy, and they bring extraordinary experience to the firm and their ability to attract additional talent cannot be dismissed. An additional benefit of platforms, which we discussed at some length at our Investor Day, is that once established as effective internal tools, they can be offered to third parties and equally serve as a basis for building new and an increasing suite of products and services across our businesses. For example, in transaction banking, we now offer clients a modern digital tool with easy onboarding, sophisticated analytics and client customization capability, along with API functionality. Our focus on building robust platforms leads to enhanced client experience and connectivity, partnerships, more durable revenues and improved efficiency. I'd like to conclude by noting that, while 2020 was meaningfully different than what we expected, our experience only reinforces our long-term strategic priorities: first, to remain client-centric and deliver the firm to our clients as they navigate this uncertain period; second, to invest in growth and build new businesses in order to drive more durable fee-based revenues; third, to remain attentive to the prudent management of risk; fourth, to maintain discipline around expense management and efficiency; and finally, to be transparent with an expectation of accountability. We remain confident in the priorities set out at Investor Day and reaffirm our financial targets, all in an effort to achieve higher and more sustainable returns. Thank you, and now, Mike, I'm very happy to take questions.

Stephen, that was a great update on some of the strategic progress. Maybe just following up on a few of the points that you brought up on some of the slides. One of the strategic initiatives that you guys had was gaining market share in global markets. So just curious, when you look at it over the past decade, like what has changed in that business? And given some of the recent share gains, like what's the outlook for that business and additional share gains at this point?

Sure. I would say, as a general matter, if you look back over several years, we've seen consolidation in the market, and that has been to the benefit largely of the U.S. firms, particularly in equities, and we've been among those that have captured share. I'd say in the more recent frame, as I said in my comments and in the presentation, over the last 2 years, we have had a renewed focus and, as I mentioned, an intentional pivot to focus less on transactions and more on client engagement, that is thinking about the client and the wallet share that we're picking up with respect to those clients, and that has been intentional, it has been quite purposeful and it is bearing results. If you look at the target of the top 100 clients in global markets, generally, we are seeing a steady drumbeat of increase where Goldman Sachs presents as among the top 3 that provide services to those clients. I'd also say that, particularly during the volatility of March and April, and I think it carries forward and carried forward into the third quarter and beyond, the fact that we stood ready across all asset classes in FICC and, likewise, with a client orientation in equities, I think, it served us well. We managed through that period of volatility with and on behalf of our clients, and I think that has led to an increasing position for us across a range of different products and stay in the strategy in that regard.

Okay. That's helpful. And then in banking, there is, probably over the last 3 years, a strategic initiative in terms of covering more accounts, and one of the focus areas was in the middle markets. And when you look at some of the areas that COVID has hit harder, it's been in some of those areas. So on one hand, that's great because there's -- you can help more companies that are in need of capital. But on the other hand, there's a lot of uncertainty there. So just wanted to get an update on how that's worked out and has COVID impacted that part of the business.

Sure. Well, look over an extended period of time, my experience has been that it is during periods of volatility when clients are most in need, not just a financial advice, but equally, capital, and for us, that has been true now. If you look at investment banking, just over the period from March through to today, we've seen engagement largely over Zoom and other forms of electronic engagement to be up 30%, meaning our bankers are engaged at a 30% higher level now than they were pre-pandemic, and I think that's as much an aggressive engagement on their part as it speaks to the need that I'm speaking about with respect to advice and capital in moments of challenge. You'll remember that we had talked quite a bit, notably at Investor Day, about the middle market, so thinking about market cap between $500 million and $2 billion, and we stepped up our coverage of those accounts, first, looking at about 1,000 that we would call on. That's now moved to about 1,700. The penetration and engagement with those clients has been quite formidable to the point that it is accretive to the tune of about $500 million in revenue to the business. So this has been a successful engagement with that segment. It's a segment that's in need during the period you're discussing around the pandemic and otherwise, and we've seen an appreciable form and manner of engagement among our bankers. I would say more broadly around investment banking, but not at all limited to this particular middle market space, we've seen increased engagement. The backlog remains quite healthy. Dialogue with our clients, again, picking up in terms of engagement and the like. And just looking at announced merger volumes in the third quarter, we were up about fivefold relative to prior periods, and that just speaks to the level of engagement and what is the need of the client during moments of challenge.

Okay. That's helpful. Heading into the election, there was a lot of commentary in the industry on just making sure that systems and like the trading and infrastructure was ready just in case we had a heightened level of volatility. So just wanted to get your sense on like how things played out last week and then even this week with more traction on a vaccine, just if you think the election, the vaccine, you're starting to see more, I don't know, clarity and if that helps clients across the platform and activity levels.

Yes. So operationally speaking, I would say that all banks, including ourselves, sort of picked quite a lesson from the period in late March when we were seeing, at the onset, the aggressive onset of the pandemic. We were seeing operational levels at 3 and 4 and 5x volume, both in fixed income and in equities. And we think that readied us and awoke us to a number of issues we needed to be ready for, particularly in anticipation, as you suggested, the election. I would say volumes coming in, in the most immediate week prior to election, were relatively modest. We were all prepared. Goldman Sachs was certainly prepared for a higher level of volatility. I think clients and customers were more watching as to what would play than they were necessarily trading in advance. As it relates to the election itself, look, the market craves stability, I think we are, this Monday morning, in a much more predictable place than where we were with President-elect Biden now set to take office, notwithstanding challenges. I think the difference relative to where we were coming into the election is, I think, the notion of a blue wave is obviously off the table with the Senate in balance, and that may mean that there is lower levels of stimulus than had been anticipated in the context of a blue wave, and perhaps some question as to the pace and magnitude of tax policy change. But I think on the positive side, there is a view that, given the longevity of the President-elect in the Senate, the possibility even of a divided government, nonetheless, producing a more engaged level of cooperation, I think, is a positive to be read by the market itself. That said, I think this morning's news and what you're referencing really suggest that, away from the politics of it all, the market is quite focused on the pace of economic activity as influenced by the forward direction of the pandemic and a vaccine. And our research group, led by Jan Hatzius, put out a note over the weekend, which spoke to a vaccine-led economy. And I think, again, you''ve seen the market's reaction this morning, where we have the potential for a vaccine that could give rise to some reflationary outcomes for the economy, perhaps even more than stimulus alone would bring. I think that's good for the economy and inevitably will be good for banks in the context of perhaps a more slope to the yield curve than what we otherwise have experienced. But I think the vaccine and the prognosis for the pandemic is going to overtake as consequential to economic performance relative to politics, notwithstanding stability brought to that.

Okay. That makes sense. You mentioned during your presentation that 2020 wasn't something that anyone would have predicted. It was an active year for the industry, and you gave some updates on the strategic front. Just curious, when you think about some of the areas that maybe have progressed faster and others that, obviously, for clear reasons, would have been more challenging to get up to speed, which ones have maybe been tougher to make a significant strategic progress? And then it sounds like you're still comfortable with the midterm targets, but I just wanted to get an update there.

Yes. I'm very comfortable with, as I noted, our midterm targets, but I would say when you think across the various initiatives, a couple of them have played to the higher side. First, alternatives. We have raised and closed on $14 billion of our first fund West Street Strategic Solutions and are on track, I think, to get as high as $25 billion of capital raise in the alternative space, and this is all part of the strategic pivot we spoke about at Investor Day, which is to move away from the more balance sheet capital-intensive, stress loss-producing activities and to pursue our investing activities more through third-party funds, which will generate more durable fee income. That's important that we continue in that regard, and I think it has outperformed our initial expectations, especially in the context of COVID. All of that fundraising has been done through various electronic means. Obviously, difficult to meet with prospective investors. And I'd also comment that the roster of investors that have come into this fund and these funds generally are -- include those that have not done investing business with us before, and so that's a very positive aspect and reaffirming of that strategic move, which I think has longstanding implications for us in terms of SEB and capital intensity. We've equally seen progress well beyond expectations in transaction banking, where the take-up on our digital platform, as manifest through the number of clients, the amount of payments made, the number of currencies and the level of operational deposits in that business, again, has been extended beyond expectations. Our consumer business, more by design, has been slower as we pulled back a bit on originations, but not because demand wasn't there, but more because we felt appropriate in a young portfolio and a young business to see how it plays, and it has played well in the context of the more credit challenge -- sets of challenges during the pandemic. I'd say perhaps one that is slower, though we stand by the medium-term target, has more to do with our funding mix. Our deposit platform performed exceptionally well. The beta is now getting higher and perhaps could have been higher throughout, but you're starting to see our rate come down, but it did not come down with the pace, for example, of Fed funds during the violence of this pandemic. But over the medium term, we're quite confident that, that strategic mix away from wholesale more to retail deposits will not only serve us strategically by way of diversifying funding sources, but I think will yield the kind of the level of savings from a funding point of view than we had expected.

Okay. That's helpful. And then you guys have been making investments over the past several years in some of these growth initiatives. But then more recently, you mentioned either the pace of some of those investments moderating and then also a focus on efficiencies even in the business. Just curious in this environment, has anything changed on that front, meaning areas that maybe you needed to make more investments or vice versa, working from home, you come up with new areas for potential efficiencies longer term?

Yes. It's a great question. I think we are ever confident in our target of $1.3 billion of expense savings that we outlined during the Investor Day, and you'll recall that we thought about that in the context of self-funding much of the strategic initiatives that we had in place. And you'll recall back to our third quarter earnings, where I took note that we had really held in check when you put aside litigation, our non-comp expense to be flat or marginally down year-over-year. And so we have good control over core non-comp expense and look for the further efficiencies to really help us in funding some of the strategic initiatives. On the question of what we have learned over the last several months that gives us that confidence and perhaps takes us even in excess of what we otherwise thought, I think the firm now has a much greater degree of confidence on the ability to put larger aggregations of people and businesses in areas away from our core hub locations. Now that's not to say that we're any less committed to New York or London or Hong Kong. But I do think we have now sort of come upon a level of confidence about the ability to further penetrate certain of the strategic value locations, such as those in Salt Lake City or in Dallas or what we have in Bangalore and the like. And I think that's one learning that's there, and I think that will drive some considerable cost savings for us as we reposition populations and businesses into more affordable locations around the world.