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

Hi, everyone. Excited to be here to host the capital markets panel. As everyone knows, capital markets has been one of the bright spots for banks so far in 2020, with revenues up in the double digits year-to-date. In today's panel, we will discuss how capital markets revenue may fare in the quarters to come, how capital markets are shaping up from a competitive standpoint, technology and its role in the future of capital markets through relative risks of this business line and how the pandemic may shape the capital markets for the years to come. With me today, I have 3 distinguished panelists that I will now introduce: Jean-Francois Astier, Head of Global Capital Markets at Barclays; Rich Handler, CEO of Jefferies; Marc Nachmann, Global Co-Head of the Global Markets division at Goldman Sachs. So welcome, gentlemen. Before we kick off the first question, I would like to put a poll to the audience. Perhaps, you can put the poll up. Okay. So the question is, what are your views of the relative riskiness of the capital markets business versus a traditional lending business? Answer a, considerably riskier; b, moderately riskier; about the same risk; or less risk. So it would be interesting to see the results, particularly how well capital markets has done so far.

So we're going to get to those questions later, but we're going to kick off the panel now, and we're going to start off with the fundamentals in the business. I'm going to turn to Rich Handler. And as, Rich, it's been an interesting year in the capital markets business. Why don't you talk about how your firm has handled the pandemic and what your outlook is for the capital markets in the year ahead?

Sure, and thank you for having me. I appreciate the invitation. It's been quite a year, to say the least. The fact of the matter is I've been through a bunch of crises in my career, and there is no doubt that there are certain aspects of this one that are just different than anything I've ever seen, starting off with -- I've never been in a crisis where there's a health dimension to it and that had implications. There is also a little or no warning when this really came on, unlike other situations where there were tellies that were showing that the capital markets were having issues. This also is a time when the financial sector was actually healthy coming into a crisis, which is generally unique. There's also no more hazard. No one did anything wrong, and that has implications for stimulus, and the breadth of pain was wider than anything that I've ever seen in my career. So you take all that and you throw it to your firm right from the start and you have to prioritize how are you going to get through this, and it was a pretty clear plan that we had, and I think a lot of firm has followed. But from Jefferies perspective, number one was we had to keep our people safe. You can't help anybody if your people aren't safe. And once you do that, you have to make sure your technology works and your capital is secure. And those 3 things are a mouthful. It requires a lot of communication and transparency. You have to talk to the rating agencies, to your bondholders, your shareholders, your Board. But once you get your platform and your operating constituency safe, then only then are you able to go out there and help your corporate clients. And bottom line, on this situation from a capital markets perspective, there was incredible need everywhere, and it was immediate. And the whole goal was to keep everyone -- your clients alive until stimulus actually came. We came out with some specific white papers explaining why we thought stimulus had to happen in the size and the scope of it. But the real question was how do we keep people alive until it actually comes. So that was rescue financings and leverage finance, block equity raises, ATMs constantly, M&A stopped completely. So it really was how do you get cash to the companies, and that was our first and foremost. For our investor clients on the capital markets side, it was a different set of problems. It was all a question of how do you possibly help them provide liquidity. In our case, you have 4,000 people who are operating out of their homes on a global basis. So again, back to the technology, being able to devote all of your firm's capital to trading, providing liquidity and the volumes were spectacularly high. Then you have to deal with micro and macro thought pieces and corporate access to clients because people wanted to know how the companies were providing. So that was the initial shock, and it was literally about a month of complete pandemonium. And once that shock ended, you can actually focus on things that are -- where you can breathe, and that is focusing on morale, endurance of your people, communication and transparency. The capital markets for the rest of the year, we're going absolutely bonkers in terms of activity. And it really was a question of speed, efficiency and competency. And I think the bottom line for firms in the capital markets, it comes down to the people and the culture of the organization. So summing up, I'd say, and today, the clients are in a decent spot. We're still supporting all of them, but M&A is back in a more strategic and vibrant manner. SPACs are a dynamic that have really come into the financing world in a very major way because all these private companies who always thought it was a big advantage to be private realized, quite frankly, that having access to public liquidity on the equity side is a very important lever to have as you try to navigate volatility. And there's a whole aspect of SPACs that have really expedited the ability to access public markets. And while we're working on all of the levers that we have to help our clients, as we transition to the end of this year, our year-end is next November 30, it's a function of paying people fairly, keeping them optimistic, giving quality reviews to everybody, focusing on the juniors who are really disadvantaged the most throughout this and being proactive on the recruiting side. So it's been quite a year in the capital markets. It has been -- every aspect of the roller coaster has been fascinating and pretty impressive for watching all the firms perform on the Street.

Great. Thank you, Rich. Yes, you bring out a good point that for this crisis, the financial institutions are not in the crosshairs of the government or regulators and actually assisting the markets, which is a good thing, of course. Marc, maybe turning to you, I just want to hear Goldman's views on capital markets, how sustainable. It's been a really great year. What are we looking for going forward from a capital markets revenue standpoint in your view?

Sure. Look, I'd say we have a positive view on volumes going forward, and I'd probably take it into 2 pieces. First, on the primary calendar, continues to look very, very strong with very high levels of financing backlog. So we continue to expect elevated levels through the primary calendar, and that obviously plays through into the secondary volumes. On the trading side, I'd say I continue to expect to see elevated volumes as investors continue to adjust their portfolios to a number of things, the trajectory of the economic recovery, additional central bank activity, evolving inflation expectation, another kind of micro level events around individual companies and sectors. I think from our perspective, what we're really focused on is market share. And so while volumes, which I just talked about, are hard to predict, we're really focused on continuing to increase market share. We had an Investor Day at the beginning of the year, where we set ourselves a 3-year target to increase market share by 100 basis points. So far, in the first half of the year, we've increased about 120 basis points. So that's well ahead of the 3-year target, and that's been super important and a big focus for us, and we think we can do more there by leaning into our client franchise. But we also have still a big on financing revenue. It's not something we talked about in our Investor Day. We continue to make headrooms there. We're up 22% year-over-year in financing revenues, but there's clearly more to do, but we're also careful about how we're pursuing it. All in all, when I look at that, one thing we've done -- and I've been in the business now a little bit over a year, as you saw on our investment banking business. But one of the things we've looked at is how durable and sustainable our revenues really in the markets business. And I think the interesting thing is when you go back several years and look at multiple quarters, what you really find is that you actually have a decent floor level in the market's revenues and that the volatility is really more upside volatility. So when you look at the data and look at when quarters perform away from the median, it's really 3x on the upside as opposed on the downside. So that's kind of interesting. But what I think what we're really trying to do is increase that base level and increase that level of durable fee-based type revenues. And so the way to really accomplish that is by, number one, getting higher market share from our clients and get kind of that persistent intermediation business out of our clients and to increase our financing revenues, which inherently are more stable. And so I think both of that, I think we've made good progress towards that during 2020. We have a lot more to do, but I think that raises the base level of quarterly revenues, and I think we've demonstrated that we can continue to have the upside beyond that when market volumes allow you to do so.

Great. Thank you, Marc. You raised an interesting point. I mean, obviously, it's been on the upside. I just want to maybe have Jean-Francois comment on -- the Fed played a big role in capital markets doing as well as they did this year. Just how might things have looked if the Fed did not step in, in general, Jean-Francois.

Very good question. I think it would be disingenuous to say that things would have not looked different. Certainly the Fed stepped in very aggressively across all market. A lot of lesson learned from the financial crisis. They acted very quickly, quicker than they did back in 2008 and provided liquidity really across every market and beyond. So certainly one of the reasons that the markets recovered as quickly as they did had to do with the Fed action. Having said that, from a Barclays perspective, the way we run our business is certainly not by assuming that the Fed will always step in this way when things become difficult. And if you look at where we were even at the trough of the crisis, 30 days into it when the markets were down more than 30%, 35%. We certainly have the capital and the ability to continue to service our client through that crisis even if we had an experience as quick a recovery. I think, certainly, the Fed action allowed a couple of things that I think are very important. One, because there was so much access to the capital markets, our clients didn't have to rely as heavily on their banks and the outstanding credit lines they have with us. So while we saw borrowings increased substantially in the first 30 to 60 days, they then slowed down pretty dramatically. And then as many of our clients decided to access the capital market, they repaid those borrowings. And then in term of potential losses on underwriting positions, especially on the high-yield side, again, I think we run a very good book, which is managed very well. So even at the trough of the crisis, we're very comfortable with the potential losses there. But obviously, the action of the Fed and the fact that the leverage finance market, especially the bond market, behaved as well as they did certainly allowed us to continue to move our positions and distribute the underwritings that we had on our books when we entered the crisis. So the Fed action, certainly very, very helpful and keeping the markets where they are and allowing corporate America to really access the market, to raise liquidity initially for rescue financing as well. And then in the second -- I think in the second part into the summer and more recently, we're seeing a lot of our clients accessing the market more in an opportunistic basis to make sure that they have a balance sheet that can withstand potentially other crisis, pushing maturities out, refinancing at lower rates, obviously in a favorable rate environment. So it's -- having been in a few crisis like Rich, I think the way this one worked out from a capital markets perspective, access to liquidity into capital for our clients has been pretty extraordinary, and it's clear that the Fed learned a lot of lessons back in 2008. And by the way, we also saw the European Central Bank, and for us as a U.K. bank, we saw the U.K. Central Bank also take a lot of actions to support the market. So it was a global effort that turned out to be very, very effective. But again, we will have made it through even with the lesser action.

Great. Thank you very much. Certainly, we're in a different position than last crisis from a financial institution standpoint. I want to turn the conversation now to competition and market share go back to you, Rich. Despite being one of the smaller players in this space by asset size, Jefferies continues to grow, continue to gain market share. Maybe you could fill in the audience how this -- how you managed to successfully compete against these larger firms. And what are your advantages and disadvantages do you attribute as a nonbank player in this space?

Sure. First off, small is kind of relative. I started at Jefferies 30 years ago after the demise of Drexel Burnham, where I worked as a young person at a graduate school, and we had $30 million worth of capital. And our banking revenues, capital markets for our first year were $9 million. I think we were ranked number of 497 out of 500 investment banks all around the world. And I remember going to S&P for my first rating in 1994 for $50 million bond offering, the first one Jefferies ever did, and I was just shocked that we were able to get that done. So I know what small really feels like. And today, 30 years later, we're still competing in the land of the giants people with multitrillion dollar balance sheets with great businesses. We have roughly a $50 billion balance sheet. Our banking revenue has grown from $9 million to about $2 billion -- well north of $2 billion this year. And we're pretty much in the top 10 in everything we do, and many times we're in the top 5. That being said, there are a lot of great firms out there that are very tough competitors. I think the way we've been able to navigate it, first, it comes down to -- it really has to be a culture of our people. All of us who've been on our firm, for the most part -- most of us have worked at much larger firms, and we decided we wanted to come to a firm like Jefferies because we wanted to be owners versus just people who work at great firms. And so that mentality has a lot of advantages in terms of the longevity of people, how they stay with us, how they train juniors, how we recruit, how we deal with clients. The other thing that really helped us along the way is using industry expertise to be the big distinguisher. We lead with ideas and relationships and trust. Capital is always important, but if it comes down to absolute capital, we're never going to win that game compared to who we compete against. So it really has to be understanding the client, understand the industry as best as we can. I think the third thing that's really important, and it's hard to do when you do well and it's easy to do when you're not doing well, but it's getting 0 arrogance in your organization and keeping it that way. And there are a lot of other broker-dealers who operated under the same kind of non-Fed structure as we did. And quite frankly, they all lost their way by not respecting bondholders, not respecting the rating agencies and going all out for ROE at the expense of long-term value creation. And that really happens when there's arrogance in the organization. So I was never under the impression that we were too big to fail. I always felt like Jefferies was the perfect size to fail. I still feel it's the perfect size to fail. And if you have that mentality and that ownership mentality and the responsibility of being a senior person on an organization like this, you have to make certain decisions that are long-term in orientation versus short term. And that means you have to grow slower and more methodically, opportunistically. And if you don't do anything really stupid in frothy times, you can tend to take advantage of times of duress.

Great. Thanks, Rich. I won't venture to ask about the trajectory from the '90s to now of your rating, where we've got off but hopefully with great experience.

I'm about the same place I started, okay?

Let me switch now to Jean-Francois, and let's talk about -- you're one of the few European banks that are left in a big way in the capital markets bank -- in the capital markets business, biggest European banks that are left. Others have gone in a different direction. Let's talk about why Barclays, as a sign of staying in this business, how you're able to compete or maybe some of your other peers have got a different direction. What's your view on this?

Absolutely. So look, a couple of things. Obviously, our CEO has been very clear about the firm strategy. And that the CIB, the corporate investment bank, is critical to the strategy. And look, it's been our view, and it continues to be that I'm sure are going to be in the investment banking business, you need to be able to compete across our products. I think the idea that you can select where you want to play, where you want to compete, for example, that you want to underwrite IPOs but you don't want to trade the stocks of companies for which you underwritten IPOs, we think that, that's a strategy that is not going to work. And if you want to succeed in this business, you've got to recognize also who you're competing with. We view the top 5 American banks as our competitors, and it is our goal to be top 5 across every single product that we offer. It's the only way that we're going to be competitive with them. I want to touch on what Rich just said about culture because it does matter. Obviously, we are larger than Jefferies, but we're still below the size of some of the largest more American banks. But culture does matter a lot. And at Barclays, we certainly have a culture of respect for each other and for our clients of excellence and of service. And it is all about really delivering for the client, building those relationships and building that trust. And it's what we've been doing by delivering extraordinary service across the board, across every product. And I think that's what clients want. They want banks that can deliver across every single product and across geographies as well. I think it is important to be able to service our clients, not just in the United States, in Europe, but also in the Asia Pacific region. And so that strategy is clearly working very, very well for us. As you pointed out, we are top 5 in many of our businesses, and our plan over the next couple of years is to continue to invest in areas such as M&A and equity capital markets to really establish ourselves as one of the top 5 players together with the American banks. And as I said, in 2020, we already saw that strategy succeed, and we're going to continue along that strategy.

Great. Thank you. I want to turn to you, Marc. Back at Goldman Sachs Investor Day, which seems a very long time ago in the change of the world, Goldman talked about One Goldman Sachs strategy. Talk about the synergies of capital markets business and how that helps other businesses at Goldman and the unison there.