Q2 2020 Goldman Sachs Group Inc Earnings Call
Good morning, My name is Dennis and I will be so once you get today.
I would like to welcome once the Goldman Sachs second quarter 2020, <unk> earnings Conference call.
This call is being recorded today July 15th 2020.
Thank you Ms. minor you may begin your conference.
Thanks, Dennis Good morning. This is Heather Kennedy minor head of Investor Relations at Goldman Sachs. Welcome to our second quarter earnings Conference call. Today, We will reference our earnings presentation, which can be found on the Investor Relations page of our website.
Are you W.W.G.S. Dot com no information on forward looking statements and non-GAAP measures appear on the earnings release and presentation.
Audiocast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated reproduced or rebroadcast without our consent.
Today, I'm joined by our Chairman and Chief Executive Officer, gated Solomon and our Chief Financial Officer, Stephen Sure. David will start my Redoing, a second quarter and first half performance. He will then provide an update on several key strategic growth initiatives and the macroeconomic backdrop.
David will also addressed the firm commitments to diversity and discussed a return to off its strategy.
Stephen will then discuss the recent stress test and our second quarter results in greater detail, David and Stephen will be happy to take your questions. Following their remarks I'll now pass the call over to David David.
Thanks, Heather. Thank you everyone for joining this call. This morning, I would like to start by saying that all of US at Goldman Sachs Hope that you your friends and your family remains safe and healthy during this unprecedented global health crisis.
Let me begin on page one of the presentation to review our financial results.
And the second quarter, we produced net revenues of $13.3 billion.
41% versus a year ago.
Strengths and breadth of our client franchise was evident this quarter as we delivered solid net earnings of $2.4 billion.
Earnings per share at $6.26.
And the return on equity of 11.1% return on tangible equity of 11.8%.
Our results in the quarter were strong.
Even while incurring higher credit provisions and litigation expenses, both of which impacted our returns.
Our second quarter results contributed to solid first half 2020 revenues of $22 billion net earnings of $3.6 billion and an order we have 8.4% Anoro T E of 9%.
Litigation cost burden to our first half returns by approximately 280 basis points.
Returns were also impacted by higher reserve build for credit losses.
The second quarter demonstrated the strength of our diversified business.
Was driven by significant new issue volumes counter cyclical performance of our market making activities.
We maintained our leading position as a strategic advisor of choice for investment banking clients.
Strong meet table positions across underwriting markets with extraordinary volumes in both debt and equity, enabling us to pick up market share.
We delivered exceptional performance in chicken equities on high levels of client activity deploying our risk intermediation expertise and our balance sheet on behalf of clients a volatile market.
We continue to provide high quality advice, <unk> wealth management clients and generated another quarter of solid consumer deposit growth.
In asset management, we recognize gains from market appreciation in our public investments continue to harvest private equity positions and experienced a partial recovery in our credit portfolio from the first quarter.
Importantly, we maintained a strong highly liquid balance sheet with an improving capital position I'm at high levels of market volatility an economic stress.
Turning to the operating environment on page two we're navigating and uncertain macroeconomic backdrop brought on by an extraordinary global health crisis.
During the second quarter, we experienced both positive and negative forces.
Reflecting the near term economic challenges related to recent business shutdowns.
Under balanced by continued support from central banks, and governments and market optimism is certain economies began to reopen.
However, as we speak today the path to reopening in many U.S. states and corresponding economic consequences remain unclear.
Since our April earnings call, our economists estimates for Twentytwenty U.S. GDP improved from an expected contraction at 2020 of 6.2% to 4.6% today.
Driven by expectations, a little faster rebound from a deeper trough.
That said on the global basis growth expectations for Twentytwenty deteriorated from an expected 2.5% decline in April two or 3.4% contraction expected today was the second quarter, reflecting a deeper decline in activity than expected three months ago.
The prospect for a steeper recovery in the second half is in no small part due to the forceful and rapid action by governments central banks and governments my global central banks, and governments, which are providing exceptional levels of liquidity an ongoing fiscal stimulus.
These actions have been key to market resilience.
Tempering, the economic impact of the virus.
In the United States, we're seeing early indications of economic improvement, including the better than expected, 18% rebounded retail sales and notable improvement in unemployment in June to approximately 11% for more elevated numbers in may.
As markets assess the impact of the virus in the second quarter and its potential economic consequence, we experienced a rise in the valuation of risk assets.
During the second quarter, the S&P 500 rallied by 20%, marking its best quarter since 1998.
Well broader global equity markets Rose a similar amount.
That's great spreads tightened by over 80 basis points and high yield spreads tightened by roughly 140 basis points this quarter.
In the context of these moves in financial assets strong levels of client engagement during the <unk> second quarter demonstrate the breath and the strength of our franchise.
As we go forward as risk managers, we continue to prepare for the prolonged economic challenges I look beyond market valuations and our overall assessment of risk.
We maintained a strong financial profile and remain agile with our balance sheet as we continue to serve our clients.
Pivoting for a moment I'm pleased to note that volatility in the first half of 2020 did not hinder our progress on most of our key growth initiatives.
June 16th we officially launched a transaction banking service to U.S. clients on time and below budget. Despite the unexpected challenges shifting our global team to work from home and launching the platform remotely.
As of quarter end, we have over 175 clients on the platform and $25 billion in deposits many of which we expect will become operational as clients begin to utilize.
Begin their utilization of the platform over time.
Second in alternatives, we accelerated the marketing of a new credit fund Cold Wet Street strategic solutions as a part of our transition to fun driven investing.
Quiet receptivity has been very strong.
We believe this strategy is well kind to capture opportunities in the market today and provide critical private financing to companies a need.
Our approach is highly differentiated leveraging the broad global sourcing capabilities of Goldman Sachs.
Just this week, we have closed over $6 billion of commitments.
Ultimately, we expect to raise an excess of $10 billion in the coming month.
What is most impressive is that our first close occurred in less than 90 days entirely virtual meetings.
We're broadening our client base to include leading institutions and pension fund investors that have not partnered with Goldman Sachs before.
These expanded relationships will be helpful to our efforts as additional strategies in funds are launched.
You will recall that this initiative was part of our strategy disgusted Investor day in January and process is to be significant in our move toward a less capital intensive more fee driven model for investing platforms.
Third in wealth management, we continue to integrate our new high net worth business, which we recently rebranded personal financial management.
Year to date, we've generated over 400 client referrals between personal financial management, our flagship Ultra high net worth private wealth business, representing $1.5 billion and assets under supervision opportunity.
As we now have a credible offering to serve high net worth clients.
That said, establishing new wealth management relationships in the current environment with only virtual communications is challenging we would expect our progress to accelerate under more normal circumstances.
Fourth we continue to expand our digital consumer business. We were pleased to announce our new small business lending partnership with Amazon, which will allow us to leverage our proprietary digital underwriting decision platform using data share by Amazon third party sellers to provide inventory and operational financing to support their growth.
This partnership which is being launched on a smaller scale. At this moment is another example of our innovation and our ability to partner with leading corporations to deliver differentiated value to our customers.
Our consumer partnership also included a recent point of sale financing engagement with jet Blue and of course, our credit card with Apple.
Before turning to Stephen I would like to spend a moment on diversity and inclusion which is a critical priority for the firm a personal focus is mine for many years.
Like so many others over the past six weeks I've spent a lot of time listening and learning about the challenges we face as a nation on racial equity.
Well Goldman Sachs is long sought to advance diversity and inclusion we're still not where we need to be it's both a moral and economic imperative that we make progress.
We must be a diverse inclusive organization to unlock our full potential as we serve a global marketplace. Its diverse in all aspects, including race ethnicity, gender and sexual orientation.
Last me, let me review our business real civilian see a return to office strategy, which has begun a major offices globally.
The from continues to seamlessly serve our clients well the vast majority of our employees work remotely.
Constraining the dedication of our people.
The strength of our technology and our business resiliency.
Our firm has always had a team oriented apprenticeship culture, and we benefit from bean and working together.
So as each of the communities, where we operate reopens, we're taking the necessary steps to gradually return to office safe manner.
We are following the lead of Barclays. Your colleagues were in Hong Kong, we're using a split team approach with up to 50% working from the office.
We're also making progress in Europe, we're on the continent, 35% return.
And in the UK were approximately 15% of our employees are back in office.
Recently in New York, a small group of employees have returned to office going forward, our progress will be dictated by circumstances in each region, and we will adjust as needed.
We are taking many new precautions to ensure safety, including through masks and social distancing and it's certainly not business as usual, but we're making tangible forward progress.
As we take these steps we will continue to keep the health and safety of our people as our top priority.
In closing I would just like to say how proud I am of the people of Goldman Sachs. They've worked tirelessly. During this time to engage and serve our clients leverage technology to answer our resiliency and prudently manage our risk and financial resources with that I'll turn it over to Steven.
Thank you David and good morning, let me begin with our summary results on page three during the second quarter. We saw a very strong performance from our investment banking and global market segments as clients were exceptionally active in raising capital in the equity and debt markets managing balance sheets repositioning investment portfolios.
And hedging risks across asset classes.
We also saw year over year revenue growth in our consumer in wealth management segment as we continue to expand our private wealth high net worth and consumer businesses.
Gains across these three segments were partly offset by a decline in our asset management segment, given smaller gains on equity investments versus year ago, but.
Before turning to segment results I want to spend a minute on capital, particularly in light of the recent federal reserve stress test results.
On June 29, we disclose the federal reserves indicative stress capital buffer estimate for Goldman Sachs of 6.7%, which implies a common equity tier one requirement of 13.7% for the firm effective October onest.
While higher than anticipated. This requirement is just slightly higher than our reported standardize cetone ratio of 13.6% as of June 30 in fact, our currency to one ratio improved by 110 basis points. This quarter and is now 30 basis points higher than where we started this year.
Demonstrating our ability to effectively manage our capital while deploying balance sheet for our clients.
Consistent with the federal reserves requirements for all large banks will extend the suspension or share repurchases into the third quarter, but it is our intention to maintain our dividends both common and preferred while complying with the FCB rule upon implementation.
Furthermore, we will continue to pursue our longstanding practice of deploying capital to our business, where returns are accretive and otherwise returning it to our shareholders as permissible and ever mindful of the environment.
As we consider the results of the stress test it is important to bear in mind that the from like the industry experienced an actual stress test over the past few months, the global economy contracted sharply and unemployment in the U.S. hit levels higher than contemplated in the federal reserves severely adverse scenario.
During this period, we maintained robust levels of liquidity and capital and despite the stress the from emerge from the second quarter stronger and continues to serve clients from a position to financial and competitive strength and with the objective of producing attractive returns for our shareholders looks.
Forward, we continue to believe that the 13% to 13.5% standardize C.T. one target range provided at Investor day is appropriate for our firm aren't a medium term basis, but we recognize our near term capital requirement is higher in light of this stress test results.
We do not control the federal reserve scenarios and models, but the results only served to reaffirm the importance of executing the strategy outlined at Investor day, with a focus on diversifying our business mix and reducing the stress capital intensity of our balance sheet as David highlighted our execute our exit.
Fusion of this strategy is advancing we have sold or announced the sale of nearly $4 billion in equity investments year to date, including our agreed sell of global Atlantic just last week, which will have positive implications for capital and balance sheet.
We remain committed capital efficiency as we diversify our business and grow more durable revenues.
With that let's now turn to our business performance on page four beginning with investment banking.
Investment banking produce second quarter net revenues of $2.7 billion up 36% versus a year ago.
Financial advisory revenues of $686 million remained healthy, but down 11% versus last year amid fewer transaction closings consistent with the industry.
Year to date, we participated in nearly $290 billion of announced transactions and close over 140 deals were $600 billion deal volume.
We maintained our number one position in both announced and completed M&A League table rankings by a considerable margin.
While recent M&A announcements have slowed our investment banking client dialogues remained very active with client interactions up over 30% versus last year, notwithstanding the continuing work from home dynamic.
In the second half we are watching for a potential pick up in M&A activity, both from companies coming from position of strength as well as those challenges by the environment.
Dislocated asset prices will help drive those opportunities as will the significant amount the private capital available for deployment.
That said macro and political uncertainty remain relevant and will influence outcomes.
As M&A announcements declined in the quarter the headline for investment banking was in underwriting.
In these turbulent markets, we've seen our underwriting market shares increase as clients. It turned to Goldman Sachs, particularly for more complex and innovative financings were execution matters.
In equity underwriting we delivered record quarterly net revenues of $1.1 billion year to date, we ranked number one globally in equity underwriting as our volumes jumped to over $50 billion across more than 270 deals.
We saw strong activity this quarter across Ipos follow ons and private issuances Convertibles also had record activity, where we ranked number one.
In debt underwriting net revenues were $990 million up 93% from a year ago as we help finance record U.S. investment grade volumes and supported a broader reopening of the high yield market.
Since the crisis hit our market shares in investment grade and high yield increase globally, driving our number four ranking in global debt underwriting.
This performance amidst the volatility of the last several months is the product of many years of strategic focus and investment in our client franchise.
Given the pace of activity, our investment banking backlog decreased significantly versus the first quarter. This is a function of both the volume of our recent deal execution and slower replenishment.
It is also important to point out that the timeline from discussion to execution, notably in financing has shortened in this period and therefore backlog may for the moment be an incomplete indicator of forward activity.
Revenues from corporate lending were negative $76 million, reflecting $200 million of hedge losses for risk management purposes, we maintain single name hedges on certain larger relationship lending commitments as credit spreads tighten during the quarter, we reversed much of the 375 million.
Dollar hedge gain we saw last quarter.
With respect to relationship lending, we also saw a meaningful reversal of corporate commitment draws in the quarter totaling $9 billion in net pay downs as financing conditions improved and we help clients access the capital markets. The strong issuance market also enabled us to reduce our underwriting commitments.
In the deals book for example, we successfully syndicated acquisition financings, including 10 billion euros for tison crop and $27 billion for T mobile, thereby reducing exposure to the firm.
As investment in the client franchise, and our continued strategic commitment to a global business model with scale across asset classes bolstered performance.
Turning to FICC on page six net revenues were $4.2 billion growth versus last year was driven by a 163% increase in intermediation and 71% increase in financing revenues.
In FICC intermediation, we saw elevated client flows with all five of our businesses increasing versus last year.
In credit our performance benefited from broad based client engagement and strength across investment grade high yield and distressed as well as bank loans amid wider bid ask margins tighter credit spreads and high new issue volume.
We also saw continued success in systematic and electronic market, making including high utilization rates for our bond pricing engine and automated trading all leading to higher market share for the business.
In currencies, we had another very active quarter with solid activity among corporates banks and hedge fund clients revenues improved as higher volatility drove significantly higher client volume in the Americas and Europe.
Our rates franchise also performed well on strong trading and high levels of client activity is elevated volatility normalized amid coordinated global central banks stimulus.
In commodities strong trading performance was aided by high volumes and volatility across all of our businesses, including oil natural gas and metals.
In mortgages net revenues improved significantly on strength in agency and non agency trading partly offset by lower loan trading volumes lastly in FICC financing, we saw considerable strength across repo and structured credit.
Turning to equities net revenues for the second quarter were $2.9 billion up 46% versus a year ago.
Equities intermediation net revenues of $2.2 billion rose, 91% aided by robust performance in cash and derivatives amid elevated client volumes.
We saw strength across the board in commissions market, making electronic trading and EPS as we executed for a broad base of active passive hedge fund and systematic clients. This reflects our multiyear efforts to leverage our scale and expand wallet share.
Equity financing revenues of $742 million declined 14% year over year, driven by tighter spreads lower average client balances and weakness in Europe, given recent dividend cancellations.
Finally across global markets, we continue to invest in technology platforms to enhance user experience and straight through processing.
We also saw continued high levels of client activity on our marquee platform through the second quarter with our highest ever external engagement in April.
Moving to asset management now on page seven.
In the second quarter regenerated segment revenues of $2.1 billion down 18% versus a year ago. As a reminder, this segment includes our platform that serves clients across us full spectrum of asset classes from liquidity to alternatives as well as our own on balance sheet investing activities.
Second we expect third party investing in this segment to grow over time as part of our broader strategic initiatives.
Management and other fees related to asset management clients totaled $684 million up 3% versus a year ago, driven by higher assets under supervision offset by mix given growth in liquidity products.
Equity investments produced $924 million of net gains in the second quarter aided by asset sales and a significant rebound in the value of public equity positions more specifically on our $2.6 billion public equity portfolio, we recognized $635 million of gains include.
Adding approximately 200 million in gains on of onto our and sprout and significantly better performance across the broader portfolio.
Despite recent gains we've reduced the size of our public portfolio by roughly 35% over the past five years.
On our $17 billion private equity portfolio, we generated event driven gains of approximately $500 million from various positions, including the sale of our UK student housing investment and air trunk and Australian datacenter, both of which we announced last quarter.
These gains were offset by $415 million of negative marks relating to two certain cobot impacted and other investments this quarter approximately 20% of companies on our private equity portfolio saw their performance impacted by coated 19.
Lastly, we also had positive revenues of $200 million related to our consolidated investment entities in the private equity portfolio.
Finally, net revenues from lending and debt investment activities in asset management were $459 million, which include approximately $200 million from net interest income with the remainder from gains on fair value debt securities and loans, reflecting tighter credit spreads retracing nearly 25.
Percent of the losses taken last quarter.
Let me now turn to page eight where we provide further transparency on the composition and diversification of our asset management balance sheet.
On the left of this slide we show our equity investment portfolio broken out by sector geography, and vintage. We also provide new detail on our $20 billion portfolio of Cie is these are primarily comprised of real estate investments of which $11 billion, our finance predominantly by non recourse debt.
At the bottom of the slide we show the diversification of the portfolio with only 7% related to the retail sector and 4% to hospitality.
On the right side of the slide we reflect our $30 billion lending and debt investment portfolio, which includes $17 billion of loans that are predominantly secured and $13 billion of debt investments.
We further breakdown these amounts by accounting classification sector and geography.
This portfolio comprises corporate and real estate loans and corporate debt Securities. We will continue to refine this disclosure to be responsive to questions from the investor community.
I will now to turned to consumer in wealth management on page nine.
In this segment, we produced $1.4 billion of revenues in the second quarter up 9% versus a year ago, driven by higher wealth management assets and higher consumer banking revenues.
For the quarter wealth management, and other fees of $938 million rose, 13% versus last year, reflecting organic growth and the United capital acquisition.
Assets under supervision rose, 14% versus the prior year to $558 billion.
Consumer banking revenues were $258 million in the second quarter rising 19% versus last year, reflecting higher net interest income from credit card lending.
Consumer deposits at quarter end totaled $92 billion across the us and UK, reflecting $20 billion of growth in the quarter.
Funded consumer loan balances remained stable at roughly $7 billion of which approximately $5 billion, where from Marcus loans and 2 billion from Applecart. We continue to prudently risk managed these portfolios and have moderated growth relative to initial budget estimates.
Now, let's turn to page 10 for our firm wide assets under supervision.
Total client assets increased to 2.1 trillion dollars up approximately $240 billion versus the first quarter and up nearly $400 billion versus a year ago.
This marks the first quarter in which we exceeded two trillion dollars in assets under supervision.
Our sequential improvement was driven by $100 billion of market appreciation $133 billion of liquidity inflows and $6 billion of long term inflows.
On page 11, we address net interest income and our lending portfolio across all segments.
Total firm wide net interest income was $944 million for the second quarter down sequentially and versus a year ago amid lower rates and an increase in our liquidity pool.
Importantly, and as I have noted previously as a firm our overall results are less sensitive to lower interest rates than many traditional banks, while our balance sheet is modestly asset sensitive given our mix of high turnover or floating rate assets and hedged floating rate liabilities if interest rates remained stable.
We expect Eni to gradually expand over time as our consumer deposits reprice.
Next let's review loan growth and credit performance across the firm.
Our total loan portfolio at quarter end was $117 billion down $11 billion sequentially as we saw significant paydowns on corporate revolvers as I noted earlier.
Our provision for credit losses in the second quarter was $1.6 billion up $650 million versus last quarter.
Let me break this provision number down for you.
On the wholesale portfolio, we took pool reserves of $700 million as modeled losses under Cecil were higher relative to the first quarter, principally as a function of macroeconomic indicators, such as unemployment and GDP worsening in the second quarter relative to similar inputs during the first quarter.
The $700 million included both higher loss expectations and lower recovery rates.
We also took impairments on wholesale loans of $540 million, primarily related to credits in the industrials TMT and natural resource sectors.
Included in the $540 million of impairments was $155 million related to hurts as the company declared bankruptcy.
This impairment was the largest in the quarter and was offset by gains on hedges, which served as a risk mitigant.
With hedge gains reported in the lending subsegment of investment banking.
In our consumer portfolio provisions of $305 million increased versus last quarter, reflecting $220 million of reserve build and $85 million of net charge offs.
During the quarter, we recognize firmwide net charge offs of $260 million, resulting in an annualized net charge off ratio of 0.9% up 40 basis points versus last quarter.
At quarter end, our allowance for credit losses for both loans and commitments stood at $4.4 billion, including 3.9 billion for funded loans, our allowance for funded loans increased 120 basis points to 3.7% for our $105 billion accrual portfolio in.
Including an allowance for wholesale loans of 2.8% and for consumer loans of 17%.
Next let's turn to expenses on page 12.
Our total quarterly operating expenses of $8.4 billion increased versus last year. This includes higher compensation expense in line with revenue growth. Our non comp expense growth was driven by $120 million increase in brokerage clearing and exchange fees from higher client actor.
70, $130 million of investments related to technology, and new businesses, including Apple cart and PFM in $100 million in Cie expense, which should decline as we harvest. These investments and are roughly $900 million increase in litigation.
Our reported year to date efficiency ratio was 67%, which was burdened by over five percentage points due to litigation.
We continue to make progress on our medium term expense savings initiatives as set forth at Investor day, and expect to realize additional planned reductions in noncompensation expenses through the back half of the year.
Finally, our reported tax rate was 22% for the year to date, reflecting the impact of higher earnings on permanent tax benefits and nondeductible expenses. As noted previously we expect our tax rate over the next few years to be approximately 21%.
Turning to our capital levels on slide 13.
As I mentioned common tier one equity ratio for the firm was 13.6% at the end of the second quarter under the standardized approach up 110 basis points sequentially more than recouping. The decline seen in the first quarter. The improvement was driven largely by earnings and R.W.A. management are.
Ratio under the advanced approach increased 10 basis points to 12.4% as higher capital was partially offset by higher our delays due to a full quarter impact of increased market volatility.
On the balance sheet total assets ended the quarter at 1.1 trillion dollars up 5% versus last quarter.
We maintained strong liquidity levels with our global core liquid assets, averaging a record $290 billion with growth largely commensurate with balance sheet expansion amid strong deposit growth.
On the liability side, our total deposits increased to $268 billion up $48 billion versus last quarter, which should enable us to maintain low levels of wholesale financing activity for the balance of the year as had been our intention.
In conclusion, our second quarter results reflect the diversification and strength of our client franchise and our ability to provide differentiated advice and market access in a volatile environment.
We maintain a prudent risk orientation mindful of continued uncertainty in the markets and the ongoing health crisis, our core businesses are performing well and many of our new initiatives are advancing ahead of plan. We remained confident in our financial position capital base and liquidity, which set the foundation for.
Our ability to serve our clients through this challenging time with that thank you again for dialing in and we'll now open up the line for questions.
Ladies and gentlemen, we will now take a moment to compile the cumulative roster.
And your first questions from the line and Glenn Schorr with Evercore. Please go ahead.
Hi, Thanks very much.
So.
My question on on training is towards the beginning year say at Investor Day, where we're talking about.
A little more focus on the financing side and felt like clients will pay for that and intermediation has been more commoditized and volatility as well. So what are you now.
Intermediation spikes because the while goes crazy so.
Here's a suit two things on this front is one is the pickup and intermediation, just the functional low volatility and that'll subside as a wildcard bad has anything changed there in terms of pricing market share in the client needs for you Thats part a and B is on the financing front you did show progress.
It is growing.
But but is there anything in the way the seek our stress testing goes that.
Good frowned upon that or change your intention on continuing to grow the financing side.
Thanks, Glenn Thanks for the questions David Thanks for the question I'm going to start on the high level.
On trading activity and I think Stephen I'll answer the second point.
Around financing and die and addressing your question as to potential impact from sea car.
There is theres no question that when we step back and we think strategically about our franchise, we want to be in a position to serve our clients.
We've always had great confidence in the broad global footprint that we bring to global markets that were on all products all of the world and as our clients look to intermediation markets. We have a full service capability to serve them.
Theres no question that over the last decade.
In a period of very low interest rates and low volatility that has been a more commoditized, Sir more commoditized service.
As you say in a period, where there is enormous change an enormous volatility in markets.
We became super busy because our clients are super busy and the reason you see this pickup in activity is because there was a lot of activity from our clients.
I don't necessarily view that as permanent.
But at the same point it shows you that whether it's in a more low muted environment, where we're well positioned to grow our financing business to serve our clients' needs or on our period, where our clients. The more access liquidity. Our franchise is very well positioned to serve them and I think we got a benefit in this quarter from from that.
Positioning, it's obviously very hard to predict given the uncertain nature. The environment. How this would continue I'd say upfront because I know it'll be a question from a number of view that the activity levels that we saw at the end margin in April really extraordinary we've not seen the same level of activity over the course in the last.
Five or six weeks since the beginning of June, but I would say the activity levels over the last five or six weeks when looked at compared to activity levels in 2019, or 2018 still look pretty active and sell we continue to see clients very very engaged in our markets business I think Stephen should comment on financing.
See car and how we're thinking about that and so I'll pass the Steven Thanks, David Thanks, Glenn for the question just to sort of pivot off of David's comments I would say.
The important thing to think about in the context of activity is that we were experiencing as David put it very elevated volumes at wider bid offer and.
Goldman Sachs sort of went to the market and didn't pull back and away from the market and in doing that we picked up market share, which I think we'll have lasting effect notwithstanding where the market goes in terms of its dynamic.
And the other thing I would point out is that.
In in working through those flows we managed risk really well, meaning we were not with elevated inventory we saw a high velocity turn in our risk in serving the intermediation needs of the clients and I think that's an important point to make.
On the financing side of the business overall.
It's important to bear in mind financing in FICC was up about 71% we saw considerable strength both in repo and in structured credit we saw similar activity on the equity financing side as well.
As it relates to FCB and see car I think that the ability of the firm to be agile and take our capital ratio up to 13.6% kind of takes SCB off the table and capital off the table in terms of our ability to present ourselves into the third quarter end.
Beyond as ready and opened to play the role we did in the second quarter, which is stand ready to meet the intermediation and trading needs of our clients.
And I think the final comment I'd make just on capital is that.
We said during Investor day that we would be agile, meaning we would be agile with the deployment of capital in and around the businesses of the firm now at the time the questions that came to US were more about the ability to pull capital from the securities business not put to it in this quarter, we moved capital to it returns were extraordinary so.
Super attractive and we were able to move that around as the kind of flexible organization that we'd like to think of ourselves as and we'll continue to do that based on what the market opportunity shows us.
Very helpful. Thank you for that one one other question as you mentioned the sale of global Atlantic I think that closes in a.
Few quarters that you guys should get a lot of respect for growing that from scratch basically.
Just curious on how much of that.
What percentage the loan Goldman Sachs I will not that not the private client.
Excellent.
Turning of the gain how much how much our Wi that frees up anything you can help on that because it is a good business. It's just really dense our Debbie I guess.
No I mean, Glenn I think you characterize it exactly well end and you hit the point, which was our motivation for the sale itself, which is this was a business that began in 2004. It was spun off in the second quarter of 13.
And over time because of its intensity as a financial institution it becomes more capital intensive. So obviously, our motivation is to free up that capital and deploy it elsewhere around.
We are about 25% of the ownership, we're selling out if not all then the preponderance of our position.
On that sale will release about $2.2 billion of risk weighted assets and about $400 million of attributed equity I'd also point out that this is part and parcel of kind of a larger move that will take place over the course of the entire year, which is this will be part of about 4 billion.
$1 of of sales off the balance sheet, all part of our broader strategy of looking at lower capital intensity lower balance sheet intense investments and moving more towards third party funds and so will we will buy the ended the year reduce that down.
And by about $4 billion that will relieve us of about $2 billion of capital and about $13 billion of risk weighted assets again global Atlantic being part of that.
I would say roughly speaking.
Almost half of that is done with the other half to announced and spoken for and expected through the balance of the year.
Your next questions from a line of Christian Bolu with autonomous. Please go ahead.
Christian Please go ahead.
Thank you so honestly it is on needs.
Good morning, Thanks, Thanks thousand new Desiree, so good morning dividends Stephen Good morning, maybe just following up on the capital question just asked.
I guess I think about your C on potential for another 50 basis points off of GCB surcharge, maybe by once in a some management buffer on top of what will be a minimum SCB number.
Your total capital requirements could be approaching 15% on a standardized side. So maybe just.
Help us think about how you think about getting that number back down to no more than 13, 13.5%, which is a long term target and then sort of water. These strategic or what are the implications all sort of strategic with initiatives to defense you have to bring down capital by that much.
Sure. Thanks, Christian so as I said in the prepared remarks.
We remain committed.
Over the medium term to the range of 13% to 13.5% I think we're executing at the moment in the moment, meaning we're in the midst of a pandemic.
Obviously the results around see car and the FCB fixing was higher than what we had an expected and perhaps reflects a view about where we are at a moment in the market.
But I think our strategy as articulated and Investor day, and frankly speaking what I described in the path toward reducing down capital intensity of our balance sheet investing are all part and parcel of our ability to take down what is otherwise meant to be represented in the peak to trough.
In the FCB and so we're executing now we are in a position having grown back our capital ratio to be within narrowed distance of what's required but again thats a moment I wouldnt fix a permanent capital buffer nor look to amend what I view as our medium to long term objective.
For a profile of the business, which will benefit from key strategic initiatives, which will lower the capital intensity.
Of where we're going and I think that's that's the forward path and so we'll remain quick on our feet as it relates to this but I just want to give you a sense of what the forward direction is for the from itself.
Great. Thank you.
And then on cost very strong core cost control ex litigation in the quarter. I believe you mentioned you'd expect more non comp benefit in the back half. So maybe help quantify that for US and then maybe longer term you've had a bit of a chance now to get a sense of the post covered world.
As those or do you think about sort of structural expense trajectory, particularly in light of that sort of 1.3 billion target today.
Much upside.
Could that be that number. Thank you sure sure. So in Noncomp expenses as you suggest ex litigation our Noncomp expenses are up about 9% and a good portion of that increase is attributable to variable expense like bcns. So this is expense obviously related to the.
Hey trend level of activity that we experienced in the business and the other portion of that increase is largely related to new businesses or larger sized businesses than where we were a year ago. So think.
The acquisition of United Capital expenses associated with it or Apple cart and so expense control has been.
On the on the front of our mind, what I expect to play out in the back half of the year will be as we've said previously the benefits from a reduction in double occupancy expense relating to real estate two buildings, both in London and in Bangalore that roll off and so as Weve long planned and expected that will benefit.
US in terms of the reduction in non comp expense overall.
On a more structural plane and thinking back to the $1.3 billion of expense reduction that we articulated frankly, I think we come at that number now with greater confidence in the in in that number and frankly the ability to exceed it.
Over the medium to long term and part of that is informed by judgments that we are making an analysis that we are undergoing not just simply about the size of the firm, but where the physical location of the from can be that is our ability to take aggregation of people or whole businesses and look to move.
Them to different locations either around the world or around the country and I think the flexibility and the agility that we.
Can take from what we've witnessed in the context of the last several months only feeds our confidence in the ability to do that and therefore, our ability to hit the $1.3 billion target or better over time.
Your next question comes from a line of Steven Chubak with Wolfe Research. Please go ahead.
Hi, Good morning, David Good morning, Steven morning, running on the.
[music].
Wanted to ask just a follow up on the funding optimization efforts that you guys have talked about before that's certainly the deposit growth continues to surprised positively both into our fourth on the consumer side as well as of end transaction banking now given that some of the growth appears to be tracking ahead of plan.
Sounds like you're quite confident on your expense savings targets for Investor Day, I was hoping you can give us an update on the funding side as well where they are still quite confident in that billion savings goal recognizing that a lot of its going to be dependent on terms structure shape that occur what have you.
Sure so.
On deposits your observations your observation is right I mean total deposits for the from now is $268 billion, that's up $48 billion.
Quarter on quarter Marcus deposits now again through the retail channel are at 92 billion that was up $20 billion.
In the second quarter, and we're also seeing deposits commando not yet operational in the transaction banking deposit side. So the growth in the deposit channels overall has been really really positive.
The question of whether we can harvest the precise level of savings of $1 billion that we forecast.
Rest largely on market.
Sort of developments would I mean by that is.
The deposits in retail currently are from a financial point of view less valuable in the moment than where they were in the January investor day, meaning we've seen fed funds come down by about 150 basis points, but we haven't experienced corresponding beta on the downside in the retail.
I'll deposit channel that will come over time, as we develop a more sort of substantive and profound level of engagement with retail customers. The reliance on rate will become less so and we will be able to sort of capture back where we were but I'd say that you know much of what we promised our investor day presentation.
Non was an assumption about normal markets, we're not normal markets.
A precipitous decline in rates, but not a corresponding decline in deposits.
I will will lessen some of the savings, but I wouldn't sort of put too much of a permanent conclusion to that let's wait until we get to a more permanent state of a normal market to sort of judge that by the way by contrast, we do see.
Positive beta in other channels, which play that way, particularly in the high net worth channel.
But I think we'll need to sort of assess just the magnitude by the way none of that is to take away from this strategic value of this consumer and the overall deposit channel, which is enabling us frankly faster than we thought to take down the wholesale funding channel and just just by way of reference we've got about.
$10 billion of wholesale debt through the balance of this year, either maturing or subject to call and we'll be able to set of act on that reducing down the liquidity that we hold all as a consequence of the growth that we've seen in the in the deposit channel overall.
Right. Thanks for all that helpful color, Steve and driving that maybe this question for you David on the M&A outlook and one of the concerns we heard reinforces the challenging M&A backdrop could very well process, just given low levels of CEO confidence in just uncertainty around the election in future tax policy and Wes.
You can give some color as to what you're hearing from this C suite regarding appetite for M&A and willingness to do deals and maybe what ingredients needs to be in place to help reinvigorate deal activity here.
Hi, Thanks for that thanks for that question and of course, you are right at a high level and we've always said this a number one thing that drives M&A activity is CEO confidence.
There's no question in this environment given the high level of uncertainty, it's much harder to see those same levels of confidence.
As a result of that as we highlighted in our and our opening commentary that M&A volume M&A announced M&A transactions and the second quarter were down 75% and so as you would expect we saw withdrawal of of activity. We obviously saw closings on previous activity, but we did not.
Replenishment and advisory transactions that we would normally see and I'd say that in March and April.
In particular in into the first half of May.
Dialogue with Ceos around forward strategic decision, making was very very limited people are in crisis mode, and we're very focused on dealing with the immediacy of the healthcare crisis and the crisis as it was affecting their businesses.
We have seen over the course of the last six weeks or so as.
Hi, as economies around the world started to reopened a re engagement by clients and Ceos and our forward strategic view I would say the dialogue levels right now are particularly robust I don't believe that we'll see short term activity.
I would expect over the course of the next two.
Two to four quarters those activity levels will build as we have a clear understanding as to the overall direction of the healthcare issue that we all face and the overall economic impact that comes out of this and as people have more confidence there will be able to move forward you did see one or two significant M&A trends.
Actions during the course in the last week I want to be clear if not shut down, but I think you need a more certain environment with better insight into the healthcare situation and the economic situation to see that replenishment normalized my guess is we'll get that but it will take a couple of quarters for sure.
Your next questions from the line that Mike carrier with Bank of America. Please go ahead.
Good morning, Thanks for taking the questions.
Yes first when you just on the private equity sales. This year I think you mentioned screening of about 2 billion to capital and if I'm not mistaken, adding during the Investor Day, you guys mentioned Henighan is about 4 billion over a period of three years.
So just curious business more accelerated has that opportunity set expanded.
Trying to get an understanding of maybe that piece of that as strategic shift.
Yes. So so you have the facts right I mean, you know by the end of the year as I said will free up about $2 billion, which is 50% of the way.
Toward the objective of for I would say that.
I don't view that four as being in any way the limit of what we can get done.
You know the more we can advance and an increase the cadence on the migration to lower capital density investing.
The better will be and we'll continue to pursue that obviously, there's two sides to this that are both progressing I mean on one hand, we're effectuating sales that will relieve us of capital, but we're doing that not leaving ourselves in kind of a canyon of activity in that.
As we said during the prepared remarks, we've really advanced on the raise of our first fund inside of 30 days, having a first close in excess of 6 billion with a target of greater than 10, and while we set out the objective of doing about $100 billion of raise in the in in in accrue.
Across a range of different funds.
I think we all have an expectation that will exceed the $20 billion target. We thought we would get to this year.
And look to revise targets across all of this as and when we think it appropriate but this is good forward progress and were very determined to see it happen.
Okay. That's helpful and then.
Just a follow up just on the trading activity of the I think you mentioned you just higher activity year over year.
To that belief of just when you think about it.
Profit products in client highway Deicing, you have ongoing at volatility and uncertainty that kind of benefits the industry, but are you seeing any.
It's a structural shifts.
In terms of Goldman share gains more easily electronic platforms.
In addition client relationships that Canadian more sustainable one some of this volatility services side.
Well I appreciate the question Mike on their number of things going on that we've highlighted but to summarize there may be put it at a different context of frames. Your question one of things we've done over the last two years as we thought very very carefully about our global markets franchise. The way, we wanted to center that franchise, which which which was really.
Around our clients.
We invested at a one Gs approach that we've talked about that really tries to improve the client experience for our clients across that franchise and we started making an investment in those relationships improving wallet gaps improving shares. That's an investment we started two years ago that was paying dividends, but I think what you saw.
Given the increased volatility in the heightened activity on the part of our clients. We saw an acceleration of the benefits of some of that investment during the course of the end of the first quarter and the second quarter I think the real share gains there I'm getting a lot of feedback from clients directly that they really appreciate the.
The way we've invested in the client centricity that business. The way we've kept a strong investment enrolling meeting their needs and I think we've we've we've reached some dividends from that investment now as that continues we'll work to protect those share gains, but I'd also highlight I still think theres upside for us when I look across the hundred largest players.
In that business and I look at our share across 100 largest players and where were top three was 100 largest players. While we've made progress I think we still have upside in the medium term. If we continue to execute on our strategy to take more wallet share given the strength of the breadth of our franchise and we're going to continue to remain focused on.
Your next questions from a line of Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy. Please go ahead and checking to see if you're on needs.
Can you hear me.
Now we can now weekend Betsy US Okay. All right. Thank you. Thanks for the time. This morning appreciate it and so it just a couple of questions. One I know that earlier there the question around capital and how to utilize capital most efficiently.
And I wanted to raise it with regard to Hallum Hound theme the var traject over this past quarter and I'm wondering.
Is there an opportunity here given the capital generation that you've been enable today and also the R.W.A. compression that we lean into the var and keep our relatively high I know in the quarter. It was up significantly Q on Q, but.
But how much of that is market related and how much.
You anticipate running it maybe a higher than you have had in the past given your capital flexibility they have.
So I think the premise of your question Betsy So the strikes at the answer which is we do have capital flexibility to elevate our var.
Using var as a basis or as a metric if you will for extending into client needs. So both you know.
Responding to the need for intermediation and positions at deploying capital against it and equally being responsive to the possibility of the market inflating is such that var increases in the context of inflated notional positions with particular credits and so I think we feel very.
The comfortable and part of the reason to take up our capital to sort of adequate levels were relative to where we will be required to be I think gives us greater confidence to see var inflate.
To the extent that we are in a position to serve our clients in in periods of continued uncertainty as David has been speaking about in the markets more broadly.
And was there anything this quarter and particularly the Anthro bar I guess last quarter was an 81 average borrowing and this quarter was 1029 total and impairment of across the board in the various categories me speak too.
What you thought in this quarter that that drove that MROP and what you think can be sustained into the second half here and what that means for trading revenues in a Jamie yesterday that valuation cut in half your trading revenues.
For three to event, where and when you stand on that kind of question well I don't think any of us or in a position to make such a declaratory judgment about the exact direction of trading revenues in through the second half of the year I think that what we need to do is set ourselves up.
To be in the service of clients and avail ourselves of the benefit of our shareholders of the opportunities as they present and I think David characterized it well, which is the second half will be more characterized by uncertainty than any ability to forecast upward down in the market itself and.
And I think we're well positioned from a liquidity from a capital and from a risk point of view to be able to avail ourselves. The one thing I would say as we think about risk in markets. Like this is drawing the distinction between what's liquid and what's not so when I look at the firm I think that.
Inventory was managed in the pursuit of intermediation in the trading business exceptionally well, we saw a very high velocity as we've long been looking to work with our securities leadership to do in in terms of seeing quicker turnover in inventory in sub par in support of.
Trading activity when I look at illiquid.
This is an area where from a risk point of view, we used market opportunities to lower for example commitments made in the deals Buck and took that book down and took risk down and position ourselves now to take on more risk.
In through the second half of the year to the extent that those opportunities.
Present themselves and so I feel quite good and confident about where we stand from a risk position not limited to what we do in trading activity, which will present itself, but equally around other areas of firm with more structural and kind of less liquid risks to take on board.
Your next question comes on line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi, well my short question is as I look at year end, we're the number why advisor. So what are you advising clients can do and how are you allocating the firm's resources to back that up and the color behind that is it seems like the elephant in the room as well Colby cases are going up.
I think death rate followed by about four weeks per experts that we add on a call and then you have shutdowns and you're seeing the shutdowns like in California and elsewhere. So these two scenarios here. One is made enrollment is needed less that investors in your clients go home and sit on the sidelines add too much risk.
Or maybe Goldman Sachs. It needed more as you said more complex deals a wider bid offer spreads.
Elevated volumes have more of a freak out market, where you guys stay open for business. So what do you advising clients, how you reallocating resources for that and what are your thoughts and my question.
Well, it's a very uncertain environment, Mike, it's a very uncertain environment and so one of the things where advising clients is that it's a very uncertain environment and they have to bring caution and planning to everything they do.
I will watch TV and read the news like everyone else and.
Sometimes quite surprised by how certain people are I continue to be relatively uncertain as to the trajectory of all this as I've said before we need to.
Understand the healthcare risks associated with the virus and get to a point where people feel safe uncomfortable, obviously, a vaccine would be a meaningful step forward with respect to that while there is no question that this progress with respect to a whole bunch of companies that are making significant investments in a vaccine.
And the was positive news again this morning, the exact trajectory at at and how we deployed and whether work in the the the effectiveness of all that is still unclear an uncertain I'm confident we will get through this but the timing and the impact is relatively uncertain. We've also because of the shutdowns economically all around the world have.
Hi slowed economic activity. There's no question has reopenings occurred we've seen a pickup in that activity, but with an increase in viruses and this uncertainty persisting I think you'll see a flattening in that economic pickup and that will slow the progress we make economically from here. So we continue to advise clients to be thoughtful and cautious of.
With that with respect to Goldman Sachs Dean open.
And ready and willing to serve our clients. There's no question in the second quarter that our clients were extremely active and we were there to support them. It's unclear how active will be in the third quarter, but there will be activity will be open at the end of the third quarter. We can we kind of look back and say how that unfolded, but I think we've proven and will continue.
It approved with great humility that we can be flexible we can work remotely we can adapt and we can also help clients adapt and so this is a very challenging time for everyone. The human told this crisis is really very significant.
Hi, everyone is focused on their employees everyone's focused on their businesses under stakeholders on the shareholders and I think that people need to be cautious because the economic repercussions of this will play out over the medium term and this is not going to be in my opinion, a quick resolution and we'll continue to try to be nimble and flexible.
Now for our clients navigate what I think we'll continue to be a very uncertain period.
As a follow up just as it relates to capital marketing are all trying to fill in our models for the next.
Several quarters, what could be the next step in capital markets.
In terms of repositioning of portfolios due to the election and another government stimulus or react with vacation continuing our you mentioned mergers where you said volumes are still above the level last year, even if coming down.
Yes people tend to give you a PE of one on your earnings.
Like quarter, such as this whereas you talk about the annuity with your clients I'm just trying to figure out what's what's the next step with capital markets at Goldman Sachs.
Well I think our capital markets businesses have long been a leader.
And we've been positioned as a very very strong leader and M&A advisory activity and equity underwriting activity for decades, we've made a significant investment over the last decade in our debt capital markets business and I think over the last few years.
You've seen the benefits of that investment and I think we're very well position to help our clients meet their capital markets needs.
Capital markets is a volatile business yet through the cycle, our capital markets businesses produced significant activity and significant profitability.
Don't have a crystal ball as to what's going to happen in the next six months I've had some discussions with people where people talk about some capital markets activity being pulled forward and there's no question that some.
Refinancing has been pull forward at the same point, there's been a whole bunch of activity that we could have never imagined whatever occurred because of the virus and the economic consequences of the shutdown. So when you look at industries like airlines and crews and travel and leisure there's been an enormous amount of capital markets activity.
It was completely unanticipated and so as we look forward over the next six months I think there'll be.
Other things based on the macro environment that will either lead to a pickup in some places or a decrease the one thing I know for sure as our franchise on a global basis is very well position to meet our clients' needs as that activity occurs Mike. The only thing I would add to David's comment is that and this goes back to the initial question you asked which is what are we doing with our.
Clients I mean, you can look in the capital markets at.
The need to apply more creativity to structured solutions for clients than perhaps what we've seen in kind of straight way issuance in more normalized markets look at the deal that was completed for United Airlines, which I think brings some interesting ingenuity and structure to what otherwise in the normal course would have been.
Fairly straight way financing and I think that's the nature and level of engagement with clients that were experiencing and I think it responds a bit to the question of where the capital markets going there may be more of a need of that right in the uncertainty that Dave it's been addressing.
Your next question comes from line, the Brennan Hawken, where the you BS. Please go ahead.
Yes.
Good morning, Thanks for taking my question appreciate all the time.
This quarter, you guys made a purchase of folio and.
And our eye a platform.
And is kind of curious if you could maybe give a little color on that was that purely for use by the United capital or is there interest in providing third party capacity services in the space, which is a market where we're seeing some consolidation and there's there's a lot there they are going for.
Threed it too strong providers of pure custody. So just curious if if that's part of the plan there.
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I think the way to think about it is is that in the end. We're looking to continue to build out kind of three components of that business does obviously, our ultra high net worth business. There is a high net worth business PFM, which was the United Capital I think folio serves.
To.
Clearly provide.
You know added.
Heft to that component of what we're trying to build the third leg in that stool would obviously be more mass affluent consumer piece, but this but the acquisition of folio is clearly aligned with the strategy begun under United capital and and the provision of third party custody more broadly so I think it fits both a generalized strategy.
But equally it it is entirely consistent with what we were trying to build out in the high net worth or PFM space, which was the United capital asset itself.
Okay.
Thank you for that too short and then when we think thinking about your comments on the M&A market interesting.
Very helpful about the pickup in dialogue in the last six weeks and clearly there's there's a lot of uncertainty.
As you flagged with health care and economic.
Factory, but we also here about the election uncertainty holding back.
Some component of activity in the US are you seeing a difference or a significant divergence in the level of dialogue in the United States versus other geographies and is it the other geographies that that's leading to the greater engagement or are you seeing it pickup in us as well just have new online app So sure Brad.
And I and what I would say as I said I don't see a difference and engagement levels in the us versus.
Versus let's say the rest of the world engagement levels will weigh down engagement levels are picking up everywhere. While the election is certainly something that I think we'll get a lot of attention over the next five months, it's still five months away and I I think that the healthcare crisis and the economic crisis. As a result of healthcare crisis has had a much bigger impact on.
Engagement levels than the election as to how the election starts to impact decision, making I can see it in some ways being an accelerant and in some ways potentially creating uncertainty and slowing things down, but I don't think the election cycle as yet playing a big role and client engagement.
Your next question from the line of Devin Ryan with JMP Securities. Please go ahead.
Great Good morning, David and Steven Thanks for all the time.
Good morning, good morning.
So just want to drill a little bit more into the progress and transaction banking and.
Really just trying to think about do the scaling in that business you know 175 clients today.
Ben and making some progress on deposits I guess, where do you feel like you are in terms of market share with those clients. So are they kind of test driving the platform today, but there's still kind of a huge opportunity of maybe more penetration and then as you think about kind of scaling that platform kind of what are they using today, where why are they using Goldman Sachs.
And what's the opportunity to do more with Im.
Sure appreciate the question and I know there's been some it has been a lot of interest in this there's also.
Hi, there are lots of and a lot of questions about our ability to execute on this if you. If you go back strategically one of the reasons that we were very confident of building. This platform as we were a big customer of other institutions and we saw a need based through our own experience and we've really put together what we think is a very very friction free do.
Digital platform that advances the connectivity to clients have to their financial institution and ease of use and very very meaningful ways.
The rollout has gone very very well I think we've been very cautious and conservative as we talked about a particularly at investor day around client take up I think one of the reasons, we felt comfortable that we could build a platform and attract clients to it if we build a good platform. If we built a good platform is that we have relationships with all these clients. These real.
Relationships a real they rely on us we lend to these clients and if we had an offering that was competitive we felt it was a reasonable ask of our clients to consider our offering I think what you've seen in this initial rollout is a lot of clients have considered our offering and the first and easiest way to consider it is too we've deposits with us.
To onboard get an account CD ease of use in doing that and leave deposits with us and so I think that's accelerated a much faster pace than we expected. We have had a handful of significant clients turn operational which is obviously, where the business becomes much more attractive to us and I would expect over the course of the medium term we.
We'll grow very substantial business, where these clients become operational on our platform.
That will lead to significant fee based revenue streams.
That will help that business growth, but we're in a very early stages. Our market share is tiny we don't have enormous market share aspirations, but we will grow this business, we believe nicely over the medium term and it will make a meaningful ill make a reasonable contribution to the overall diversification of Goldman Sachs.
Okay terrific appreciate that and then just a follow up.
Question, just around the comp ratio so year to date.
The accruals, 35% versus 36%.
Last year in the first half.
Trying to just kind of parse through how much of that is actually some of those expense savings coming through versus maybe leverage on mix or the fact that revenues are up 20% or trying to think about the accrual.
Are you guys are thinking about that relative to where you were last year sure. So the way we think about it is that in each and every quarter, we've taken accrual as at that quarter as to what we forecast we need to pay the organization and compensate the organization on a pay for performance basis, and it's not more than that Theres no signaling that's embedded in it or.
Otherwise I think a good deal of the savings is not anticipated in the context of lowering our comp ratio. It's really looking at the balance of expenses that I was addressing to an earlier question in terms of what we can do to bring down some of the noncomp expense and overall bring our operating expenses down but fixing this at 35.
<unk> percent as you May remember, we were 33.8% last year and so this is an ongoing quarter by quarter assessment of what we need to do taken look it at the overall performance of the business itself.
Your next questions from the line of Jim Mitchell with Seaport Global Securities. Please go ahead.
Hey, good morning.
Maybe just a question on the FCB and fast just trying to is if we look at trading as you pointed out I agree you see you've seen almost a counter cyclicality and trading revenues holding up very well in this kind of stress test, we just had from co Ed.
Yes, Ken losses, and trading through de faster so pretty high so when we think about your Sep going forward do you think theres any opportunity that have sort of the the fed sort of recalculate, how they think about trading losses, which could be a benefit to you or is simply the view to get the FCB sort of down as to just continue to do.
What you're doing over time and remix assets just just trying to see if you think theres a potential for a little benefit from the performance over the last six months.
Sure.
So I would say that for us pursuing both passive petition and action is right, meaning there is a do it yourself proposition here, which is to drive what we've been talking about that is lower capital intensity of balance sheet investing third party funds and the like all of that is subject to self help and we are minded.
Too aggressively address that so as to bring the intensity down.
As as a related.
Matter I think as you would imagine.
We have been very active in our engagement and discussions with the fed about the very observation, you're making which is when we look back historically at our own performance volatility carries a positive correlation to trading revenue and it's not uncorrelated and we have a view about what that means in the case.
Context of what.
The downdraft would be.
And have been engaged in a in a very active dialogue with the fed on that topic, how to handicap. The outcome of that is as an impossibility and so it is why notwithstanding that petition we continue to engage in self help and look to remedy.
This on our own terms.
Well, it's always good to hear your lease asking and just maybe one quick follow up on the advance CPT one.
Given the FCB is based on standardized does.
I mean is there any constraints does it matter the advance seats, you want to hate to say it that way, but does it.
Well I think the rating agencies appropriately take a look at the advanced and remember this has the CV a component in it that is not represented in standardized and so.
You've got to be mindful in managing all of these capital ratios that theres not one, but many constituencies to bear in mind and.
And so we do that and obviously pay attention to all of these ratios in the context of of how we carry ourselves.
Your next questions from the line of Brian Kleinhanzl with KBW. Please go ahead.
Thanks, just one real quick one on credit as early as you guys give an update on kind of where you're at with regards to deferrals and delinquencies and then also how you're thinking about reserve build from here I mean, both reserve a decent amount this quarter.
The peak or I guess sufficiently reserved for go forward losses. Thanks.
Sure so when I start on deferrals or forbearance so.
It's quite light across our whole portfolio. There is only about 3% of our total credit that is itself subject to forbearance. It's it's higher in the consumer portfolio, it's been about 10%.
Of the total portfolio that has.
Taken up forbearance interestingly of those that do about 50% our current on their payments, but bear in mind Thats, a very small component of the overall risk profile of the firm at $7 billion total so over across the whole of it it's about 3% it's not significant in the context of how we over how.
We.
How we operate in how we think about the risk overall, given how low it is.
I would say as it relates to the consumer.
It is one reason why the coverage ratio that we have through our reserve on the consumer portfolio is as high as it is at 17% that's not at all a reflection of our current experience in terms of losses losses actually are trending lower notwithstanding the moment in the market but out of.
Prudence and caution and given how young that portfolio is and given the fact that forbearance can mass risk.
We've taken up our provision there more generally on your question about provisioning.
As you know Weve took a provision of $1.6 billion in the quarter.
The methodology. We uses the same we did in the first then we'll hold ourselves going forward, which is we look at macroeconomic indicators, including unemployment that sort of correlate well to expectations around default rates and then pull that through to avail ourselves of.
Pool reserves.
And we broke that down in the prepared remarks, which amounted to about $700 million of the 1.6, that's there with the balance being impairments and the consumer component of provisions that I spoke about it leaves us with a coverage ratio of about 3.7%, which I think is roughly in line with where the mom.
Market is and accurately reflecting risk that's there as to what happens in the forward it'll purely a function of what plays out in the market and whether certain of these macro economic indicators worsen or improve from here and that obviously will flow through our model and dictate the level of provisioning we take.
Good thanks Cheryl.
At this time there are no further questions. Please continue with any closing remarks locations. There are no more questions I'd like to take a moment to thank everyone for joining the call on behalf of our senior management team. We look forward to speaking with many of you in the coming weeks and months if there any additional questions that arise in the meantime, please do not has it.
I hate to reach out to Heather and her team otherwise please stay safe and we look forward to speaking with you on our third quarter call in October. Thank you.
Ladies and gentlemen, this does conclude the Goldman Sachs and second quarter 2020 earnings Conference call. Thank you for your participation you may now disconnect.