Q3 2021 Goldman Sachs Group Inc Earnings Call
Good morning, My name is Erica and I will be your conference facilitator today I would like to welcome everyone to the Goldman Sachs Third quarter 2021 earnings Conference call. This call is being recorded today October 15th 2021. Thank you Ms. Holly O. you may begin your conference.
Good morning. This is Cary Holly I'm head of Investor Relations at Goldman Sachs.
To our third quarter earnings conference call today, we will reference our earnings presentation, which can be found on the Investor Relations page of our website at www Dot Dot com no information on forward looking statements and non-GAAP measures appear in the earnings release and presentation. This audio this audiocast is copyrighted material.
Oldman Sachs group I may not be duplicated reproduced or rebroadcast without our consent I am joined today by our chairman and Chief Executive Officer, David Solomon, Our Chief Financial Officer, Stephen Scherr, and our incoming CFO Dennis Coleman with that let me pass the call to David.
Thank you Carrie and good morning, everybody I'm, joining you today from California, where we have been hosting one of our best known client events, the builders and innovative summit.
We bring together over 100 of the most intriguing entrepreneurs in the world to exchange ideas and hear from thought leaders about how to build successful and enduring companies.
From a number of them that they are extremely excited to meet with our team and with other entrepreneurs here in California.
In addition over the last few months I've also been able to travel around to spend time with our employees and clients in person, which has been invigorate my.
In my conversations with clients and then the results we're reporting today, it's clear that our client franchise is on very solid footing.
This quarter, we announced two acquisitions, a key pillar of the strategic vision that we laid out at our Investor day in 2020 centered around diversifying our business mix towards more recurring revenues and durable earnings.
There's no question that we have been successfully executing on our growth plans and now we are further investing in the growth of the firm to accelerate our strategic evolution.
First in August we announced the acquisition of a leading European asset manager and then investment partners the.
The addition of $320 billion in assets under supervision will help us achieve greater scale and our asset management platform enhanced our distribution network on the continent and bolster our ESG capabilities.
On the topic of ESG as world leaders prepare to convene in Glasgow later this month, a cop 26, I would like to underscore the firm's commitment to working across our businesses to deliver on the goals of the Paris agreement.
This includes partnering with our clients to help drive climate transition and inclusive growth I want to make.
<unk> progress toward our target of $750 billion in sustainable financing investing and advisory activity to help achieve these goals.
My view is that the businesses and markets need policy.
It supports the deliberate transition to a more sustainable future.
This includes developing a mechanism to put a price on the cost of carbon.
This transition is complex and won't happen overnight.
It will require both the public and the private sectors to do their part.
And given the fossil fuels will remain part of our energy mix for the near future. It is critical that we strike a balance between good public policy and recognizing the consequences of the supply constraints that we face.
Our second acquisition was Green, Scott, which we announced in September the.
This transaction furthers our efforts to build the consumer banking platform of the future.
It provides our consumer business with an attractive and high credit quality customer acquisition channel via an impressive network of over 10000 merchants and secondly growing market.
That's a digital cloud based infrastructure and product capabilities that are synergistic with our broader platform.
And with the addition of our bank funding model, we expect to generate 20% plus returns at scale for recurring fee based on net interest income revenues.
Importantly, these customers will be our customers. They will live in the markets ecosystem, where we can holistically help them manage their financial lives.
Turning to page one of our presentation, we produced net revenues of $19.0 billion driven by year on year increases in three of our four business segments.
On the bottom line, we delivered net earnings of $9.0 billion and quarterly earnings per share of $107.0
Our year to date revenues of nearly 47 billion and net earnings of over $22.0 billion or higher than any full year results in our history and drove an ROE of nearly 26% and an ROE of over 27%.
Our performance underscores the strength of our client franchise and a supportive market environment.
In investment banking, we produced our second highest quarterly revenues our clients. We're extremely active we turned to Goldman Sachs for a leading M&A franchise, driving strategic activity and associated financing the elevated levels.
We delivered solid results in global markets as we continue to focus on market share and engage with clients on a broader array of solutions.
In asset management assets under supervision and another record of $1 seven trillion, which will be further enhanced by the <unk> acquisition, we continue to transition our alternatives business to more third party funds and we have gained momentum as we spend a significant amount of time with new and existing institutional clients.
<unk> $90 billion against our goal of $150 billion in gross fundraising commitments since our 2020 Investor day.
And then consumer wealth management, we had a record quarter.
Wealth management, we've seen strong long term fee based inflows in the first nine months of the year and a big client wins and eco that give us the opportunity to serve employees at all levels of their organizations.
In consumer we are now, enabling 9 million customers to spend borrow and save on our multi product platform.
All in our strong performance tireless focus on our clients and relentless execution of our strategy strengthened my confidence that we will continue to advance our strategic evolution and deliver higher more durable returns for our shareholders.
Let me now turn to page two.
Broadly speaking the current operating environment still has solid fundamentals, but there is increasing uncertainty and a number of factors.
On the one hand fiscal and monetary policy remain accommodative in equity markets is still near all time highs.
COVID-19 vaccination rates are rising around the world.
I believe that we are likely pass the worst of the pandemic effects on the global economy.
And as technology behind the vaccines continues to improve we will make further progress against the virus.
That being said there are a number of emerging areas of uncertainty, we're paying close attention to.
First the trajectory of inflation, particularly wage inflation in the short term.
Second there remains significant uncertainty around the Delta variant.
Third there is ongoing political debate in the U S over economic policy, including the potential for additional infrastructure deals the longer term extension of the federal debt ceiling and tax increases and for us The U S. China relationship remains complicated.
Taken together these items have the potential to be a headwind to growth.
As further indicated by the downward revision in our economists U S GDP expectations earlier this week.
Regardless of the market backdrop, I consistently hear from clients how much they value the high quality service, we provide especially our differentiated execution capabilities.
Yes.
As I look ahead I remain optimistic about the opportunity set for Goldman Sachs and our ability to grow our firm.
Activity levels remain high, particularly in investment banking and we have solid momentum in our asset management client business.
Before I close I would like to thank thanks, Stephen for his nearly three decades of service to the firm I've.
I've had the privilege to work with Steven since the early two thousands and I couldnt be more grateful for his counsel and friendship over the last 20 years.
In January as we announced previously Stephen will be succeeded by Dennis Coleman 25 year veteran of Goldman Sachs was held numerous leadership positions with an investment banking most recently as co head of the financing group.
And Stephen have enjoyed a close working relationship for almost 20 years and are progressing toward it.
A seamless transition in the CFO seat.
With that I'll turn it over to Steven.
Thank you David Good morning to all of you on the call before I turn to the results. Let me briefly that I have thoroughly enjoyed the opportunity to work closely with all of you our shareholders and the analyst community over the past three years as CFO and I am committed to facilitating a smooth handoff to Dennis who as Kerry noted who's joined us on the call today.
On our results, let me begin with our business performance by segment starting on page four I am pleased to start with investment banking, which has continued to experience strong momentum and produced its second highest quarterly net revenues of $10.0 billion.
The consistency of performance in investment banking is a reflection of both elevated market activity and increased market share in a client that has long enjoyed a leading competitive position.
Financial advisory revenues of $7.0 billion were an all time high.
We maintained our number one league table position for the year to date participating in one four trillion of announced transactions with a volume market share of 32%.
M&A activity was elevated across geographies and industry groups with particular strength in TMT and health care and benefited from our strategic footprint expansion and our significant position with financial sponsors who remain exceptionally active in the market.
Underwriting results were strong notwithstanding more normalized activity relative to the very robust levels in the first half equity underwriting generated $3.0 billion in revenues, representing our fourth consecutive quarter with revenues in excess of $1 billion. We ranked number one globally in equity underwriting for the year to date.
With volumes in excess of $110 billion across 570 deals that represents volume market share of 10%.
In debt underwriting net revenues were $726 million with.
And supported by solid high yield and investment grade issuance as well as acquisition financing activity given the current levels of M&A announcements and continued healthy activity among financial sponsors, we expect acquisition financing activity to remain high.
Despite significant levels of completed transactions, our investment banking backlog, Nonetheless ended the quarter significantly higher than year end levels.
Corporate lending results of $152 million reflected revenues from transaction banking middle market lending and the relationship loan book, including associated hedges in transaction banking, we achieved our five year goal of $50 billion in deposits. This quarter well ahead of the target date is a key growth initiative.
For the firm with a very large addressable market. We continue to successfully access the breadth of our corporate client base, and adding customers and driving higher engagement on the platform, which has exceeded expectations. We remain confident in the longer term revenue target for this business of $1 billion.
Moving to global markets on page five segment net revenues were $11.0 billion in the quarter, 23% higher year on year, driven by healthy client activity, notably in equities and a generally supportive market, making environment characterized by heightened volatility in certain areas results were also support.
By recent market share gains across FIC and equities global markets again produced returns in excess of the target ROE expressed at our Investor day, reflecting the strength of our franchise and ongoing attention to cost.
Turning to page six our FIC businesses generated $7.0 billion of net revenues for the third quarter.
The decline in FIC intermediation versus a year ago was the result of lower revenues and rates credit and mortgages offset by materially better performance in commodities and higher results in currencies activity increased into the end of the quarter with September proving to be a very strong months, our commodities business continued to.
Performed well amidst the heightened level of volatility in the business, including in oil natural gas and power.
Financing revenues of $513 million were the best in over a decade, and we're up meaningfully driven by mortgage lending consistent with our strategy.
Total equities revenues of $4.0 billion were very strong helped by higher results in equities intermediation amid better performance in both derivatives and cash and record equities financing as we saw record average balances in prime and opportunities to extend liquidity to clients.
Moving to asset management on page seven in the third quarter, we generated revenues of $5.0 billion management and other fees totaled $724 million, which were.
<unk> by approximately $155 million of fee waivers on our money market funds. We again extended these waivers for clients consistent with industry practice in this low rate environment.
Equity investments produced net revenues of $935 million and made $7.0 billion of gains on our $16 billion private investment portfolio, plus our consolidated investment entities, partially offset by $820 million and losses on our $4 billion public portfolio.
Losses in the public portfolio were dominated by a few positions, which by contrast, where material contributors to gains in the segment last quarter. Additionally, we had operating revenues of roughly $200 million.
Related to our Cie portfolio.
Staying with asset management page eight again provides disclosure on the composition of our equity and debt positions by vintage region, and where relevant accounting treatment on.
On page nine we show a longer time series of disclosure regarding the progress made and harvesting our on balance sheet investments.
Since our 2020 Investor day, we have actively harvested positions of $16 billion, which have been partially offset by markups on the portfolio of $9 billion and additions of $5 billion, which include early fund facilitation and other commitments the implied capital associated with total dispositions occur.
Cross, both private and public equity positions since our 2020 Investor day is approximately $8 billion.
We continue to have line of sight on $10.0 billion of incremental private asset sales corresponding to $2 billion of capital reduction we remain focused on the execution of this strategy and meeting our capital target for this segment to this end, we sold over $1 billion of Cie portfolio during.
The quarter and also disposed of $2 billion of private positions.
Moving to page 10, consumer and wealth management produced record revenues of $2 billion in the third quarter in wealth management very strong long term fee based inflows for the year to date helped drive record management and other fees of $3.0 billion.
Which rose, 10% versus the second quarter and 28% year on year.
Incentive fees of $121 million largely reflected the recognition of overrides in certain of our investment funds private banking and lending revenues of $292 million rose, 12% with loans to private wealth clients up $2 billion sequentially as demand for lending products remains high amid.
The low rate environment, I would add that we view private bank lending as an integral part of our wealth offering with room for further growth based on the needs of our clients and our current penetration rates as well as the strong credit standing of this client base.
<unk> banking revenues were $382 million in the quarter, reflecting higher credit card loans and deposit balances year over year, we expect loan growth to accelerate in 2022, given the pending acquisitions of Green Sky and the General Motors credit card portfolio and continued expansion in our existing product set.
Looking across these two segments page 11 shows our firm wide assets under supervision and management and other fees. We have been building. These businesses steadily and total <unk> now stands at a record $2 four trillion.
Putting us in the top five are both active managers and alternative asset managers globally disc.
This growth is driven higher firm wide management, and other fees, which rose 16% year over year to a record $10.0 billion.
On page 12, we address net interest income and our lending portfolio across all segments total firm wide NII was $7.0 billion for the third quarter higher versus a year ago, reflecting lower funding expenses and an increase in interest earning assets our total loan portfolio at quarter end.
<unk> was $143 billion up $12 billion sequentially, reflecting increases across the portfolio.
Corresponding provision for credit losses of $175 million reflected portfolio growth.
On page 13, you'll see our total quarterly operating expenses of $6.6 billion.
Our efficiency ratio for the year to date stands at 52, 8%, reflecting our ability to exhibit operating leverage while maintaining a pay for performance culture and investing for growth our year to date non compensation expenses were down 17%, but up 11% ex litigation, while our compensate.
<unk> expenses were up 34% on a year to date basis.
Turning to capital on Slide 14, our common equity tier one ratio was 14, 1% at the end of the third quarter under the standardized approach down 30 basis points sequentially.
Despite higher capital on solid earnings generation. The decline was driven largely by a $43 billion increase in our <unk>, partially reflecting revisions to <unk> calculations based on regulatory feedback in the quarter.
In the quarter, we returned a total of $8.0 billion to shareholders, including common stock repurchases of $1 billion and $700 million in common stock dividends consistent with our capital management philosophy, we will prioritize deploying capital for our client franchise at attractive returns.
And then return any excess to shareholders via dividends and share repurchases.
In conclusion, we delivered another quarter of strong performance, reflecting the diversification and strength of our client franchise. Additionally, we announced two acquisitions that will enhance both our asset management and consumer businesses and increase the firm's recurring revenue stream looking forward the overall opportunity.
Set remains attractive across the firm as we continue to execute on our strategy. We are building towards a path to sustainable mid teens returns with that we'll now open up the line for questions.
Ladies and gentlemen, we will now take a moment to compile the Q&A roster.
Your first question comes from the line of Glenn Schorr with Evercore ISI.
Hi, Thank you.
Stephen I Wonder if I could ask a quick follow up question on your comments just now on capital.
So you make a ton of money book is up 21% year on year Amazing.
You did the green Sky and IP deals.
But <unk> resolved because activity is strong in factories coming so I wonder if you could just peel back a little bit more and just talk about.
Where you see your excess position now and if at the margin we should be expecting continued investment.
I'd say the digital consumer build.
At the.
At the margin more so than the buyback side. Thanks.
Sure Glenn so.
Let me start kind of with with a reiteration of our standing capital policy as you know.
Our priority is to deploy capital in the business on behalf of clients and to do that especially when returns are as attractive as they have been so in a quarter, where we produce 22, 5% Roe.
It stood to reason and consistent with that that we deploy the capital in the business I would also point out that in the dividend our dividend is now at $2 a share up from a dollar and a quarter. So on an annual basis, we're returning an additional $1 billion or so to shareholders through the dividend.
And where we exhaust opportunities that proved to be attractive, we'll return capital back and that really represents what we do in terms of share repurchase now.
Now in terms of the opportunity set you referred into the consumer business. It is unquestionably a priority David is reflected time and again the long term view, we have about how that business can grow and be accretive to the firm, but I would say that the deployment of capital no. It's not one segment, nor one opportunity. It is a broad look across.
The firm and we think always about how do we add in an agile way to deploy capital across the whole of the business. So I wouldn't necessarily say that its targeted against anyone in particular.
Obviously, we're operating at a higher SCB of higher minimum requirement.
Pursuant to the fed therefore surplus is less and we.
Consistent with the policy always look forward to what will be in effect a petition on capital that we know soccer is certainly one of them.
And in that regard, while we've not made a formal decision on implementation and we'll let our regulators know when we do we're looking forward to that and our view is that when we.
Put soccer in place it will increase our <unk> by about $15 billion or tax our ratio by about 30 basis points.
It is at that level in part because as we look back when soccer was finalized by Basel in 14 and adopted by the fed in 37. We began then to kind of proactively mitigate the effect. So the implementation now reflects mitigation progress we've made in anticipation of it.
As opposed to kind of our starting work stream and obviously the work was assembling data and understanding where appropriate netting pursuant to the rules could play out, but I think that's a reflection of our proactive engagement so as to minimize the impact to capital and ratio now.
<unk> to what it.
Would have been and so.
Sorry for the long answer, but that gives you kind of a complete picture. If you will of how we're thinking about capital.
That was comprehensive I appreciate it take notes.
One last follow up.
Because year to date revenues were up 42% and so strong you may put them on the comp dollars accrued are up 34%.
I Wonder if we could talk about that a little bit in terms of leverage I know, it's a bottom up and I know a lot of people at Goldman Sachs at Telemundo.
But I think one mbd.
Impacted things last year, so just thinking full year to full year comp ratio.
Anything on the puts and takes.
On what to expect.
I start with the numbers and then I'll turn it to David who I think can reflect on kind of comp philosophy, generally, but where we are right now comp to net revenue net of provision for credit loss is at 31% through nine months.
Was it 34% when we ended the second quarter.
We always reserve for compensation.
With the with what's required of US which is what do we think we need to pay the firm consistent with performance as at that date. Obviously, there is a quarter to go. So we're at a 31% ratio revenue net of provision for credit loss you can see through nine months in the comp and benefits line not to confuse the two numbers that number.
There is up 34% again, reflecting.
The performance of the business in a pay for performance philosophy more broadly that 34% is obviously to be measured against revenues that are up 42% year to date and revenues net of provisions up 56%. So you can see the comp leverage that exists even when we are.
<unk> for what we believe to be a healthy and robust.
Comp process I think.
Overall, if you look at total operating expenses, because we look at it that way, including our non comp expense.
There continues to be the exhibition of leverage operating leverage in the business again revenues up 42%, but total operating expenses ex litigation are up 24% and so this just gives you a sense of the leverage in operating expenses broadly and in comp.
Specifically, but maybe David wants to comment just on the philosophy.
Glenn I appreciate I appreciate the question I know one of the things you're getting at there is no question. There is compression is wage inflation everywhere.
All aspects of of every business right now we're extremely focused on it we are a pay for performance culture and there is no question that people are performing but we're very very comfortable that we're managing this in a way where we can show real operating leverage to our shareholders given our performance and at the same time our.
People exceptionally for the exceptional performance.
And we are on top of it we feel good about it.
Yeah.
Thank you Paul I appreciate it.
Your next question comes from the line of Christian <unk> with autonomous.
Good morning, David Steven and welcome Dennis.
I, just echo David's sentiments about Steven <unk>.
Congratulations.
Definitely it will be very big shoes to fill for sure.
So my first question here is on the digital consumer bank that business continues to do very well I didn't get states revenue growth is an impressive 30%.
But that's still lags some of the pure play of Neo banks out there.
And some of that might just be a function of product holes.
If you could check and payment functions and invest in functions and mark was a little bit a little bit light.
So curious how you think about the product road map.
From CFO Markus.
Potential to use M&A to fill some of those gaps.
And then longer term, how should we think about sort of.
Sustainable revenue growth for that business.
Sure I'll start and Stephen Stephen May add some comments, but this is this is Christian.
This is something that we're focused on over the long term I think we've built an excellent platform from.
From a standing start at zero and five years, we've built a very very significant.
A depository institution with over $100 billion of digital posits no branches very small marketing budget, our customer acquisition cost.
Cost of the infrastructure that holds and drive those deposits is very very efficient needs of the other models. We have 9 million customers that we're servicing right now we have our own credit card platform that I think is really differentiated and we're onboarding. Both other partnerships, but also have the opportunity for our proprietary card.
<unk>, it's in development, we've talked publicly about adding digital checking to the portfolio. During 2022 and that is on track and it's expanding green Sky allows us to broadly expand our point of sale capability.
Was highlighted in the.
Starting comments their tech platform. They are cloud based technology integrates very seamlessly into what we're doing and so we feel very good about the fact that we're going to continue to grow this and build a consequential business, we have a long term view with it.
Yes.
I'm not going to comment on our revenue growth percentage. Unlike a lot of the fin techs that are simply trying to look at our revenue growth model. We're looking to build a sustainable business that contributes durable recurring earnings to Goldman Sachs over time and to compound that and we do believe that if we serve clients well in a seamless way.
With good technology. It will continue to grow and we will do that I don't know Stephen if you have anything else you think should be added well the only thing I'd add Christian is if you just look at the year over year comparison right. So you can't forget that we went through kind of a more challenging period in COVID-19, where we by design look to limit the amount of underwrite.
We were doing we're now coming back to sort of turn that back on having seen the portfolio performed very well so year over year revenues in consumer are up 23% in the deposit line there up 54% in credit cards and Thats, just a reflection of the renewed commitment that David is reflecting.
Just sort of growing out the business and seeing it perform and I think David's comments are spot on if you look at loans and savings and Apple card soon to be joined by General Motors, the investing module and checking this is what's coming into focus as a big broad platform that can serve customers in all of their needs.
As opposed to where we began and kind of a bespoke product set and and I think we're at we're at a key moment now with the acquisition of Green Sky to sort of take that forward.
Great. Thank you Mike.
My second question, maybe back to trade in a bit of a high high.
First problem here, but.
The results are just another quarter of market share gains in the trading businesses.
But the share gains have been so dramatic over the last few years that one has to wonder how sticky it could be going forward.
So just curious how you think about it.
The inability of share gains in the trading business.
Roll into sort of 4045.
Well Christian I appreciate I appreciate your.
Focus on the share gains I don't I don't.
I think it's a really important part and highlight of what we've been executing on in the context of the strategy that we laid out when we went back to Investor day, and so I think there are a couple of things that we've tried to do very differently over the last few years to strengthen the position of this business and I think they are accruing.
The results that will be quite sticky and I don't want to say that the share gains are going to continue at this pace because they want we know that but we've positioned the business much much better for I think two principal reasons number one the business has been much more focused on having a client centric one GFS culture to really figure out how to.
Serve the needs of our clients in a very holistic way the business has been less transactional more long term focused on the client relationship and the level of client service, while bringing to bear the market, making provisioning and financing capabilities of the firm that we have and I'm hearing repeatedly from clients.
See a real switch and the way we're operating the business and it is accruing to market share gains, it's benefiting us in that context.
Number two we were never an organization that's focused on financing our clients.
As a business segment that we can meaningfully grow and target and so since the investor day, we targeted our ability to grow our financing capability across both equities and fixed and we succeeded on that and that's a place where we've taken market share and that is more durable share obviously and we continue to think there are opportunities that we can.
<unk> to prosecute on.
On the financing side and that's different I would also highlight that we've been making significant investments in technology and we have the scale and have developed platforms that enhance the competitive position that we have with clients and I think one of the things thats happening broadly is the leading players here given the yes the tetramer.
Saturday have an advantage the secondary or tertiary players and so we're benefiting from that also now there is no question. This is a very conducive environment. The performance of that business and we're not sitting here, saying this level of performance will continue but I think that the way we're running the business the focus we have.
Made.
Certainly takes us a step function up from where we were in 2019 I'd also say as part of our Investor Day, we were focused on efficiencies and operating that business and so even if we went back to a different level or at a higher hurdle return rate and the business at lower levels and so we feel very good about the way the business is positioned.
Your next question comes from the line of Steven <unk> with Wolfe Research.
Hi, good morning.
Hey, good morning.
Good morning, I wanted to start off with.
With a question.
And there will be a multifaceted one sponsors in the alternative space.
As sponsors had been really significant and clearly growing contributor to increased M&A activity. These last 12 months you guys have certainly benefit from that we're selling with unique perspective into the business just given you're building out your own third party alternatives platform and you cited some really impressive fundraising numbers I was hoping you could just speak to how much longer this <unk>.
The pace of both fund raising and deal activity could persist and whether there are any factors, we should be watching whether it's tax reform or higher rates that could potentially derail some of that momentum.
Sure.
And I'll I'll.
Tried to talk at a high level about some of the Steve.
And I think you're right. We're at a moment in time, where the activity levels are quite high.
First on fund raising I would just say that one of the reasons why we got very focused a few years ago.
And in a much more organized way growing our third party capital in building institutional relationships to add to our alternatives platform.
So really a secular growth in the context of capital allocation.
The alternatives and as you get out and you get around the world, whether it's government sovereign wealth funds are brought institutions.
All of them or a broad array of them are increasing their allocation to alternatives. I think in addition, there is no question that we're in a position in the world is in a position where retail participation to wealthy individuals is broadly expanding in the alternative space and so there is more access being offered to wealthy individuals we've always.
Had a distribution channel with ultra wealthy individuals, but that access is broadening.
More significantly and so I do think we have a number of years ahead, a broad secular growth in terms of the capital allocation onto these broad global alternatives platforms. I think we're very well positioned for that and so that's helping us in the context of our fundraising as we highlighted.
With respect to deal activity, there's a lot of dry powder out there I would note that sponsor activity and M&A was a much higher percentage of activity this quarter.
It's been over the last few years.
And in the past when sponsor activity has increased.
One for a while but then ultimately there'll be something that backs at all.
Watching the velocity of our lending activity into that sponsor activity very carefully thinking very carefully about risk management around that.
It feels at the moment, given the continued accommodative monetary and fiscal policy environment and the re acceleration of the economy coming out of the pandemic that this will run for some while but thats also something that we're going to watch very carefully.
Because it won't sustain at this pace will certainly be speed bumps along the way.
Okay. Thanks, David for all that color and maybe just for my follow up.
A question Steven just on equity investments and the impact to capital and one of the primary drivers of future SCB reduction, which you've talked about is the harvesting of those equity investments, we know they've got very punitive treatment in CCAR.
And this is a high class problem shrinking the investments at least on that basis has proven rather difficult and remained stubbornly above that $20 billion level, how much smaller does the book need to get in order to meaningfully reduce your SCB and is that 13% to 13, 5% CET one target.
Still the appropriate long term bogey, just given some of the <unk>.
The high equity investments have persisted for the better part of a couple of years now.
Sure Let me, let me start with the with the <unk> part of your question.
Our strongly held view is that 13% to 13, 5% is the right place for this firm to operate now our ability to get there is obviously frustrated by with the fit is otherwise requiring of us in the context of CCAR NFC b. So.
In that context, what we can do and what we are doing.
Is candidly taking action into our own hands, meaning we're not waiting for petitions to be well received and ordered that the requirement comes down, but instead, we're pivoting and moving.
From balance sheet into fund format.
If you look at the page nine in our in our deck, what you'll see is what's happened in terms of $16 billion of dispositions and what that has meant for AE free up. So I'll just give you a sense of it in the last nine months, we've seen reduction in balance sheet of $17.0 billion.
Corresponding to $10.0 billion of AE since.
Since Investor day, $18.0 billion of reduction in balance sheet and $11.0 billion of freed AE.
And we have line of sight from where we sit.
To about $10.0 billion of balance sheet reduction freeing.
Freeing up about $2 billion of AE.
You all those numbers because you can see in the magnitude of the activity that's been going on that will continue.
And we had always.
Focused in on whether or not at Investor day, we would experience a bit of a canyon. If you will of revenue, meaning we would see balance sheet reduction come off at a quicker pace faster slope than what might have been a yawning line. If you will to two fund raising and deployment.
It's not happening.
David has said we have $90 billion.
Our fund raising which and underlying that is about $50 billion of aes, which is fee paying and so that transition is being managed well and this just gives you a sense of the overall capital reduction in the context of what we're trying to achieve.
Your next question comes from the line of Jeff Harte with Piper Sandler.
Good morning, guys.
Hey, Jeff Good morning.
So balance sheet growth has stepped up since the pandemic and its something we kind of been waiting for really kind of since the great financial crisis.
Can you talk a bit about how much of that growth has really been driven by client demand for balance sheet, which would be a good thing versus just being a function of kind of QE and the flood of liquidity in the market.
Well I would say that.
Much of the balance sheet growth that has gone on has been attributed to client activity. If you just look at.
Segment by segment, you look at growth in our financing activity in investment banking that supports our M&A franchise, you look at financing that's going on in the context of both FIC and equities that were up year on year and that David was reflecting in the answered his question around kind of sustainability and the forward in our <unk>.
Trading business and so a good deal of this is balance sheet in support of clients I would point out though that in the context of growing balance sheet. It doesn't grow in isolation, meaning we have various risk metrics that are in place capital has obviously grown liquidity maintained at the firm obviously.
Grows in the form of our <unk> and so all of these I think are meant to be read in tandem in the context of serving clients, but doing that in a way where balance sheet growth is is held in the context of various risk be it capital and liquidity profile.
The firm itself, we're not we are not a bank notwithstanding the fact that we have strategically grown our deposit base that are experiencing the kind of outsized growth in deposits that you are seeing or that you have seen at the bigger commercial banks and that is inflating balance sheet. There, we're not seeing that kind of.
Asian frankly in part because this is a new platform for us and a strategic pivot in terms of very usable deposits as a substitute for wholesale funding.
Okay and as we are.
Think about the kind of recurrent question for a number of quarters now capital markets and kind of how sustainable are these really strong activity levels understanding that you can't predict and things could shut off tomorrow. How do you think about things like investment banking and global markets. When you look at kind of the budgeting process into next year and maybe the year beyond I mean, how do you.
Broached that what's your outlook from that perspective.
Hi.
I think our outlook there are confluences of things, Jeff that are going on that are obviously quite accommodative for that.
You are right at any point in time that mix could change.
We wouldn't see the same robust amount of client activity.
But we have fundamental growth.
<unk> markets, we have fundamental growth and economic activity around the world and that over periods of time growth long term growth and these business platform. So I certainly would say we're running at very very robust capital markets activity in the investment banking franchise at the moment, but I'd also say whenever things.
Slow down and rebalance a little we're going to find that these businesses are baseline fundamentally larger than they were five years ago, because of the growth and market capital World and the growth in economic activity in the world and so we've always said that there's a real correlation to economic activity.
Two our activity because real correlation and market cap growth to our activity. Obviously, these things will ebb and flow but.
But we have lots of flexibility in the context the way we manage the businesses.
And these businesses I think will continue to be strong performers even in different environments. They just might not perform at this level all the time.
Yeah.
Your next question comes from the line of Betsy <unk> with.
Morgan Stanley.
Hi, good morning good.
Good morning, good morning Betsy.
So we talked a little bit earlier about market share and market share opportunities I just wanted to take a slightly different angle on that and ask the question about where you think you are.
Punching below your weight.
If we could think about that being an opportunity from a regional perspective so.
Especially in Europe, or Latin America, maybe Asia, you could speak to where you think you have opportunities in those regions.
Okay.
I point to a couple of things at a high level Betsy. There's no question one of the reasons why and was really attractive to us.
Is that in our asset management business, we've been punching below our weight across Europe.
In terms of the assets that we were supervising but also in our distribution capabilities.
And accelerates that I still think there's more opportunity there I.
I do think around some of the public.
A portion of our <unk> business.
Across the world there is still opportunities for us to punch.
Better way, even though at this point, yes, we're one of the top five active asset managers and.
And so we continue to think about that as an opportunity I think there are opportunities for us around the wealth management business in particular.
In Europe, and we've been focused on that I think they are wealth management opportunities for us in the U S. As we move from simply managing money with Ultra high net worth client tells that had been our traditional PWM business.
Two a more mass affluent structure and using digital technology and extending the use of April China is another place where there is opportunity for us from a wealth management perspective, and you've seen we've announced our joint venture with IC DC, which we think is an interesting opportunity.
That part of the World and so those are those are a handful of things from a regionalized basis I would highlight.
Okay. Thanks.
Your next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hi, Hey, Mike.
I was wondering if you could just kind of mark to Mark.
On your tech.
Successes our initiatives.
As you mentioned year to date growth in revenues.
Two to three times that of expenses, so you're getting the higher marginal margin now some of that's due to the bull market you mentioned comp leverage, but then how much of that is due to technology. So I guess.
One way to phrase this question is.
By area. So you have your new growth initiatives, you mentioned digital deposits of 100 billion in transaction banking deposit of $50 billion. So that would I think that's born in the cloud.
And then you have your legacy trading activities, where I guess, there's been a lot lot of electronic vacation and there is the rest of the company, where I'm not really sure what the tech backbone and so the question is how much has the tech backbone contributed to that higher marginal margin for each of the growth areas trading and the rest of the firm.
I'll start, Mike and Steve and I'm sure, we'll have some things to add here too.
At a high level, we're spending significantly.
On.
On technology to expand the platforms that we operate on to better connect to our clients.
To enable us obviously to operate more efficiently.
We're performing.
Coming very well at the moment, but our commitment to continuing to uplift our broad background and to put more of our businesses into the cloud.
For a variety of reasons, which I'll highlight just a second.
I think it's something that we've been very focused on strategically and it continues but we're in the middle of the execution path.
Historically developers at the firm have used their own physical data centers to build in house technology.
And cloud adoption.
It really enables innovation by allowing talent that we have all across the organization to focus their time.
Really matters and to be able to much more directly create services and applications that can directly service our clients need rather than doing what I call is undifferentiated heavy lifting tech build that managed what was more traditional tech infrastructure.
The cloud really provides low friction access.
AI technologies, such as big data and machine learning analytics, which enables us to continuously deliver products to meet the growing demand that our clients have as they want to connect with us and it's allowing us to accelerate some of the initiatives, we have and you highlighted some of them like transaction banking.
And some of the things we're doing on the market platform and so there is no question that there are real efficiencies for us that are coming out of that.
We know that the cloud is not for everything and so there are some services I'd give you. An example, like high frequency trading.
Better served on premise.
And so we clearly operate in a hybrid biomed.
And we also choose our partners.
Kind of a multi cloud or what we call poly cloud strategy. So that we can take the best of breed offerings that each of these different technology platforms have and allow that to better leverage what we can do for our clients.
So overall, we are in this journey, that's very very intentional it's aligned with our strategic objectives of delivering better services to our clients and operate the firm more efficiently and I think we're getting real benefits from it and the execution of our strategy, but I think theres more upside in that as we continue to build the financial cloud.
So to speak for some of our principal businesses I mean, Stephen would you add anything to that or do you want to quantify some things a little more yes, the only thing I'd add a bit of quantification so Mike.
<unk> heard me say before our non comp expenses, excluding litigation to just looking at the core non comp expense year to date is up 11%. If you look at the gross expense that that represents about a third of that increase is related to technology. So we're about a third of the increase of non comp non comps.
<unk> expense in the firm through the first nine months relates to technology and this is this is spent all across the firm. So it's both in particular initiatives like consumer at DXP marquee, but equally it spend broadly on the broader uplift of platforms in and around the firm.
Cloud based engineering is one that David.
Brought to your attention.
In all of these spends we sweat the ROI of this investment and so as an example, part of the uplift will enable us to create greater opportunity for automation, which will play out as a return across the whole of the firm. So I just offer that to you just to give you some sort of dimension if you will.
From a from a true expense line as to what David was otherwise describing.
And just a follow up maybe digging deeper on transaction banking.
I've been a little skeptical, but you did get your five year target as you said.
And so if you think about the cloud cloud enabled cloud native or I think in that case born in the cloud.
Can you just define really what that means is that the Nevada state of being in the cloud the way you have transaction banking.
To what degree has that contributed to you're getting you're $50 billion and by the way does that 50 billion include any deposits from Goldman Sachs itself.
So.
I don't believe that there are <unk> deposits in it it's $50 billion of gross deposits.
And as we've said that's now become about 25% operational so a value to us, but just to come back to your question about the cloud. So the TSP business was built entirely in the cloud.
No that I wouldn't necessarily conclude that that is why it's been successful I would conclude however that it is how it's been built on a very cost efficient basis and built with a level of security that I think satisfies us and our client base, meaning I think it's a draw card in the context of it the reason Mike.
It's kind of self evident which is that it's built in the cloud as David noted, it's not built with multiple instances of the transaction banking platform across redundant data centers, it benefits without necessary necessarily costing us to sort of improve security upgrades to sort of tech.
Knowledge and the like that is the benefit of sitting within the cloud itself. So I can't tell you that I could draw a line to the deposits that have come in I can tell you that we built it better cheaper and on a more attractive basis to facilitate client attention and attraction to it.
The one the one thing one thing Mike that I want to add very very clearly the reason our transaction banking platform is I think accelerating in its success.
Is because the quality of the offering for our clients is differentiated and better meeting their needs than the existing offerings and part of the reason as Stephen highlighted we could do that so quickly once because it's easier to build on the cloud and transition but fundamentally. This is an example of us seeing.
An opportunity to build a digital platform. It took friction out of the activity that was deeply embedded in our corporate clients as a user of that activity. We saw that experience and we saw that there were ways that that experience can be improved and we built a platform that delivers a better experience and thats why it succeed.
And that's why it's meeting targets and continuing to grow and Thats why were very optimistic Steven laid out to your $1 billion of.
Revenue, we're confident in that target and this business has margin in it and we will be a good contributor and so we're very confident about how we'll continue to execute but fundamentally its about the quality of the product we're delivering to our clients.
Your next question comes from the line of Brennan Hawken with UBS.
Good morning, Thanks for taking my questions just first congrats and best of luck to you Steven.
<unk>.
And Dennis Congrats to you also on the new role looking forward to working together.
Maybe we could start with the Green Sky acquisition.
So the firm a lot of investors see how the stock has performed since the IPO.
The pointed to spotty history in underwriting and the permit began exploring strategic alternatives in August of 2019. So.
Could you maybe add your perspective on why this was the right franchise to connect your growing consumer banking business and maybe what you think the market might not be appreciating our understanding about this company that led you to be interested in acquiring it.
Sure.
I'll start here I know that Ed and I appreciate the question Brennan, but.
First it's a very different company as an independent public company than it is as a platform inside Goldman Sachs and one of the big weaknesses of the company as an independent public company as it didn't have a funding model.
It had to fund differently inside Goldman Sachs, we have funding.
Attractive funding it becomes a technology platform that allows us to connect to a very attractive base of customers.
That we can pull into the market's ecosystem I think the merchant network that they develop well over 10000 merchants and they developed over 15 years is extremely valuable and then the work we did to try to have a point of sale merchant network and look at that we think it would've taken us close to 10 years to develop a similar network and so the ability to acquire that.
At work, bringing.
Bring a very very high quality customer. These are customers that are at home. These are customers that have high FICO scores very very attractive into government SaaS. It allowed us to do something that fits seamlessly into our platform and allowed us to expand the point of sale activities that we were doing and so we feel very very good about it.
And we think that this acquisition will consistently deliver 20% plus returns on the activity that it generates.
Okay.
Great. Thanks for thanks for that David.
Maybe following up on that.
Could you provide some context around.
Strategic priorities from here you've done two recent acquisitions smaller bolt on size, but certainly a bit of activity.
When you think about the different businesses in which you want to grow.
You've done a lot of these smaller bolt on some in the wealth side with United Capital and Folio several years ago.
And just kind of more recently.
Going from here is there any particular business that you think is quite compelling given either some combination of.
Right inorganic opportunities that the market might be under appreciating similar to or.
Sure.
The platform can be different within Goldman than it is as a standalone the way it was with Green Sky.
Should investors think about priorities and direction from here and how that.
Sure sure Brandon I'll bring you back I really want to bring you back in center U two centered around what we see.
Said during our Investor day.
<unk> out a strategy that said, we will continue to invest in our core businesses to grow market share and increase the positioning I think we've done that theres still some opportunities to continue to do that but we highlighted a handful of areas, where we saw opportunities to grow and expand our competitive position while also increasing the <unk>.
Mix of durable fee based revenues into the business and when you look at those areas it's transaction banking.
Asset management.
Wealth management, and our digital consumer bank.
And so as we look forward I still think there are opportunities to grow all four of those areas.
I think we can continue to grow them organically, but when there are opportunities to make an acquisition that can accelerate our competitive position and our growth in one of those areas, we're going to take a hard look at it.
As I've said before the bar for us to do something very significant is extraordinarily high.
I think there are still opportunities there may be opportunities in the coming years for us to do things that can accelerate those areas, but we are focused on those four areas because those four areas diversify the durability of our revenues and allow us to continue to grow a more durable and consistent earnings stream and so that's the <unk>.
But we will continue to look at I wouldn't I wouldn't point to anything more specifically.
Your next question comes from the line of Devin Ryan with JMP Securities.
Yes.
Great. Thanks. Good morning, I guess first question just wanted to dig in a little bit on asset management and the opportunity on the third party.
Turning to fund raising.
Just the ability to continue to scale that both on kind of the customer side and product side and when we look at some of the Standalone alternative manager peers.
They've done a great job in recent years of expanding the product menu and then consolidating LP relationships, where they're connecting on numerous products and so that effectively creates.
Our network effect and so looking at Goldman.
Where do you guys feel like you are with Lps.
There is the opportunity to add more Lps or is a big opportunity to connect with.
With more Goldman Sachs product, and then I guess on the product side.
Alternatives are there any areas, where you feel like you could accelerate investment or this could be areas that could help you connect with your Lps existing Lps on more products.
But when we when we I appreciate the question Devin, It's obviously something strategically we have been very focused on it but I will go back to some of the things that we said at Investor day that kind of geared or sort of focus on that we've done in these businesses for a long time and we actually have something that I think is very differentiated and that we have a truly.
Broad global product offering that is relatively built out and has been built out for a number of years, we have positions in private equity and growth equity in credit and real estate and infrastructure and we also have them globally.
Now in the World and when you look at a lot of the freestanding firms there are some.
That have that broad array, but very few have all the products on a global basis. The way, we're set up what was differentiated or different about our business and alternatives before we roll that together and got our focus is generally our LP relationships came through our private wealth network.
And we have raised an enormous amount of money through our private wealth network, including the partners of the firm, while we had some institutional LP relationships, we had not really been a large institutional.
<unk> into this business platform and given our relationship with a lot of these institutions broadly from other activities. We knew that if we took a <unk> approach.
Taking a long term view and building relationships with those institutional partners, we could grow our partnership with them. So a big part of the growth opportunity has been adding new Lps.
To our ecosystem and if you look at strategic solutions, which we raised last year. There were a number of probably a dozen new significant institutional LP. That's the first time they were coming onto our platform within that strategic solutions fun. So I think theres, a big opportunity for us to continue to.
Span that is something we're very focused on but the opportunity for us is less than product addition, although we are adding products. We've just raised the horizon fund, which is an ESG centered funds will allow us to allocate capital into.
Certain climate technologies and will add other product capability that we think are interesting, but our focus is on meaningfully using the Goldman Sachs platform and the broad institutional relationships, we have to really meaningfully expand the list of institutional Lps that are partnered with us and I think we have a lot of upside to run on that.
Your next question comes from the line of Ebrahim <unk> with Bank of America.
Hey, Thank you.
One question, David I guess to US how you are thinking about just digital assets have you.
Are you seeing the entire ecosystem being built around digital asset custody. The organization just give us a perspective, because it seems like all of that would be right in goldman's wheelhouse of capitalize that some of these things accelerate.
So would love to hear your perspective on one how you see that ecosystem developing and they're all Goldman can play in that.
Alright, So theres no question that that activities that we're involved in are digitizing quickly I think there is a meaningful acceleration.
And the disruption that the.
Digitalization of financial services.
Is occurring there are places.
That that Digitization is allowing us to disrupt and accelerate our position. The two we've talked about a bunch today on this call that are happening because of digital infrastructure, our ability to do what we're doing in transaction banking is taking some of this digital disruption and using it in a different way what we're doing in building a digital consumer bank.
Is also relying on this.
The broader.
Digital ecosystem.
I think it is in early stages I think we're at version one point out I think you'll continue to see a lot of disruption on traditional ways that financial services are delivered and consumed I think big competitive platforms will continue to be a place where more financial services or intermediate. It I think there are lots of complications around the regulatory <unk>.
<unk> and how the regulatory structure, where ultimately managed some of this as the technology allows for more disruption, but I think we're very early in the game and I think it is a big opportunity for the firm and the firm continues to be focused on it.
Sure.
Your next question comes from the line of Matt O'connor with Deutsche Bank.
Good morning, I was hoping you could just elaborate on what drove the increase in <unk> from the.
The regulatory guidance this quarter please.
Sure. So we had about $42 billion increase in our there'll be ways about half of that.
Related to.
The changes in the methodology that we're using and the computation.
The <unk> and that was the byproduct of just routine in ongoing discussion with regulators and so.
That plays through in the third quarter ratio will play through on the forward.
But that's really the source of about 50% of the <unk> lift the other 50% is obviously in the context of the overall business and risk and exposure.
Pending there.
Your next question comes from the line of Gerard Cassidy with RBC.
Thank you.
Stephen one David.
As you are Steve Stephen can you share with us.
Mentioned in the transaction banking, you've got to the $50 billion in deposits, which is ahead of schedule and you're still confident youre going to reach the $1 billion in revenues back in the Investor Day. When you gave us those numbers were those numbers linked meaning when they were supposed to kind of be a cheese around the same time and then second when do you think you'll reach that.
Billion dollar target.
Sure so.
Targets were set at the same time, though bear in mind. The environment, then and now is quite different in the context of interest rates. So we've seen fed funds come down from the from the time of Investor Day, I don't know I want to say about 150 basis points, maybe a little more the consequence of that is that.
The value of deposits the economic value of deposits is not as rich now as we had imagined back at Investor day, but equally in the context of an expectation of rising interest rates, we will see a return to the value of those deposits otherwise modeled out and and therefore on the forward.
Curve, our view is that.
We will be able to achieve that $1 billion.
Revenue target I point out that of the $50 billion more of them are operational that sort of step one to achieving the value of that and that has been a big quarter on quarter increase from about 14%.
The last quarter and I think more broadly in transaction banking about two thirds of the revenue from the time, we modeled it through now.
As COO.
Correlated to deposit intake with the balance around FX and other fees and so as we see interest rates come back the value of those deposits will as well.
Yeah.
At this time there are no further questions. Please continue with any closing remarks.
Yeah.
So since 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 hope to see many of you in the coming months if additional questions arise in the meantime, please do not hesitate to reach out to carry in the Investor Relations team otherwise please stay safe and we look forward to speaking with you on our <unk>.
Fourth quarter call in January thank you.
Ladies and gentlemen, this does conclude the Goldman Sachs third quarter 2021 earnings Conference call. Thank you for your participation you may now disconnect.
Okay.
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