Q2 2022 Goldman Sachs Group Inc Earnings Call

July 18, 2022

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Speaker 3: I think our intention at the moment is to be focused on integrating these successfully and making sure we execute at a very high level. Certainly as we get out into 2023 and 2024, we'll be more open to other partnerships and other meaningful things going forward, but at the moment we're focused on really executing on what we put forward, which included, as we had highlighted, launching checking later in the year.

Speaker 4: Okay, and then separately on transaction banking, you've given us a lot of good metrics along the way on how that business has been building out. Maybe you could update those a little bit for us today as well as give us a sense as to how the higher rate environment is impacting your returns there. I would think you're running ahead of plan based on that or expected to by year-end. How do you redeploy that fully into that business line or elsewhere? That is our hope, is to serve our customers and exhe Lu. New develop Mo Jane So how many of you are interested in taking a look at tier threeINTER RAM? So here's what we've considered Actionhold today. After trying the other, solut progression was discussed. On TV, Sarah 400, noticed

Speaker 5: I'll take that one. As you suggest, we feel really good about the transaction banking business, its progress year-to-date, and the forward. We continue to improve on each of the metrics that we've been reporting on, so nearly 400 clients, deposits at around $65 billion, revenues year-to-date $175 million, and importantly, we continue to improve the percentage of the deposits that are operational.

Speaker 5: You know, operational and fully insured deposits are now north of 35% at the end of the second quarter. So we'll continue to focus on growing overall clients, balances, and continuing to incrementally operationalize that business. It's obviously a profitable business already, and it's a business, as David highlighted, that benefits from leveraging the relationships that we have already inside the firm to grow it incrementally. We'll continue to focus on growing overall clients, balances, and continuing to incrementally operationalize that business.

Speaker 6: We'll take our next question from Mike Mayo with Wells Fargo.

Speaker 7: Hi

Speaker 8: I guess I'm thinking in terms of the trade-offs that you have to make, David, in terms of both capital and expenses. On capital, I mean, you talk about a broader, diverse, resilient, more annuity like Business Dream, but then we get the Fed stress test results, and you guys finish in last place. I'll be at better than last year, but still last place. So I guess the regulators don't see it the same way that you do, and that the trade-off between managing for lower.

Speaker 8: regulatory capital requirements versus the loss of revenues. The other dynamic decision is managing expenses lower. As you said, you're taking a closer look at that, the tradeoff between insuring good profit margins but at the risk of maybe losing revenues if things come back.

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Speaker 3: I'm not sure there was a question there. I think there was a fair balance of exactly what we wrestle with. I would highlight, while it's a fair comment that our SCD is higher than everyone else's because of our current business mix, if that's what you referred to as last place, I would comment for the stress test. We came in first place that we were the only firm.

Speaker 3: that actually saw their SEB decrease and many institutions saw their SEB increase very meaningfully. Now, you know, I don't take that as a victory lap. We're early in the journey of taking assets off our balance sheet, but I still do think, Mike, one of the big attributes we have as you look ahead over the next few years is we are going to continue to make that business much better.

Speaker 3: less RWA dense. And I do think, as indicated by the step forward we took in this stress test, that we will hopefully take other steps forward in future tests as we continue to change that mix. I'm not satisfied with where we are on the journey of making the firm more fee-based and more resilient, but I am satisfied that we've made meaningful progress. And I think the results this quarter show the diversity of the business in a positive light, what was a really tough operating environment.

Speaker 3: So yes, it's a balance. I think we're trying to strike that balance appropriately. And we're gonna continue to be laser focused on making sure we do as good a job as we can striking that balance effectively.

Speaker 8: And on the second part, as it relates to expenses, it sounds like you're going to not quite plan B, but you're getting ready in case you need a plan B. How long do these deals stay alive before it pencils down and they just say, all right, we're gonna wait for the next cycle? I mean, it seems like with every month that passes, the chance to cap the markets will rebound.

Speaker 8: close to where it previously was declines. How long do you and the markets have before things just stay lower for longer?

Speaker 3: Well, I guess I'd say a couple of things. We always, I think we're very nimble allocators of resources. Financial resources, human resources, you know, we try to have a very, very flexible, nimble approach. And so, of course, we've expressed earlier in the call, we think this is an uncertain environment and we're going to be cautious. Of course, we will have, you know, plans, you know, in hand to the degree the environment gets, you know, the environment gets.

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Speaker 3: a few quarters, they get back into the market that's available to them. And so I'd be very surprised if we don't see, you know, as we had into 2023, some sort of a normalization of capital markets activity. Now we might not because the world could get worse, and it could stay, it could stay, you know, more difficult longer, but it's not baked in the cake, in my opinion, that we're headed to a super negative environment, but it is uncertain, it is a little bumpy, and so we're going to proceed cautiously.

Speaker 6: Thank you. We'll take our next question from Brendan Hawken with UBS.

Speaker 8: Good morning, David and Dennis. Thanks for taking my question. I'd like to start on expenses. So you indicated that you're adjusting the investments, but it sounds more like that's about slowing the hiring outlook. So maybe the impact there has a lag and we're more talking about year end or even into 2023 and more on the comp side. So I'm curious about.

Speaker 8: Number one, whether that's a fair interpretation. And then number two, the best way to think about non-comp, if we adjust for the legal charge and maybe some higher BC&E this quarter, is this the right jumping off point for non-comp or might some of that expense diligence that you flagged also put some downward pressure on the non-comp plan.

Speaker 2: Thanks.

Speaker 5: the first half of the year, we've taken compensation expense down significantly, $3.5 billion less comp expense in the first half versus the first half last year. At the same time, we did see some increases on the non-compensation side of the equation. As we look forward into the second half, as we indicated, yes, slow velocity of hiring, decrease replacement of attrition, probably reinstating our annual performance review of our employee base at the end of the year, something that we suspended during the period of the pandemic for the most part, and just being much more disciplined and focused on utilization efficiency of our human capital resources given overall environment. You're right, some of that will take time to reflect itself through the P&Ls. I think that's the right expectation. You are correct in anticipating that we're also looking at non-compensation expenses and taking some actions there as well to slow the rate of growth and reduce certain components of our non-compensation expense. Some of them dovetailed well with investments that we're making to grow the firm. Some of those activities will obviously look to continue. We may slow the pace, but we'll continue to grow the activities that support the growth of the firm. There are other items in non-compensation expense, occupancy as an example, or travel expenses, where we actually see the impact of inflation impacting the overall level of expense. That's just going to require us to work harder to manage towards our overall efficiency target, which is, I think, the comments and references that both David and I have made with respect to our orientation on the...

Speaker 8: And for the second question, I'm curious, we've seen, you know, you talk a lot about M&A and how obviously your investment bank franchise is holding up really well, but just sort of a question around the environment. And we've seen riskier debt issuance swell a lot year-to-date and started to hear chatter that availability has actually continued to become challenging. So, curious whether or not that's also what you're seeing and whether or not there's any concern.

Speaker 3: very, very out of favor sectors.

Speaker 3: people confuse availability with acceptance of the new and reset price. And so I would say at the moment, the bigger thing that's slowing down capital markets activity is people accepting of the new price environment. Ultimately, companies need to raise capital. They find that new clearing price. But I do think if the environment stays very, very difficult from an economic perspective, there are certain sectors where availability is an issue. And there are a couple of them now that point to retail as one where certainly capacity and leverage levels have constrained meaningfully. And so I think we'll watch this very cautiously. But again, I would tell you that there's a mindset when you go through this in a resetting that's going on. And I think ultimately markets find clearing prices and capital markets there's certainly plenty of capital, plenty of liquidity available in markets for people who are doing reasonable deals at reasonable prices. The most levered companies will have a tougher time in this environment. Another thing I would add, just that very same environment also presents an opportunity. So as an example in our FIC financing business, there are a number of clients who are looking for financing. They have important transactions to execute, attractive assets to have financed. And to the extent that there's less availability of financing across the street, that presents an opportunity for us given the way that we're currently positioned, our focus on financing and the franchise relationship that we have with those clients that are big users.

Speaker 5: Thank you. We'll take our next question from Devin Ryan with JMP Securities. Great. Good morning, David and Dennis. Question on the RIA custody offering, can you just talk a little bit about the evolution of that offering and whether we should expect a more aggressive acceleration in the marketing of that offering in the coming quarters? There's been some recent press just suggesting that you guys are better integrating that with

Speaker 3: the broader Goldman capabilities. I'd love to just get an update on your thinking there. Well, we obviously made an acquisition in the space. It's something that we're focused on as an opportunity for the firm. But I'd say, you know, at this point, you know, the resources and the size and the scope of that, you know, are relatively small. But I think as we look forward, you know, over the course of the next three to five years, it will be an area that we see opportunity in and we'll turn more focus to expanding. That's why we made this acquisition and we think it's an interesting opportunity.

Speaker 9: exist here or clients now operating at lower levels of leverage relative to recent history and how that interplays with your trading outlook as well.

Speaker 5: I appreciate the question. Connecting it back to some of the comments that David's made, looking back over the course of the last couple of years, we've gone through an extraordinary period. We see an ongoing transition into a new type of market environment. I'm sure there are some clients that have looked to de-lever themselves and position for the current operating environment. We continue to see very high levels of client opportunity. There was a lot of engagement in the second quarter, particularly in the macro businesses.

Speaker 5: clients approaching us to help them intermediate risk, other clients looking for financing, which is why we had record performance in fixed financing. And I think as we look forward, we're obviously starting the quarter with a buffer to our minimum capital position. I mean, very focused on the environment to deploy capital in the second half. We think there should be some good opportunities, and there may be clients that incrementally turns us to help them navigate the opportunities. So...

Speaker 5: I think we feel well set up and we're optimistic about the opportunities with clients going into the second half.

Speaker 6: We'll take our next question from Ibrahim Poonawalla with Bank of America.

Speaker 10: Hey, good morning.

Speaker 11: I just wanted to follow up on the strategic targets, David. So you said multiple times on the call that you don't see any reason why Goldman won't achieve, I think, your ROT target 15 to 17 percent by 24. When we think about that, I think where investors struggle with is just the lack of visibility on the revenue side and how quickly you can flex expenses. Just give us a sense of when we think about year-to-date ROT, about 13 percent, and then

Speaker 11: the journey from here to your targets, how much of that is reliant on the macro getting better versus do you think structurally the business can continue to become more profitable without any improvement in the macro?

Speaker 3: Well, if we stayed in a macro environment, it's a good question. I understand where the question comes from. If we stayed in a macro environment like the first six months of this year for the next five years, I think it would have an impact on the journey with respect to returns. Although I do think that we'd be more resilient and probably do better than the base perception would be of the industry broadly.

Speaker 3: By the way, not just Goldman Sachs, if you really had that kind of environment, because the world would adapt to that kind of environment and people would make changes in their businesses on the expense side, et cetera, over time to make sure that they could deliver appropriately for shareholders. I don't expect, I think this has been a very difficult six months and there have been some big headwinds in the course of the six months. I don't expect to have the same headwinds.

Speaker 3: in the next six months or the next 12 months. Now that doesn't mean that the environment couldn't be worse or there couldn't be different headwinds that create different issues, but I think to kind of take what's going on with some of the exogenous impact over the course of the last six months and translate it as a three or four year thing forward, that's just not our base case. That's not our base case. And if that was our base case, we would be much more aggressive and forward with respect to.

Speaker 3: expense changes, investments in the business, etc. But that's not our base case. And so, you know, we continue to move forward with a base case where we're pretty confident that we can deliver the level of revenues with an expense base and a resource allocation that we can adjust and be nimble with to deliver those returns. And I just, you know, I just highlight, you know, that in the, in the, in the first half of the year, we're not that far off from what we said we need to accomplish over the next three years.

Speaker 11: That's helpful. Thank you for that. And then just recognizing it's very challenging to predict trading activity, but when you think about just good volatility versus bad volatility, do you see just given all the uncertainty on macros for central bank actions, et cetera, in terms of fixed trading, things to remain strong as we think about the back half of the year? Just whatever is in your crystal ball.

Speaker 3: The good volatility, bad volatility has never been an expression that I've liked. I think about our business in markets as a business where it's serving our clients and we're making sure that we're meeting their needs. That's why we've been very focused over the last three, four years on really improving our approach to our clients, really improving our market share with our clients, adding financing as a capability to our clients, which is much more resilient and therefore puts a base in the revenues that did not exist before. We're very focused on the good volatility, bad volatility has never been an expression

Speaker 5: I think if we get out of quarter to quarter and continue to look over three-year periods, this is a very big business that generates very creative returns and serves our clients well. Thank you. We'll take our next question from Dan Fannin with Jeff Rees. Thanks. Good morning. Good morning. Dan? Good morning, we'll move on to Matt O'Connor with Deutsche Bank. Hi. Some good details on your loan portfolio and loan loss reserves on slide 11. Just wanted to ask specifically on the consumer book, you've got about 13% reserves to loans. Obviously, charge offs are only 2% and change, but how much of that reserve is factoring in growth, seasoning, or just a more tough macro environment? How would you frame that? Sure. I think I would frame it actually as a combination of those factors. Your seasoning point is fair as well. It's a less aged portfolio, if you will, than certain other broad-based consumer portfolios. There's an element of seasoning. There's an element of the overall macro environment that come together to call this conclude that that's the appropriate place to be. You do make reference to charge offs, obviously firm wide. They're flat quarter on quarter, wholesale down slightly, consumer is up a little bit.

Speaker 5: But those are some of the factors that we also take into account and look at. I know earlier you were asked about through the cycle provisioning, anything specifically on consumer charge off as we think about those portfolios, what you would expect?

Speaker 12: once you have the seasoning and what those levels would be, not in a recession, but just more through the cycle.

Speaker 5: I think through the cycle is where we are in terms of our observations. Whether the impact presently is more a function of normalization from really quite exceptional set of conditions in the last year, the starting point, the overall health of the consumer is very strong. The credit environment for consumers has been very, very benign. I think you need to take stock of where you are starting from. Obviously if the environment continues to persist more negatively.

Speaker 13: Can you share with us where you are on that progress? Are you at a level that you're comfortable with, or you still got some more to go in reducing that portfolio?

Speaker 3: Sure. I'll answer at a very high level and then I'm going to have Dennis walk you through some specific details. I am pleased with the progress, but not comfortable with where we are. Comfortable is probably the wrong word. I'm pleased with the progress. I'd like us to continue to accelerate to make more progress. I think we're going to make progress over the course of the coming 12-24 months.

Speaker 3: Our progress, we've made a lot of progress. It was flowed also by the fact that we went through a period in 2021 where the value of a lot of these assets grew very meaningfully, even as we were selling things. But why don't I have Dennis walk you through some high level numbers that we've put out there. Yeah, so a couple things. I think we're well on our way in terms of the journey. We remain completely committed to the progress and the direction of travel. You'll note there were no particular additions over the course of the last quarter. We continue to move down.

Speaker 5: to apply against that portfolio. And so that's incremental affirmation that we've selected the right strategy. And that if anything, we should continue to move forward, maybe even accelerate the rate of disposition, you know, remaining mindful of the overall environment and the ability to execute. But I think, you know, the direction of travel for us and our commitment to reducing those exposures is completely unchanged.

Speaker 13: Very good. And just as a follow-up, maybe you guys can give us a little deeper color into the ECM business. Obviously, according to the deal logic numbers, you know, the first six months of this year we all know we're very weak in market conditions we recognize as being the driver. But David, you alluded to maybe that price expectations are coming down. Was it primarily just the volatility that pushed everybody to the sideline? Was it lower valuations that pushed them there? What did you guys see as the biggest drivers for these?

Speaker 3: of preparation and you get in your mind and you get with all the shareholders that you're going to go public at a particular value, a particular price and all of a sudden the value of the price is 20 or 30 percent less and the whole tanker just stops. You can't they can't turn on a dime and get everybody's mind reset and so you know I think I think a shift in valuations and that volatility had a big impact. You know the period in terms of the the you know the anemic nature of equity capital markets issuance kind of reminds me of the period in 2002.

Speaker 3: where we obviously had enormous growth in equity capital markets activity in 1999, 2000, 2001. And then in March 2001, you started to see a real change in market and valuation. It was the beginning of a decline in the NASDAQ where the NASDAQ ultimately went down 85%. I'm not saying that that's going to happen again here, but really, equity issuance shut off in late 2001 and 2002 was a really, really anemic year for equity issuance and started picking back up again in 2003.

Speaker 13: But I think on the flip side, you guys are pretty optimistic around still growing the financing business. It looks like trading assets are up year over year or flat year over year. Loans are up. Balance sheet is up. So is this just something about balance sheet and RWA growth slowing or is there specific areas you think will shrink or you can cut?

Speaker 5: So, I think we're looking at this holistically. A lot of the questions speak to our strategic plan, our ability to execute, to hit targets over time. Given the environment that we're in right now, we see an opportunity to target a 3% G-SIB. Obviously, it's for the benefit of 2024 and beyond, but the decision to be made is a current one. So, in terms of our ability to target that level, given what we've seen in terms of various balances…

Speaker 5: targeting a 3% G-SIB, we can at the same time deploy other financial resources to attractive client opportunities. So our expectation is that we'll be able to continue to support clients with attractive and accretive business activities while targeting a 3% G-SIB.

Speaker 14: Well, can you help us a little bit with the specifics of what you're actually targeting? Or is that? Q&A DouglasOutput.co.nz Copyright committee.

Speaker 14: You're unwilling to disclose that.

Speaker 5: We are currently targeting a 3% G-SIB. We're not putting out a particular G-SIB score that we're targeting.

Speaker 6: Thank you. We'll take our next question from Dan Fannin with Jefferies.

Speaker 13: Thanks. I'll try this again here. Just wanted to follow up on the $20 billion of commitments and all third-party funds that you highlighted in the quarter. Clearly, there's still strong momentum. As you think about this market backdrop and the outlook for that, are you seeing any change in behavior or signs of slowing?

Speaker 3: that you saw in 2021, but certainly a strong secular growth trend that kind of moves forward with respect to allocations of capital by big institutional allocators, you know, into the space. I would say one of the place that places that a number of participants in the market, we have not been as big a, as big a participant, but there's been a lot of retail flow, um, into the alternative space. And, you know, there, my insight there is that it's slowing, but it's not, it's not turned off, um, and it's still adequate. And from what I can see in our private wealth, uh, lens that we have with a very, very, you know, high end private wealth business, there's still significant interest in alternatives as people move forward. So something to watch if the environment got much worse, maybe that would change, but at the moment not seeing indications that the changes are meaningful. Great. And then just as a followup on the balance sheet outlook and the harvesting of some of the investments, you've historically given a line of sight number on these calls, given that I would assume the market backdrop in the short term, there's just less, you know, uh, outlook or, or clarity around what you might be, uh, looking to sell here. I think that's right. So last quarter we gave a line of sight of approximately a billion, which is, which is ended what ended up happening. Um, right now line of sight is less than a billion. Um, just given the overall, overall environment. Um, that's what we see it right now. Thank you. At this time, there are no further questions. Please continue with any closing remarks. We just wanted to thank everyone for joining the call. Obviously, if any other questions arise, feel free to give me a call directly. Thanks so much. We'll speak to you soon.

Speaker 6: Ladies and gentlemen, that concludes the Goldman Sachs second quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect. You may disconnect.

Speaker 5: The consumer portion, that's really driven by ongoing growth in the asset origination as opposed to deterioration of credit quality. On the wholesale side, we obviously model the macroeconomic outlook. When we do our work across our various scenarios, over the course of the first quarter into the second quarter, our outlook for the forward is for a less robust set of macroeconomic variables from GDP growth to employment levels to inflation, probability of recession, possibility of stagflation.

Speaker 3: did site plans to manage to the lower G-SIB surcharge of 3%? I know you were on a path to potentially migrating as high as 3.5%. I was hoping you could speak to the specific actions you are taking to mitigate the G-SIB score, whether we should be contemplating any level of revenue attrition from those actions, and does your ability to manage to that lower G-SIB surcharge inform the more aggressive tone we heard on buyback? I appreciate the question, and let me try to give some clarity to our thought process. As monetary and fiscal policy were extremely loose and extremely forward, the opportunity set with our clients was expanding very, very rapidly. In the context of that in 2020 and 2021, we saw opportunities to deploy resources, serve our clients, and therefore expand meaningfully the revenue opportunity and the profit opportunity for the firm. That environment has certainly shifted in 2022, and while our clients are still active, they are not active to the same degree that they were in 2021. You can obviously see that in the revenue environment, not just with us, but across the street. In stating that we are focused on controlling that resource growth and bringing it back to a 3% level, we are making a forward assumption that is consistent with what we have seen in the first half of the year. I note one of the things that I said in my comments was if there was information that would lead us to a different conclusion, we will obviously evaluate that and change that. Based on the experience we have had over the last six months and the revenue opportunity we are capturing, we think we can continue to capture that revenue opportunity that is available based on client activity by being a little bit tougher on our resource allocation. That should free up potentially some capital for shareholder return or potentially other investments. I would think at this point in time, looking at that Dennis highlighted in his remarks with the stock trading where it is, we are certainly thinking about that very carefully as we evaluate our capital return going forward for the rest of the year.

Q2 2022 Goldman Sachs Group Inc Earnings Call

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