Q2 2023 Goldman Sachs Group Inc Earnings Call
Good morning, My name is Katie and I will be your conference facilitator today I would like to welcome everyone to the Goldman Sachs Second quarter 2023 earnings Conference call. This call's being recorded today July 19th 20 twenty-three. Thank you Miss you may begin your conference.
Thank you. Good morning. This is Cary Holly I'm head of Investor Relations and Chief strategy Officer at Goldman Sachs. Welcome to our second quarter earnings Conference call. Today, We will reference our earnings presentation, which can be found on the Investor Relations page of our website at www Dot Dot com no information on forward looking statements and non-GAAP measures appear on the earnings.
The release and presentation. This audiocast is copyrighted material of the Goldman Sachs Group, Inc, and may not be duplicated reproduced or rebroadcast without our consent I'm joined today by our chairman and Chief Executive Officer, David Solomon and our Chief Financial Officer, Dennis Colby, Let me pass the call to David.
Thank you Carrie and good morning, everyone.
Do you all for joining us this.
This quarter, we produced net revenues of $10.9 billion and generated earnings per share of $3.08.
ROE of 4% and our O T a four 4%.
Our results were impacted by several items related to businesses, we're executing on our strategic transition and positioning the firm for the future.
In particular shifting our asset wealth management business to a less capital intensive model and the pivot to narrow our consumer ambitions.
All in these items reduced our EPS for the second quarter by $3.95 and rose by five two percentage points.
Our results were also impacted by the challenging macro environment and in particular headwinds facing our specific mix of businesses.
Activity levels in many areas of investment banking hovered near decade long lows and clients largely maintained a risk off posture over the course of the quarter.
Deals around the world and you have to be cautious as businesses grapple with persistent inflation geopolitical tensions and slower growth.
But we know the corporate activity of capital formation of corridor financial system and there are a number of structural catalysts that should lead to increased levels of activity and we're seeing it begin to pick up in a few spots already particularly equity capital markets and M&A dialogue.
There's no question recent economic data in the U S indicates the fed's efforts to fight the fight inflation are showing progress and we're starting to see more optimism about the forward trajectory. However.
However, the year unfolds, we stand ready to help our clients navigate the evolving backdrop, while maintaining a prudent risk posture and operating the firm more efficiently.
Importantly, we laid out a clear set of strategic goals at our Investor Day in February and we are in execution mode. We have two incredibly strong client franchises, a world class global banking and markets business. We continue to deliver solid returns even in an environment with reduced activity levels, and a scaled asset and wealth management.
Platform that continues to show very strong underlying trends are aligned with our investor day goals with growth of our recurring revenues of management and other fees and private banking and lending.
These businesses are supported by a number of things.
First our long track record of serving the world's leading businesses institutions and individuals Dolby.
Building relationships as a trusted advisor is core to what Goldman Sachs does.
Next a client centric mindset over the last five years, we have strengthened our efforts to bring to bear the best of the firm's capabilities and holistically serve clients without one Goldman Sachs operating any of those clients.
Client feedback continues to be highly encouraging and we see opportunities to make further gains.
We also have a global broad and deep platform with capabilities that span across products geographies and solutions, a key differentiator of value for our clients around the world.
We have exceptional people they are differentiated and they work hard to make a difference for our clients and.
And lastly, this is all underpinned by a culture of collaboration and excellence.
We are also pleased that our strategy to reduce the capital intensity of our business is resulting in sustained multi year progress.
Starting in October our SCB will be reduced by 80 basis points to five 5%, giving us greater flexibility to deploy our capital we.
We continue to execute on the $30 billion share repurchase program, we announced in February and we recently announced a 10% increase to our quarterly dividend.
We have made it a priority to grow our dividend to a competitive rate and since the beginning of 2019, we have more than tripled our dividend from $82 75 per share per quarter.
Our ongoing strategic efforts to lower the firm's capital density and reduce earnings volatility, we are well positioned to grow it further.
As I said, we are laser focused on executing on our strategy. This moment of the economic cycle creates meaningful headwinds for Goldman Sachs and our business mix at the same time, we are making tough decisions that are driving the strategic evolution of the firm given both these factors it should come as no surprise that we're going through a period of lower results.
I remain fully confident that we will deliver on our through the cycle targets of mid teens returns and create significant value for shareholders I will now turn it over to Dennis to cover our financial results for the quarter in more detail.
Thank you David good morning.
Let's start with our results on page one of the presentation.
In the second quarter, we generated net revenues of $10 9 million and net earnings of $1 2 billion.
Resulting in earnings per share of $3.08.
As David mentioned, we have provided additional detail this quarter on three items that impacted our results.
These items are a gain in connection with our sale process for the Marcus unsecured loan portfolio as well as the businesses operating results.
Losses from our historical principal investments within asset and wealth management.
And results relating to green sky, including a goodwill impairment and consumer platforms.
In aggregate for the second quarter. These three items impacted net earnings by $1 4 billion and reduced our EPS by $3 95.
And our ROE by five two percentage points.
Turning to performance by segment starting on page four.
Global banking and markets produced revenues of $7 $2 billion in the second quarter.
Advisory revenues of $645 million were down versus a strong prior year period amid significantly lower industry completions.
Equity underwriting revenues rose year over year to $338 million as we saw some signs of reopening in the capital markets. Although volumes continue to remain well below medium and long term averages.
Debt underwriting revenues were slightly down versus the second quarter of 2022 as activity remains muted.
Nonetheless, our client franchise remains very strong and we remain well positioned to support the needs of our clients. We ranked number one in the lead tables across announced and completed M&A as well as equity underwriting and high yield debt on a year to date basis. Additionally.
Additionally, our backlog rose quarter on quarter, primarily in advisory.
<unk> net revenues were $2 7 billion in the quarter as clients remained in a risk off posture relative to an active prior year quarter, particularly in commodities rates and currencies.
<unk> financing revenues were $622 million.
As we benefited from our ongoing strategic focus and increased balances. This was largely offset by a decline in intermediation revenues primarily in derivatives are.
Our strategic priority to grow financing across both FIC and equities continues to yield results as these activities increase the durability of our revenue base and we continue to see attractive deployment opportunities to support further growth.
Moving to asset <unk> wealth management on page five.
Revenues of $3 billion were down 4% year over year.
Primarily driven by weaker results in equity and debt investments.
Management and other fees increased 5% year over year to a record $2 4 billion largely driven.
Even by higher assets under supervision.
Private banking and lending revenues were also a record at $874 million, we continue to see positive momentum in this business as we benefit from higher deposit balances and NII.
Our results were supported by a gain of approximately $100 million related to the sale of substantially all of the remaining mark as loans portfolio.
Equity investments generated losses of $403 million.
More specifically, we have roughly $305 million of net losses in our private portfolio, primarily due to markdowns on investments and office related commercial real estate and.
And approximately $100 million of net losses in our public portfolio, largely driven by a loss related to a historical principal investment that we sold out of during the quarter.
Importantly, we have now reduced the public portfolio to approximately $1 billion.
Down from more than $4 5 billion in 2021.
Debt investments revenues were $197 million with the year over year decline driven by weaker performance in real estate investments.
This quarter, we also experienced approximately $485 million of impairments on our real estate related Cie portfolio, which are reflected in operating expenses.
In aggregate the results from Marcus loans, and the losses from our historical principal investments negatively impacted our margins for the segment by approximately 15 percentage points for the first half of the year.
Now moving to page six.
Total firm wide assets under supervision ended the quarter at a record $2 seven trillion dollars.
Driven by 30 billion and market appreciation as well as $8 billion of long term net inflows, representing our 20 <unk> consecutive quarter of long term fee based inflows.
Turning now to page seven on alternatives.
Alternative assets under supervision totaled 267 billion at the end of the second quarter driving $521 million in management and other fees for the quarter.
Gross third party fund raising was $11 billion for the quarter and 25 billion for the first half of the year totaled.
Total third party fund raising since our 2020 Investor day is now over 200 billion.
And we remain very well positioned to achieve our 2024 target of $225 billion.
On balance sheet alternative investments totaled approximately 53 billion.
Of which 24 billion is related to our historical principal investment portfolio in.
In the second quarter, we reduced this portfolio by $3 6 billion.
Which included sales of a number of CRA related investments, bringing year to date reductions to approximately $6 billion and putting us well on pace to achieve our 2024 year end target of the historical principal investment portfolio below $15 billion.
Next platform solutions on page eight.
Revenues were $659 million driven by growth in loan balances and consumer platforms. As noted earlier, we took a 504 million impairment charge on the goodwill associated with consumer platforms. This quarter in connection with our exploration of a potential sale of the Green Sky business. We will continue to evaluate as intangibles for impairment and should we decide to sell that.
Business, we will also make a determination regarding moving green sky to held for sale similar to the actions we took last quarter with respect to our Marcus unsecured loan portfolio, we will share further updates as appropriate.
Additionally, you'll recall that our Investor day earlier. This year, we said that we expected to reduce the efficiency ratio and platform solutions below 100% by the end of this year and we are making progress absent the impact of the goodwill impairment and consumer platforms. The efficiency ratio for this segment year to date would have been better than our stated goal.
On page nine firm wide net interest income was $1 7 billion in the second quarter, our total loan portfolio at quarter end was 178 billion.
Unchanged versus the prior quarter.
For the second quarter, our provision for credit losses was $615 million provisions in the quarter were primarily due to continued growth and higher net charge offs in our lending portfolio with a consumer platforms.
Additionally, within our wholesale portfolio impairments and a reserve build were partially offset by releases due to lower balances.
Moving on to page 10.
We've added a new slide this quarter, providing additional detail on our CRE exposure.
Starting with the left side of the page CRE loans represent a relatively small percentage of our overall lending book roughly 15% and we are well diversified by property type with only 1% in the office category.
Moving to the right side of the page you can see additional detail on our CRE related on balance sheet alternative investments, we conducted a comprehensive asset by asset review of this portfolio this quarter and we've incorporated the feedback from our sell down process office related exposure represents approximately 2% of the aggregate portfolio of equity securities loans and debt securities and approximately <unk> <unk>.
15% of the Ci investments in other category net of financings overall.
Overall, the CRA investments are diversified across geographies and positions with no single position representing more than 1% of the total on balance sheet alternative investments.
Furthermore, 50% of these investments our historical principal investments that we intend to exit over the medium term. We continue to remain highly focused on the overall risk management of this portfolio.
Turning to expenses on page 11.
Total quarterly operating expenses were $8 5 billion.
Our year to date compensation ratio net of provisions is 34%, which includes approximately $260 million of year to date severance costs at.
At Investor Day in February we articulated a goal of $600 million and run rate payroll efficiencies to be achieved this year and we have now largely reached this target with line of sight to surpass it.
Quarterly non compensation expenses were $4 9 billion.
The increase in our non compensation expense was entirely driven by the Cie and goodwill impairments I discussed previously absent. These items non comp expense is down for the second consecutive quarter, even in the face of inflationary headwinds.
Our effective tax rate for the first half of 2023 was 22, 3% largely as a result of an increase in taxes on non U S earnings for the full year, we expect a tax rate of roughly 22%.
Next capital on Slide 12.
Our common equity tier one ratio was 14, 9% at the end of the second quarter under the standardized approach, which is a 190 basis points over our new 13% requirement that will become applicable in October .
As David mentioned, we are pleased with the results of the recent stress tests and remain confident that our strategy to reduce the capital density of our business will continue to help improve our seb overtime.
The 80 basis point reduction in our CB will allow us to continue to remain nimble and dynamically deploying capital to support our client franchise.
In the quarter, we returned $1 $6 billion to shareholders, including common stock repurchase of $750 million in common stock dividends of $864 million. Our board has also approved a 10% increase in our dividend to $2 75 per share beginning in the third quarter. This increase will enable us to pay our shareholder.
A sustainable growing dividend and maintain a competitive yield complemented by our previously announced $30 billion share repurchase program, where we intend to step up the level of buybacks going forward.
In conclusion, our second quarter results reflect the challenging backdrop as well as our ongoing execution of several strategic actions. These initiatives will help transition our business and improve our overall return profile, we remain confident in our ability to deliver for shareholders, while continuing to support our clients and remain optimistic about the future.
Opportunity set for Goldman Sachs with that we will now open up the line for questions.
Thank you, ladies and gentlemen, we will now take a moment to compile the roster Q&A.
Shannon.
We will go first to Glenn Schorr with Evercore.
Hi, Thank you.
So wanted to talk about how we build towards that is that.
Medium term ROE target. So obviously this four was.
For this quarter was depressed by the write downs, let's start with a nice starting point, we know capital markets activity will be better in normal times. So I know, we're a lot closer than it looks right now.
If you look at page seven where you.
Thank you you spelled out the $3 6 billion of historical principal investments that declined in the quarter or if you want to do it year to date either way my question related to that reducing capital intensity is.
In a good way it didn't look like there was a big gain or loss related to those exits.
Is that right.
And B.
How much capital of RWD ICU free up because I'm, just trying to build towards that ultimate goal. Thanks.
So Glenn Thanks. Thank you for the question and I think in terms of our journey towards our through the cycle returns there.
There are a number of things that we would need to do in terms of achieving the topline targets that we laid out at investor day, as well as continuing to drive ongoing capital efficiency.
The capital efficiency has been a.
A project that we've been working on for a number of years, we've had particular.
Increases in those reductions over both the first and second quarter as you note.
About <unk> down $6 billion.
And as we if we ultimately reach our target we expect the total a reduction to be approximately $9 billion.
And.
Yes, I'd just add Glenn I just wanted to I wanted two things just that just haven't.
Looking at that because guidance is focused on.
The AE and the continued journey. The one thing you didn't touch on was your question.
Around.
The reductions in weather there were meaningful marks around that there are some where you would reduce where it might be a public positions. We mark those public positions that market that you sell that position at a discount so there could be a slight loss. There are others that are private positions, where you keep evaluation adjustment or discount.
To what you believe it's worth that you're selling you would get a gain but I wouldn't say, there's anything material that I would call out in the context of that of that process, but the important thing about the journey that I'd like to emphasize is we laid out clearing investor day that we were going to narrow the consumer ambitions and really focus on these two big businesses.
Clearly at this point in time, given the lack of investment banking activity our investment banking business is performing at a lower level of return on a lower level of activity than we've seen in nearly a decade. We don't believe that constant we believe that that global markets and banking business can deliver mid teens returns through the cycle and that obviously makes up more than two.
Third with the farm in addition, mark not been laid out at our Investor day, a very clear.
Path on asset management to grow the top line of asset management ex the legacy balance sheet by a high single digit percentage and we set a target to drive the margin at which ex the legacy balance sheet up to 25% at that point that is a mid teens return business and as we continue to narrow the drag.
<unk>, which we are making progress on and the platforms that I believe will narrow that zero and move past that you've got these two businesses that are the firm that will be mid teens through the cycle. So that's the way I'd think about it but obviously you need a better environment in this environment to see that.
I appreciate all that and maybe one just big picture I think a lot of banks.
Some banks that have reported over the last couple of days have had varying degrees of optimism about capital markets activity returning.
And I think in typical Goldman Sachs and you all have been.
We think appropriately conservative over the last couple of quarters. So maybe just get a mark to market on what Green shoots you may or may not be seeing you mentioned your advisory pipeline was up just kind of contextualize that that'd be great.
Sure.
I'd say I'd say the following.
Definitely feels better over the course of the.
The last six to eight weeks than it felt earlier in the year.
And I've talked in the past on this call and other times.
When when I've talked to many of you about the fact that when you have a big reset it takes five or six quarters to get that reset it's not surprising that we're kind of it's six quarters now.
And you're starting to see more activities. So there's definitely going to pick up in equity capital markets activity that definitely feels better there is more M&A dialogue.
I can't tell you exactly what the journey is but I go back and I look historically at other periods, where the macro environment has created sharp drops in investment banking activity. They tend to last for a year or so and then they start to improve and so I think we're starting to see that it definitely feels better I think the inflation data has been.
The client sentiment is better and now we will have to watch and see that journey, but I know this activity level of 10 year lows in investment banking activity is not going to be the normal on a forward basis.
Okay.
Thank you we'll take our next question from Ebrahim <unk> with Bank of America.
Hey, good morning.
Maybe just the first question when we think about.
Potential for obviously pick up in the back half David as you just mentioned, but give us a sense of right.
Right sizing the business given the slowdown that we've seen over the last year or so.
The dead head count Hawaii's infrastructure wise that you wanted to be on the expense base and as we anchor back to the <unk>.
Since the target at around 60% and just give us a sense of.
How do you think we get there.
Goldman is today in terms of just right sizing the expense base.
Yeah. So I think we've made I'll make couple of comments and Dennis will probably add on with some more granular detail but.
I think we've made progress we set some targets at the beginning of the year as you heard as Dennis has prepared remark.
We have basically accomplished and in line of sight for more.
You've seen our non comp expense exiting is extraordinary items around impairments.
It had been down for the second quarter in a row, we've been very focused on that and there has been real work done there because we certainly inflationary pressure on a bunch of the line items in our non comp expenses.
With hindsight I'm very glad that we were early in January is starting to work on the head count sizing. We took a couple of actions. So far this year and we feel good about where we are.
Mind, everybody and we've said this before that we are resuming our regular performance based process that we do with compensation at the end of the year, which we had stopped.
During the pandemic and started again next year. So we go through compensation, we will do a performance review, but we have no. Other specific plans on the head count now, we'll watch the trajectory of revenues and the environment as.
As we go forward, we'll always make adjustments if something changes, but as we just said we think we're operating in an extraordinarily low activities or investment banking, we're not going to erode that franchise that is the key franchise of the firm. So this is a moment that we probably have to support that I'm, a little bit more as things recover.
We obviously are focused on.
Shove efficiency uplift in processes operations, we have a big project going on to make some investments that can create more automation and technology and we feel good about that so we think that over time, that's not a 2023 or early 'twenty four thing, but we think over time, that's something else that will benefit the trajectory.
Dennis do you have some specific steps I mean, just to add for you. So in the end of the second quarter. We ended head count was 44006, hundreds down about 2% on the quarter about 8% year to date I think the more comparable metric is probably the year over year metric of down 5% because a lot of new joiners in the third quarter, but as David said, we are <unk>.
Be about taking the action early in the year are positioning the firm appropriately and also pleased that we've been able to reach towards our target of $600 million and run rate payroll efficiencies.
Got it and just maybe a quick follow up I think if I heard you correct correctly you mentioned.
To maybe step up the pace of buybacks in the back half.
If you could maybe put some numbers around that what level of buybacks, we should expect and how big a deal is Basel NPR from what Youre hearing it may take six to 12 months before we know what the final rules when they incorporate industrial feedback look like so how big of an unknown that is in terms of your capital deployment plans.
Sure. So <unk> pieces of the answer to my question to the question.
Before my answer so what we would say obviously very pleased with the CCAR results, we have 190 basis points of cushion.
We intend to deploy some of that excess capital into the client franchise to continue to grow our activities there.
Announced or increasing dividend, we've been very committed to sustainably growing our dividend and we're going to increase our level of buybacks.
We are mindful of Basel III revisions, but we also recognize that we will get a rule there'll be a comment period for the rule there'll be a period in which that is implemented some suggestions in the beginning of 2026 that implementation may even have a phase in period so as.
We think about the way in which we manage capital we think we should be optimizing for our client franchise and for our shareholders. We obviously will make sure. We're in a position to adopt any new guidance and to do so.
On time and early but in the intervening period, we're going to continue to manage our capital to grow the firm.
And to deliver returns of capital to shareholders.
And we thought we would indicate that that intention is to step it up from where we are.
Thank you we'll take our next question from Stephen <unk> with Wolfe Research.
Okay.
Hey, good morning.
Good morning.
David there's been a fair amount of press speculation covering how your consumer business specifically.
But even some recently, suggesting you might look to sell some additional receivables tied to a partnership with Apple and GM I know price speculation might not be representative of what's actually being discussed so it might be helpful. Just to hear about your strategic priorities for the consumer business, maybe how your vision has evolved and reach.
Months, just given some of the challenges facing that business.
And maybe not fitting with your aligning.
Aligning with your core competencies.
Yeah. So thanks, thanks for the question.
This way as I think you know we've made we made difficult but appropriate decision.
A year ago, working with our board to narrow our consumer ambitions and kind of rolled out fall the direction of travel and have been executing on that.
And that included the wind down and the execution of the markets. The wind down of the execution of the sale of the Marcus loan portfolio, which has now been completed.
And obviously exploring options for Green Sky, which we've been transparent on are in the process up. We've also said very clearly that our credit card partnerships are long term partnerships. We don't have unilateral rights with them. They definitely can operate better we've been working hard to improve the operation of them, which will reduce the drag.
And we're making good progress on that and we're working with Apple and also with GM to do that and so there is significant focus on reducing that drag and the drag of those credit partnerships has gotten smaller and it will continue to be reduced as we move forward into 2024.
We continue to have a very strong deposit platform we launched.
Apple savings platform, which also was a successful launch that grew our deposit base and so we will continue to grow deposits.
And that's the course that we're on at the moment.
No. It's great color. So thanks for all that David maybe just for my follow up on equity financings specifically the contribution in the first half actually implies an incremental $1 billion in fees year on year.
You've definitely been highlighting the commitment.
To grow the financing piece and just wanted to better understand why the durability of the gains that you saw in the first half and as we look out over the next few years, how significant of a contribution to the trading business do you expect from the financing component both across equities as well as FIC.
So I'm going to I'm going to start with a high level strategic view of what I think we've done and we're focused on doing and then Dennis will give you.
A little bit more detail, but one of the one other thing this has been a strategic priority for us because I certainly remember.
Going back over the last decade, there were times, where we did not have the largest equity business and we were not in a position with our clients and the equity franchise that we're in now and there were some reasons based on strategic decisions that we made at the time, but we've been very focused over the last decade, and improving that position at a very good.
Progress and growing the financing franchise also expanding the base of clients that we worked with there has made a real difference and so I look at the equities performance this quarter and feel very good about very good about what the teams accomplished and very good about the feedback we get from clients now broadly that financing revenue is more durable than intermediation revenue.
But it obviously is effected by risk on risk off and.
Overall market level activities.
So there can be variability in it but theres a base stability there that's much more meaningful than intermediation revenues.
Dennis can expand a little bit more on how we think about that from a risk and a capital perspective short so.
That is the strategic direction of travel.
We are allocating a lot of time and resources human capital financial capital to grow those activities equities financing revenues are nearly 50% of overall equities revenues this quarter and thats something that has been growing even the combined FIC and equities financing as a percentage of FIC and equities.
To grow so we remain very focused on prioritizing activities in that space with clients and we're also observing that there's a virtuous reinforcement of our commitments to grow market share and to cover clients more holistically over a multi year period, it's paying dividends both across dividend and intermediation.
And recognizing David's comments with respect to market valuation levels, which drive changes in balances and changes in behavior. There is also activities that we've been taking to sort of systematically identify components of the client base across the financing activities and make sure that we're capturing more share in underpenetrated portions.
So the client base. So we remain committed to growing growing that activity, it's relatively more durable than intermediation, but like all of our other line items. It can it can fluctuate on the forward.
Thank you we'll go next to Betsy <unk> with Morgan Stanley .
Hi, good morning.
Good morning, <unk> morning.
Hey, just one follow up to that last question and then a different one but just on the last question.
So you mentioned durability. When you were talking about financing that was part of what I wanted to understand do you feel like this quarter financing revenue is a good jump off point for us to grow from.
And if there's any puts takes on how you would think you how would you want us to think about that level of durability that would be helpful. Thanks.
Sure. So I'll comment both on both on FIC and equities.
In fixed income.
We had slightly softer performance period on period that was driven by a component of fixed financing, which is more episodic just commodities based financing those activity levels were a lot rollout higher and so I think youll see lack of contribution from commodities based financing activity that was in prior periods, but I think the forward for <unk>.
Other components of our fixed financing like collateralized lending and repo I think there remains opportunity for us to deploy and continue to grow those types of activities.
Always cautious about predicting growth off a record performance, we're pleased with the equities financing.
Performance in the second quarter, and we do intend to grow that from here.
But we'll have to continue to work hard to continue to deliver the type of period over period growth, but we do think there is still unaddressed market share and we continue to grow our balances to grow those revenues.
And you highlighted capital obviously had.
SaaS significant access so there's that flex between buybacks versus deploy this as an opportunity to deploy I guess the follow up I had to that was in your comments earlier on the Basel III end game I think you mentioned that you look youre in a position to.
The opportunistic whether or not you want to.
Meet the requirements are early and I guess that was the question I had on when you say on time of course, but early just meaning within that phase in period early and again I kind of ask the question with the context of <unk> got this opportunity and financings. So how should I think through.
Meaning it early versus leaning into financing versus other options you might have thanks.
Yes, so look I appreciate that I think there's a lot that's unknown about the direction of travel on this and we're talking about years out and so I think Dennis is message on early was in the context of the phase in period, making sure we were getting there on time.
No we are focused on to point.
We generate a lot of capital because the firm generally through the cycle generates good earnings we are going to return a bunch of that to shareholders and there are opportunities as we're talking about to deploy that in service of clients.
Given the work we've done strategically we now have much greater flexibility, which gives us the option to look sharply as some of the deployment opportunities where maybe six months to 12 months ago, we felt we needed to be more cautious and at the same point, we have more capacity as Dennis said the step up buybacks.
You should view that we're very very focused on delivering capital to serve clients and to shareholders and we'll be very thoughtful about the adjustment phase in of whatever comes when we understand it but I would just say there's a lot of uncertainty it's a ways out.
There's going to be comment periods.
And so.
Theres nothing is going to be premature about what we do.
Thank you we'll go next to Mike Mayo with Wells Fargo.
Hi.
Look I think you described here.
Sizing with this SaaS been accurately that CIA.
As consumer.
Head count.
<unk>.
No.
A specific question is.
What were any severance charges in the quarter and where are you on the right sizing on head count.
And the Big picture question for David and simply.
Is this as bad as it gets.
Do you feel comfortable that you captured everything with.
You know from the any severance.
Mr Green Sky to CAE with debt investments equity investments that you are conservative or not we're going to keep seeing 9% Roe easier.
Does this accelerate your journey to that 15% midterm ROE is thanks.
Okay, Mike, It's Dennis I'll start and then I'll turn it over to David So we called out our severance expense year to date was $260 million.
The vast majority of that was in the first quarter in connection with much much larger levels of head count reductions then the reason that we're making an effort to call. It out you will also notice that our comp ratio net of provisions at 34% were just making an effort to provide transparency in terms of what components of our compensation expense accruals are.
Designed for severance and we think thats important because with the balance we're going to be focused on our pay for performance ethos as well as balancing returns for shareholders, but making sure that we have the capacity this year to protect our talent protect the franchise make sure we're positioned to capture the upside so.
The severance disclosures are just designed to help understand.
The financial impact of the actions we've taken.
We will give you more color, but we've largely done what we set out to do we're on target for the payroll efficiencies.
And that will help you understand what the severance picture is relative to the overall accrued level of compensation expense.
And Mike to your bigger question.
A meaningful quarter and putting some things that we strategically decided to do.
Behind us.
With respect to the balance sheet I think one of the things Thats very important to call out. This is an environment at the moment that's been hard on that legacy balance sheet, we are reducing the legacy balance sheet, but we could just as well next quarter. If the environment improves have positive revenues from that legacy balance sheet too.
But if the environment got worse, we still have balance sheet to reduce so.
I've been around the firm a long time. This was obviously a tough quarter, but we also we also had one off items that we've put in we're going to continue to give you transparency on the legacy balance sheet and we're going to continue to move forward I think the environment feels better if the environment feels better and the environment turns out to be better you'll see better performance.
But I feel very very good about the strategic decisions that we're making the execution that we're working on the progress, we're making in asset and wealth management.
And we as a leadership team see a clear path to improvement and a better operating environment.
And can you remind us.
So you are taking this pain.
The charges and Youre looking to get to mid teens Roe.
The medium term, how do you define medium term and what should we be looking at along the way because COVID-19.
Stent that this accelerates this transition.
It would be nice to see some metrics externally for that progress.
Well.
We're going to make progress Mike over the next couple of years. The next two to three years, we're going to make meaningful progress but.
I just highlight when you go back to our core business banking in markets, where we are a leader and I think given the mix of that business is performing well and what's not a perfect environment for that business. If that business. We really believe will deliver mid teens through the cycle. The investment banking returns right now are at a very very.
Significant low, but we do have a 14% ROE to date in global banking and markets. So an improved environment should help us the asset management journey is going to take and we were very clear about this in February it's going to take two to three more years for us to continue to make progress on the journey with respect to the continued reduction.
Our balance sheet and the revenue growth and the margin uplift and we are working on it we see a clear line of sight, we're gonna make progress.
Thank you we'll go next to Brennan Hawken with UBS.
Good morning, Thanks for taking my questions.
You spoke earlier to green shoots that you're seeing in the banking side.
Given how important sponsors are to your banking franchise curious to drill down and specifically understand what youre seeing without cohort and whether or not we need to see the levered loan market recover before they can come back in full force.
Yes. So thanks for that question Brennan, It's a good question Thats important thing Im glad youre asking us to highlight it because I.
I think about it this way and it's very very important when you look at our M&A business.
A significant contributor our M&A business as M&A for responses and that has come to a halt it's come to a halt there are two aspects of it is by size and the sell side. The buy side is obviously also give us financing and other capital markets activity. The sell side, sometimes give staple in financing opportunity too, but that stuff's kind of come to a halt.
Here's one thing I know about financial sponsors.
Number one they are a bunch of assets.
They are all for sale and they all will be sold this environment has slowed down the pace of sale and a better environment that will accelerate and I think we're going to see that accelerate as we look forward from here. This has been a particularly slow environment for that secondly, they have enormous dry powder.
And they can't make money unless they deploy and so as soon as you get to a place with values reset and financing costs are understood and you start to see people deploy we're starting to see some of that you saw this quarter, obviously, a very very good transaction.
Around <unk>.
And so youre going I think the seaboard as we move forward. So this is a very very important part of the investment banking ecosystem that kind of came to a shutdown given the volatility of change in the environment and I'm not smart enough to tell you this quarter next quarter, but it will meaningfully improve and it is an important component to investment bank.
Activity and it's one of the reasons why investment investing activity is running at.
From an activity level kind of 10 year lows and the other part of your question Brendan speaks to availability and help the financing markets. I think we certainly have underwriting appetite to facilitate these transactions. We believe we can distribute risk into the market. There's also a number of principally buckets, both with our clients and within our.
Own funds that are capable of deploying financing to support transaction activity in this environment that could also be an attractive source of activity for the firm.
Great. Thanks for all that color I appreciate it.
And then for my second you started the process of selling Green Sky, we saw the goodwill impairment what's been the reception to that asset and has that impacted your expectation for how quickly you could finalize that so thanks.
So Brendan.
Terms of the process, we're obviously in the middle of the process.
Have feedback I think.
Extra color just to share with you in terms of how you think about potential on the forward. It's a business. We bought for 1 billion seven we integrated into Goldman Sachs. We're seeing it perform well it's a good business. We have made the decision to explore alternatives because it's not the right fit necessarily for Goldman Sachs.
We've written down the goodwill and the consumer platform segment. There is no more goodwill to be written down that business at this point has <unk>.
Remaining unamortized intangibles of approximately $625 million that we.
Consider for impairment on a quarterly basis, and we'll do so in the future.
And should we move forward with the transaction with respect to Green Sky. It could happen in a number of different ways. We could sell the platform. We can sell the platform and the historical lending book that we have on balance sheet and.
And should we choose to sell the loan book does.
As ignite that is held for sale are much like the Marcus loans process and Youll see the P&L impact accordingly, as we mark the loans and released the associated reserve. So those are the types of things that could occur on the forward given the strategic activity, but I don't think there is anything else to say about the green sky process, given where we are.
Thank you we'll go next to Devin Ryan with JMP Securities.
Thank you.
Morning.
In markets, where you had on financing so just want to look at intermediation here, obviously results were off quite a bit from the great quarter last year, but based on the results and also it looks like you.
You did better than the implication on the conference circuit.
You saw late in the quarter. So just the implication there would be the June got a lot better for intermediation. So I just want to make sure kind of that read is correct and then the June feel like a more normal month relative to the first couple and you know how can that continue just trying to think about.
For the quarter and the cadence there. Thanks.
Yes, so thanks, Devin I would just say and you highlighted it's appropriately just pointed back I mean, one of the big differences. When you look at the year over year comparison is we're coming out of a period with awards started in Russia that was enormous activity in the commodity space and we were very very well positioned to serve clients in that space and so we if you go back and you look at the <unk>.
Quarter 2022, we way outperformed.
In that quarter because of that commodities activity and obviously you didn't have that here I think the second part of your comment Yes June was better.
June was definitely better.
So there was an improvement in tone and a little bit of improvement in risk on and look we're early in the quarter, but there is no question as more of a risk on sentiment.
In the month of July than it was earlier in the second quarter and you just think about where we're coming out of March we were coming out of the banking crisis and you think about when we were on this call. You know in early April we were in a very different place in terms of investor sentiment. Overall, so there has been an improvement through the quarter.
I think its noted appropriately.
Okay. That's great and then just on transaction banking and the momentum there it'd be great to just get an update on some of the kind of the drivers and you really the question is it's such a huge market as you guys identified when your guys business. It's still very small driver for Goldman and so I'm just trying to think about the growth there.
Are there opportunities for more step function growth, if you add a certain capability or just how should we think about the opportunity to really.
This to become a much bigger business for Goldman.
So I appreciate that question I think it's I think youre right I think we've got an interesting platform, it's been very constructive and bringing deposits to Goldman Sachs, but one of the things that we've said over the last couple of quarters as we're working now on getting the clients that are on the platform to really get more of their payments activity into the flow so that as deliveries.
Revenue and real value over time.
Just to kind of compete for and be engaged with us they like our technology, but making changes in payment flows take time. So I think the team here is very focused on the long term investment in building those relationships I think a particular opportunity for us is around what I call kind of a financial sponsor companies et cetera, where obviously given our financial sponsors France.
We have a very very good opportunity set over time, but this is going to take time to execute I think it's one of those things, where we have a business thats.
It's performing fine, but it's not making a meaningful contribution but I think this is something where over time, we will work hard to figure out how this can make a more meaningful contribution to the firm with our client base.
Thank you we'll go next to Dan Fannon with Jefferies.
Thanks, Good morning, I wanted to ask about private banking and lending even ex the $100 million gain this quarter that continues to be an area of growth can you talk about the prospects as we think about going forward and the inputs to.
To continue the level of growth you've seen.
Nicely and there was the area in which we had our Marcus loans activities, which on before those will obviously have.
Will not be contributing on the forward, but the other piece of it which is an area of strategic priority for US is the overall activities with respect to wealth lending activities and we have as I think David highlighted earlier, a premium ultra high net worth business.
That has been growing nicely, but we feel like we're relatively underpenetrated with respect to some of the lending activities with those clients and across the wealth space and so we have some new leadership across the division in the past number of quarters and a very very clear mandate that we should be out there aggressively leaning into those relationships and.
Making sure that we can solidify them as comprehensively as possible and we expect that will be a contributor to that line item as well on the forward.
Great and then just as a follow up in terms of the balance sheet reduction outlook.
Outlook.
No.
As you think about light of site, which I think you used to give us some numbers and given the capital markets may be opening up in a little bit more receptive to exit anything that you could point to or numerically to talk about it in the short term that youre planning on or as I said line of sight on.
Sure I appreciate that question. So obviously, we took you to current on historical principal investments of $23. Eight you know that there is a year end 24 target of below $15 billion. We said, we are well on pace towards that target I would say that we have line of sight on several billion of incremental <unk>.
Reductions, we have a large number of processes in positions that we're exploring for disposition, they're all in various stages of completeness from exclusivity to an offer to being marketed to being prepared.
Moved a large number of positions year to date and we have more that we're focused on moving from here. So I would offer that up as an ongoing highly engaged process, where we expect to make incremental progress.
Thank you we'll go next to Matt O'connor with Deutsche Bank.
Good morning.
The FCB, obviously came down very nicely this year and has been trending down for a couple of years now.
We are getting some questions on how some of the consumer loan portfolios have.
I have impacted that.
And specifically with.
With the sale of the Marcus loans and potentially.
Green Sky loans and again, according to the media potentially exit the credit card I guess the question is.
Do do those loans actually helped bring down the SCB.
Or.
What are the puts and takes there as you think about the impact of those loan portfolios in aggregate on the annual DFAST CCAR.
Sure. So look you are familiar with the process as we are there's various levels of transparency that you get through the process, obviously, those contributions from lending activities, which which roll into <unk>.
Components of the test, but the big driver for us.
And what we feel has been enabling us to meaningfully move down our SCB towards the 5% area that we've been discussing is really attributable to the on balance sheet.
Investments, we think that has a very very meaningful impact for us and the thing I would remind you is that the impact that was just revealed in this year's test with this.
A five 5% due to be implemented in October that's based on a snapshot of activity that the fed took last year.
Which means that all of the activities that we're discussing on this call are going to be considered in the next test and assuming that the test is similar next year to the test this year, which I don't know, but if it is we will continue to see benefit from our reduction of these on balance sheet investments. So the reason why we remain so focus on <unk>.
Those targets and providing so much transparency about our trajectory and our path is that we really believe that thats, a very very meaningful way to understand our trajectory in terms of minimum capital ratios.
Until obviously any new news on that front.
Okay.
Focus much more on the legacy on balance sheet positions versus the consumer lending portfolios.
Alright Thats helpful. Thank you.
Yep.
We will take our next question from Gerard Cassidy with RBC.
Good morning, David Good morning, Dennis.
Good morning, David David in your opening comments you were talking about you guys are still very focused on reaching a mid teens Roe through the cycle.
I'll note the business has been depressed as you pointed out.
Your comments can you share with us if you go we have.
Public has access to the Dealogic data your data is probably better than that but if you look at the dealogic data for 'twenty, one and 'twenty two obviously the global investment banking revenues were unusually strong why would you think is a normal level for global investment banking revenues that you need to get to that mid teens ROE that you are.
Targeting.
So again.
I would highlight that that global banking and markets. Even in this environment has close to 14% Roe for.
For the first six months of the year and what's not a great environment for investment banking, we don't disclose the separate ROE for investment banking, but I'd just highlight to you it's running way way below what it's run on average over the course of the last five of the last 10 years, we do not have to go back to 2021.
<unk> kind of levels in order to see a material uplift in that investment banking ROE, which will bolster the overall through the cycle uplift of our global banking and markets franchise.
I'm sure.
Lifetime, maybe not my career I will see another year like 2021.
2021 falls into that category of yours come along.
Once in a decade I wouldn't call that normal either but I would say this.
This is not normal a normalized somewhere in between our averages I hate the word normal average lies somewhere in between the only thing I would add which I'm sure is intuitive to Gerard some of the activities that are not contributing a substantially right now are very capital efficient activities and so looking at deal logic levels of activity or revenues.
Our one metric, but some of them are very very beneficial to our overall results and they also have the capacity to catalyze other activities as a consequence. So then in environments of more active levels of investment banking, we see some positive impact across the rest of the firm that's not necessarily captured simply from the.
Delta explained in that investment banking line, Yeah, one other thing Gerard I would just add if you go back it's in there.
Interesting thing to do if you go back and you look at investment banking revenues from people, who report them over the last 20 plus years go back to 2000 and look at investment banking revenues.
There is a change in the environment and investment banking revenues have dropped meaningfully because of that you can go back and you can see that in other times over the last 20 years to 25 years, you can see that from 2001 to 2002, you can see that from 2007 to 2008, you can see that in 2010 to 2011, and obviously youre seeing it from 2020.
1% to 2022 and 'twenty three what's interesting is to go look at what happens when you come out of the cycle.
And kind of look at the growth in the up shoot because market cap grows this growth in the economy et cetera, I don't think its going to be different. This time I think this is a cycle, we haven't seen a cycle in a while and the other side of the cycle. We will continue to look attractive the services of advising the need for mergers and consolidate.
<unk>, even though there could be headwinds and friction the need for capital markets activity Ipos equity financing debt financing, that's a fundamental part of our economy, it's not going away it's been depressed for the last for.
For the last four to six quarters.
Very helpful. Thank you and then Dennis Technical question for you on Green Scott You mentioned that you still have intangibles and you are going to think or you still have a determination to make whether green sky should move into held for sale.
Part of question, what will trigger that to move it into held for sale and then should you do that and if there isn't an intangible impairment do you have to take the impairment at that time, when you're moving into held for sale or you can wait for a later date.
So thank you the decision as to whether whether and when we move it to held for sale is when we make a decision affirmatively that we are selling.
The business and are selling the loan portfolio and we will when we make that decision we will designate it as such and you will see the P&L consequences of that designation at that point in time, we evaluate the intangibles every single quarter for impairment and then the next quarter. We will also analyze the intangibles.
For impairment.
Thank you we'll take our next question from Jim Mitchell with Seaport Global Securities.
Hey, good morning.
Just on platform solutions profitability appreciate youre getting to an efficiency ratio already below 100%, but the other the other drag on profits is credit.
Thank you guys noted that.
And consumer platforms at a five 8% net charge off ratio.
I would imagine point of sale is.
Lower than card so that would imply cards is well north of 6% in terms of the net charge off ratio. How do we is that right and how do we think about the credit quality of that book and where you see it kind of normalizing.
Sure. So a couple a couple of things on the one hand, the net charge off and consumer at five eight for the quarter given the nature of our portfolio. Its maturity. The overall operating environment. We do have we do expect that that will continue to tick up over the next couple of quarters, but you'll also notice that we reduced our coverage ratio.
This quarter as well and Thats because the performance of the activities is actually coming in better than we had originally expected that we had put put together provisions on a conservative basis and now as we have more and more data coming through we actually are comfortable and removing some of that conservatism in bringing down the cover.
<unk> ratio, so I'd say trending as expected.
With overall better data coming through than originally anticipated.
Okay, maybe just a follow up question on wealth management.
I haven't really talked about it in a while but whether it's with eco and trying to move a little bit down market from the ultra high net worth space can you talk to the progress you've made there and what kind of where youre seeing investments in growth.
So eco within within the overall platform Eco is something we continue to grow we continue to be focused on it's extremely well received in particular by a number of our C suite clients. It's part of our approach to having a more integrated and comprehensive approach to clients in that segment.
We do see opportunities to continue to expand our offering but we also see opportunities to expand within the ultra high net worth space, both in the United States and abroad, and we have a very very long track record of delivering and we believe we are actually despite the franchise underpenetrated continue to grow that as well.
That will conclude our question and answer session. Please continue with any closing remarks.
We just want to say thank you for joining and obviously if you have any further questions. Please feel free to reach out to me or to Han and the rest of the team otherwise we look forward to speaking with you soon thank you everybody.
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