Goldman Sachs Group Inc (GS) — Q1 2015 Earnings Call Transcript

Good morning. This is Dane Holmes, Head of Investor Relations at Goldman Sachs. Welcome to our first quarter earnings conference call. Today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events that, by their nature, are uncertain and outside of the Firm's control. The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for the year ended December 2014. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our Investment Banking transaction backlog, capital ratios, risk-weighted assets, Global Core Liquid Assets, and supplementary leverage ratio, and you should also read the information on the calculation of non-GAAP financial measures that's posted on the Investor Relations portion of our website at www.gs.com. This audiocast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Our Chief Financial Officer, Harvey Schwartz, will now review the Firm's results. Harvey?

Thanks Dane and thanks to everyone for dialing in. I will walk you through the first quarter results, and I am happy to answer any questions. Net revenues were $10.6 billion; net earnings $2.8 billion; earnings per diluted share were $5.94, and our annualized return on common equity was 14.7%. The first quarter was dominated by one primary theme, central bank policies. In the United States, the market heavily debated whether 2015 would be the year that the Federal Reserve raises rates. On the other hand, the European Central Bank announced the creation of a €1.1 trillion quantitative easing program that kicked off in March. The prospect of two of the world's largest economies implementing divergent monetary policies had a significant impact. Market participants reassessed the implications for both global economic growth and, as a consequence, the performance of various financial assets. Regarding the economic outlook, on one hand, low rates are viewed as providing an important economic stimulus to the United States. On the other hand, a return to normalized rates would be consistent with a strong underlying economy. Looking at the bigger picture, the degree of conviction around a slow but stable U.S. recovery continued to gain support for most of the quarter. The weaker recent jobs report in the U.S. has sparked some debate around the timing and magnitude of potential rate hikes. However, the long-term expectation of slow, but steady growth and higher rates remains intact. Across the Atlantic, the announcement of quantitative easing in Europe provided some stability and the basis for greater economic growth in the region. The launch of a €60 billion per month purchasing program provided greater confidence to market participants on the Eurozone outlook. The impact was immediately felt across European financial markets. If you take the European government bond market for example, more than a quarter of the bonds are trading with negative yields today. The equity markets in Europe rallied, as demonstrated by the 18% increase in the Euro Stoxx 50 Index during the quarter, and the Euro reached its lowest level versus the dollar in 12 years. As a result, there was greater activity as clients responded to heightened market volatility. Given the scope, complexity, and significance of these two different monetary policies, it isn't surprising, that there continues to be a robust discussion around the potential impacts. For our firm, the focus continues to be our clients and serving their needs. Our clients are placing a greater premium on both intellectual and financial capital, given market dynamics and an evolving competitive landscape. We are committed to providing our clients with superior advice, investment performance, content, market liquidity, and certainty of execution. We believe that our extensive capabilities favorably position us to meet a variety of client needs, in what is certainly a dynamic market environment. Now I will discuss each of our businesses. Investment Banking produced first quarter revenues of $1.9 billion, up 32% from the fourth quarter. Our Investment Banking backlog decreased since the end of the year, but its still up significantly, relative to a year ago. Breaking down the components of Investment Banking in the first quarter, advisory revenues were $961 million, the highest since 2007. This 39% increase relative to the fourth quarter reflects both the increase in completed M&A and the strength of our leading global franchise. In the quarter, Goldman Sachs ranked first in worldwide announced and completed M&A. We advised on a number of significant transactions that closed during the first quarter, including Allergan's $71 billion sale to Activis; RWE's €5.1 billion sale of RWE-DEA, Indecent Group, and Dai-ichi Life Insurance Company's $5.7 billion acquisition of Protective Life Corporation. We also advised on a number of important transactions that were announced during the first quarter; these include MeadWestvaco's merger with Rock-Tenn for a combined enterprise value of $20 billion; Charter Communications' $10.4 billion acquisition of Bright House Networks; and Dow Chemicals' $5 billion separation of its chlor-alkali and downstream businesses to Olin Corporation. Moving to Underwriting, revenues were $944 million in the first quarter, up 26% sequentially as equity issuance improved. During the quarter, we ranked first in Global Equity and Equity Related and Common Stock offerings. Equity Underwriting revenues of $533 million rose 56% compared to the fourth quarter, largely due to an increase in secondary offerings. Debt underwriting revenues were essentially unchanged at $411 million. During the first quarter, we actively supported our client's financing needs, leading Santander's €7.5 billion follow-on equity offering; Chevron's AUD4.7 billion sale of its stake in Caltex Australia; and Berkshire Hathaway's €3 billion investment grade issuance. Turning to Institutional Client Services, which comprises both our FICC and Equities businesses, net revenues were $5.5 billion in the first quarter, up significantly compared to the fourth quarter. FICC client execution net revenues were $3.1 billion in the first quarter, and included $32 million of DVA losses. Net revenues were up more than 2.5 times sequentially, as client activity increased in a number of our businesses, in response to higher volatility and improved market conditions. Interest rates and currencies were both significantly higher sequentially, as client activity improved amid diverging central bank policies. Credit increased significantly from a more challenging fourth quarter, as credit spreads generally tighten during the first quarter. Mortgages also rose versus the fourth quarter, although volatility and client activity remained generally low. Given continued trends in the energy markets, commodities improved sequentially, with higher levels of client activity. In Equities, which includes equities client execution, commissions and fees, and security services, net revenues for the first quarter were $2.3 billion, up 20% sequentially and include $12 million in DVA losses. Equities client execution net revenues increased 50% sequentially to $1.1 billion due to a favorable market-making backdrop with higher levels of client activity, particularly in derivatives. Commissions and fees were $808 million, down 3% relative to the fourth quarter. Security services generated net revenues of $393 million, up 12% sequentially, reflecting higher customer balances. Turning to Risk; average daily VaR in the first quarter was $81 million, up from $63 million in the fourth quarter. The move up was primarily due to increased market volatility across all categories. Moving on to our investing and lending activities; collectively, these businesses produced net revenues of $1.7 billion in the first quarter. Following a sale of our investment in Metro International in the fourth quarter, we made a decision that the remaining revenue related to consolidated investments within the other line was not significant in the context of the I&L segment. As a result, we are now reporting the other I&L revenues within the equity and debt lines. Equity Securities generated net revenues of $1.2 billion, primarily reflecting strong corporate performance and company-specific events in private equity, as well as net gains in public equities. Net revenues from debt securities and loans were $509 million, with roughly $200 million in net interest income and the balance coming from net gains. In Investment Management, we reported first quarter net revenues of $1.6 billion, essentially unchanged versus the fourth quarter. Management and other fees were down 3% sequentially to $1.2 billion. Assets under supervision remain flat at $1.18 trillion. $7 billion of long-term net inflows, driven by fixed income and equity products, and net market appreciation of $6 billion were offset by net outflows of $14 billion in liquidity products. Moving to performance; across the global platform, 82% of our client mutual fund assets were in funds ranked in the top two quartiles on a three-year basis, and 73% in funds ranked in the top two quartiles on a five-year basis. Now let me turn to expenses; compensation and benefits expense, which includes salaries, bonuses, amortization of prior year equity awards and other items such as benefits, was accrued at a compensation to net revenues ratio of 42%. This is the lowest first-quarter accrual in our public history, and 100 basis points lower than the accrual in the first quarter of 2014. Our lower accrual rate reflects our strong 14% year-over-year net revenue growth and the positive operating leverage embedded in our firm. First quarter non-compensation expenses were $2.2 billion, 12% lower than the fourth quarter and slightly lower than the first quarter of 2014. The fourth quarter included higher charitable contributions and higher impairment charges on consolidated investment entities. Now I'd like to take you through a few key statistics for the first quarter; total staff was approximately 34,400, up 1% from year-end 2014. Our effective tax rate for the first quarter was 27.7%, that is down from a 2014 rate, primarily due to changes in geographic earnings mix. Our global core liquid assets ended at $175 billion. Our common equity tier-1 ratio was 11.4% using the standardized approach, and it was 12.6% under the advanced approach. Starting this quarter, the lower of these two ratios is our binding regulatory constraint. Our supplementary leverage ratio finished at 5.3%, 30 basis points above the minimum requirement that begins in 2018. And finally, we repurchased 6.8 million shares of common stock for $1.25 billion in the first quarter. These repurchases reflected the completion of our 2014 capital plan. As previously announced, the Federal Reserve Board did not object to our revised 2015 capital plan, which includes share repurchases, dividends, and other capital actions. In terms of this year's CCAR test, we announced an increase in our quarterly dividend to $0.65 per share beginning in the second quarter. As it relates to our share repurchase capacity, one point I want to highlight, is that any potential share repurchases over the next five quarters will be heavily back-end weighted. As you all know, we do not publicly disclose the approved size of our repurchase capacity. Again, we take this approach for a very specific and practical reason. We don't want our shareholders to view the approved buyback amount as a commitment to return that capital. For us, capital allocation is a dynamic process. If we see opportunities to deploy the capital attractively to support client activity, we want the flexibility to do it, and conversely, if our clients are less active, we will certainly look to return it. Our track record on this one is well established. Now, before I take your questions, let me offer some closing thoughts. The first quarter has served as a strong start to 2015. The year-over-year increase in net revenues reflects, not only the strength of our franchise, but also our ability to provide high-quality advice and certainty of execution for our clients. Our performance this quarter, while just a quarter, reflects numerous efforts over the last several years to adjust our business. We sold several businesses due to regulatory capital implications. We transformed our financial profile, significantly improving our risk-based capital. We revamped our capital allocation processes, improving our decision-making and efficiency. We took a hard look at our operating costs, fundamentally changing our expense structure by eliminating costs, reallocating resources, and leveraging technology. We made all these changes, while at the same time, continuing to invest in our global client franchise. We know that our success in many ways begins and ends with our clients. It’s the trust they place in us and our ability to execute on their behalf that drives our franchise, and we believe that our steady commitment, particularly through these more difficult years, has been critical to creating stronger client relationships. And there is one important thing that we didn't change, our focus on creating shareholder value. Our efforts are ultimately a reflection of our commitment to you, our owners. We understand that to create shareholder value, we need to have strong financial footing, be efficient allocators of capital, and have a world-class client franchise. Ultimately, our efforts over the past several years have meant that a 14% increase in year-over-year revenues can contribute to a 40% increase in net earnings, a 48% increase in earnings per share, a 380 basis point improvement in ROE, and finally 9% growth in book value per share over the past year. Thank you again for dialing in, and I am happy to answer your questions.

Thanks very much.

Hey good morning Glenn.

Good morning. Let's start with Investing and Lending, it was pretty darn good. I am curious on the equity side, how much of it was actually realized in asset sales, because it was a pretty active quarter? And then maybe related to that, if you could give the portfolio breakdown in terms of equity, debt and lending assets?

Let's start with the balance sheet. At the end of the fourth quarter, it was $79.5 billion, with over $50 billion attributed to debt. That's the majority of the balance sheet. In terms of equity, we have $4 billion in public equity and $18 billion in private equity. Regarding the equity performance this quarter, we don't view it mainly as asset sales, as we frequently conduct asset sales and there are times we are restricted. That's why we are careful about providing the public equity figures. Essentially, when analyzing the performance, about 40% came from those public assets. Another 40% was from improvements within the company, and the remaining portion was from factors like pending IPOs. That's how I would summarize it for you.

And, what's the disallowed portion or what's the best way to ask how much Goldman still has in the funds that you need to eventually liquidate?

I want to ensure I understand your question correctly. You're asking about the number under regulatory guidelines, which is approximately $8 billion. This has been increasing due to good performance. It's important to note that we emphasized this in discussions over the last couple of years because the initial deadline was July of this year. However, regulators have since provided an industry-wide extension until 2017. So, we are still focusing on it.

Great. Last one is, on FICC, I mean, the macro products are great, but credit mortgage wasn't, so not exactly hitting on all cylinders as a whole. But it certainly seems like, maybe some of the reduced capacity in the industry is helping you, and so your long-term strategy that we all beat you up for the last five years might be working. Could you talk towards what you're seeing in terms of capacity and now that you've seen a pickup involved, clearly, what it means?

So on FICC, I think you're right to say that, one of the things we have benefited from, certainly is the diversity of the businesses. It's not just FICC, it's across equities as well, because as you said, even in a quarter like this, where you're seeing improved FICC performance sequentially and year-over-year, you're really seeing it in the macro side of the business, and as you said, not all cylinders are firing. In terms of us, through this part of the cycle, while you were beating us up, we were spending a lot of time focused on the clients and staying very, very committed to the businesses, and we are seeing it translate through. I don't have perfect visibility into our competitor's obviously, but you've seen the announcements, some things more stark like commodities. But certainly, we are hearing it from clients, and now we are starting to see a bit of it, I would say geographically, certainly in Europe. I know you asked about FICC, maybe take the equity business for example. We have seen a trend in derivatives, and then certainly in a quarter like this, it was pretty significant.

Okay. Thank you very much.

Good morning Harvey.

Hey, good morning Christian.

So to start on maybe CCAR, the Firm has proven very adaptable in managing the regulatory environment. As you think about, obviously, your CCAR results. I am just curious as to what levers you have here to improve your relative positioning?

Sorry, I didn't hear the very beginning of your question, I apologize Christian. Could you just repeat it?

Yeah. So my question basically is just on your CCAR ratios. I am just curious, what levers you have to improve your positioning?

Right. Okay, I understand. So as you know, we get very little transparency by design, in terms of how the regulators have constructed CCAR going into the test. One thing of course is, we get transparency on our results coming out of the test. And so last year, you saw us digest that information among other regulatory constraints, and we took very immediate action around the balance sheet, and as you saw in the second quarter, reduced the balance sheet by $50 billion. Every year's test, you learn a little bit more in terms of the results. This year's tests, in terms of the constraints, again this is all public, had to deal with total capital, and so we are again digesting the results, and we will look at that, in terms of how we think about deploying our balance sheet, our capacity and our capital structure, and again, we will go through a process. I am not saying the process will yield the same results in terms of last year's balance sheet actions, but we are going through that same diagnostic process now, with our teams in the businesses.

Okay. Have you mentioned your clients are placing a greater premium on kind of financial capital, and execution. Curious to how this is being expressed? Are you seeing wider bid-ask spreads in the market that give you more business, or something else?

So, as I mentioned, we are seeing it in certain parts. I guess one of the areas I point to is if you just look at the capital we committed to block transactions during the course of the quarter, obviously there were some significant capital commitments we made to clients during the course of the quarter, the largest block transactions that were done. And so, we felt very well positioned to connect those sellers or issuers of equity with buyers on the other side. I'd say more broadly, the process of repricing has been maybe slower than folks would have expected. We are certainly seeing it in parts of the business, and when you start to see it, is when the market picks up. So again, I highlight the derivatives activity, which was a solid driver in our equities client execution line this quarter. We have also talked about it in commodities for example. So in the commodities markets, you don't see it as much. But when activity picks up, you start to see it.

Great, very helpful. Thank you.

Good morning.

Good morning, Matt.

Any more color you can give us in terms of the strengths within equity, derivatives, from a regional point of view, should we assume that it was in Europe, from QE and some of the movement in prices there. Just trying to piece that line item together a little bit more?

The performance in equities this quarter was widespread. To be a key player in this area, it's essential to have scale, be present across all business lines such as prime brokerage and derivatives, and be able to commit capital. Strong electronic capabilities and geographical diversity are also important. This quarter, we saw solid contributions across the entire business, particularly in derivatives in Europe, which had not been as strong recently. Overall, the performance was robust, especially considering we struggled in the first quarter of last year.

Okay. And then just separately, in terms of the comp-to-revenue ratio coming down, I mean I feel like symbolically its important that the ratio came down the first quarter, which hasn't for several years. So just how are you thinking about, what the target is, in terms of operating leverage? You said, a focus on generating positive operating leverage, but I think it was more than two times to one, so you had a lot of margin there to say play with?

So, the 42% at this stage is our best estimate. We did reduce the competition expense last year from 44% to 43%, and then this is 42%. And again, we have always talked about the fact that, the compensation is going to be driven by performance, and this year with the 14% year-over-year increase in revenues, that's our best estimate. Now in terms of the operating leverage, this has been years of hard work, in terms of managing expenses, really thinking about how to most efficiently use the resources. And so, when you have that in place and you get the revenue uptick, obviously, you can more easily translate that into the bottom line, and that's what you're seeing this quarter.

Okay. Thank you very much.

Thank you.

Good morning Harvey. Just a follow-up on the equity. So it sounds like you mentioned the derivatives, you mentioned blocks; I just wanted to make sure on the block side, was there anything that was way outside, when you look at whether it’s maybe quarter-over-quarter, because year-over-year, you know, you had a weak comp?

No. As I said, prime brokerage balances were up. There were a number of drivers in volume and activity. But it was really client-driven. So there were index rebalances, transactions that we do. This quarter, we were able to facilitate large volumes for clients. It just came together nicely.

Okay. In the last quarter, you mentioned the repositioning that has happened over the past couple of years and the revenue losses. You also talked about the investments being made in technology to prepare for new roles. Considering the current expectations of the industry moving forward, do you believe that you are mostly prepared? I am trying to understand if your positioning will influence your client or market share, especially since many other firms are still sorting things out. I'd like to know your perspective on navigating the conflicting regulations and how well you feel you can manage them based on your current knowledge.

So, let me start with technology, because obviously technology has been a critical driver and part of our operating infrastructures are firm for as long as you have been covering us and well before. And that investment is not something obviously you can do in a short period of time. So this reflects decades of investment in technology platform as you know. We have talked about this in the past, Mike, we have one risk management platform SecDB, which certainly gives us some efficiencies in scale, because as we adapt, if we need to build things for our equity business, or if we need to build things in different parts of the world, it obviously goes without saying, that you can be more efficient as you replicate those things. So it’s that constant reinvesting in the business that gives us that flexibility, but that's not new. The regulatory component obviously, as we get into the finalization of rules and the implementation of rules, that will continue to be an ongoing process; when we think about technology away from the narrow subset of regulatory compliance, which plays obviously a mentally critical role. The other way we think about it is really how do we deliver to clients, and that again, we continue to invest in, and then other than being efficient, are there ways we can grow revenues from technology, and so we are constantly monitoring that.

Okay, that's helpful. Thanks.

Thanks Mike.

Hi. I am just going to ask a real basic question; how sustainable were your results in each of the four business lines? You already said, the investment banking backlog is a little bit less than at year-end. So as you look at it compared to the prior quarter, should we expect this higher level of performance, or is this just the usual first quarter bump and that we are going back down to a lower level?

So lets just take Investment Banking, Mike; so you remember, at the end of last year, we talked about the fact that we had 1 trillion announced transactions and there was a $200 billion gap between us and our next closest competitor. So in the first quarter obviously, you would expect to see a certain of those transactions coming through. I would point out that the backlog is up significantly from last year. And so, in terms of the backlog in the quarter, it was down a little bit in investment banking, and then it was up across equity underwriting and it was up across debt underwriting. We shouldn't think of it about the backlog in the way that you described it, but for example, if you asked the question slightly differently, you said listen, the trend in banking, does it feel like it's still in place? The short answer to that is yes; when we talk to CEOs and Boards, CEO and Board confidence continues to be high, and you've even seen in the last couple of weeks in announced transactions, there is a fair bit of activity out there, and we feel very well placed for it.

And on the trading side?

So, on the trading side I'd say the same thing; in terms of trends, this discussion around diverging monetary policies, which is a catalyst. That trend feels like its in place, and the client dialog and in terms of our communication, we are very focused. But in terms of you extrapolating that in terms of the quarter, its very early in the quarter, and so all these things, as you know, are going to be driven by the environment, and ultimately, how our clients respond to that.

Then one follow-up question; the PSUs are new with an 11% hurdle for ROE and this quarter you had a 14.7% ROE. So is that PSU hurdle high enough, how did you come to that? Do you consider that kind of a target for the firm?

I am glad you asked that question; because we have had this discussion around target. And as we said before, a call wouldn't be complete, unless we talked about something about a target with you Mike. So really important, the PSUs that you mentioned, which I am sure you saw in the proxy, that is not a target for the firm; and that's an important distinction for everyone to understand. The reason we don't have a published ROE target, is because it's just not how we manage the firm. If you recall, all the time we spent in the fourth quarter, talking about our ROE framework, in terms of how we think about capital management. That's a much better way to understand how the firm thinks about most efficiently deploying its capital. So in terms of the PSUs, as for the proxy, our Board engaged with shareholders actively as they always do, and they took that feedback in along with other constituents, and they felt like adding those metrics to certain executives in the firm made sense from a shareholder perspective.

All right thank you.

Regarding the ROE target, it's interesting to consider that if there had been a target in place, we achieved an 11.2% return last year. If a target had been set at 13%, and we delivered 14.7%, I’m not sure how that would be interpreted. We believe that 14.7% represents a solid performance for the quarter and we're in the mid-teens range now. However, our goals for delivering value to our shareholders are higher, which is why we don't specify a target. We focus on driving value over the long term.

All right. Thank you.

Thanks Mike.

Hey, thanks.

Hey Betsy.

Hey good morning. Hey, a couple of questions. One is just on the fundamental review, the trading that Basel is currently engaged in and wanted to get your thoughts on, how you see that going, and if it goes into places its currently outlined, how you deal with that?

We have been actively engaging with regulators, which is a common practice in the industry regarding the trading book review. It’s premature to draw conclusions from the quantitative impact study regarding any final rule. Our discussions focus on calibration and how stakeholders approach the upcoming rule changes. As we've demonstrated in the past, we will adhere to any final rules that are implemented. As we consider these regulations that affect businesses requiring inventory, we must emphasize the importance of calibration, given that we need to maintain market liquidity and the industry's capacity to support it. This has been a key topic for us.

Right. Just because it feels like the hedging is a little bit clunky, not really treating risk as you would want to manage it?

Yeah I would say, let's give regulators time on this, I don't want to pre-judge anything. There is still a lot of work to do.

Okay. Separately, could you share your thoughts on the commodities business? There have been some recent headlines from regulators regarding this. I know you are committed to a client-oriented approach, but can you specify how much of your commodities business today is client-facing?

The key factor for us is our clients. We have divested certain assets, which plays a significant role in our fixed income business, particularly in commodities. This is an important moment to discuss commodities and regulation, especially since we've observed significant volatility in natural gas markets and a substantial decline in energy markets over the past several months. This situation highlights the necessity for firms like Goldman Sachs to provide liquidity and financing to our clients. We've been engaged in the commodity business for a long time and understand its value to our clients, and we are deeply committed to it. Regarding regulation, we will monitor its evolution and maintain open communication with the regulators. Everyone recognizes how crucial it is for our clients.

Thank you.

Good morning Harvey. Question for you first of all on the buyback comment you made and the idea of backend loading, and I was wondering in the context over the last couple of years, where it has tended to be more consistent. What prompted the rethink? Is it something to do with CCAR, reinvestment opportunities that you're seeing? Just a little color on that would be helpful?

As you are aware, the CCAR test changes year-to-year. I cannot discuss specific supervisory details, but there were specific aspects and nuances in this year's tests that suggest we may utilize our capacity later in the year. The Federal Reserve publicly provides this capacity on a quarterly basis. I wanted to inform you that due to the nuances in this year's test, particularly because we mark-to-market our balance sheet, the extent to which we utilize it will likely be more weighted toward the end of the year.

Okay. So it has more to do with that, than the idea that with business levels picking up, you're seeing more opportunities to deploy capital in the business?

No. I was specifically speaking in a CCAR context, with the expected capacity. Of course, as you know when you look at our long history, as a firm, for the vast majority of our history, we have reinvested capital into the business, and so to the extent to which we continue to see growth in client demand, obviously that's our preference.

Got it. Let me ask you a litigation question; you certified a $190 million in the quarter, can you give us a sense for how much of that is the reserve build versus just incurred costs?

So we don't break it down specifically at that level. What I will tell you, it’s the same process. We continue to evaluate any outstanding litigation in the course of the quarter, and we accrue accordingly.

And how should we think about, the fact that in the most recent quarter, one of your major competitors said that they were in negotiations with the Department of Justice on private label mortgage securitizations. And really at this point, if we assume that they do what they are in negotiations to do. The only major U.S. dealer that wanted to have done one of those settlements is Goldman. Should we be thinking that there is probably going to be something coming down the line in the next few quarters, that you're in negotiations?

So again, to the extent to which on any specific cases, we are not going to comment. I am sure you understand that. I would really encourage you to look at the most recent 10-K and our Q disclosure, where we are very explicit about all these matters.

Okay, fair enough. My final question is about the tax rate. You've mentioned geography, and we've observed tax rates similar to the ones you reported this quarter in the past. Should we consider that alongside the typical low 30s range for the first quarter, and think of something around 30% for the full year, or do you anticipate this tax rate to remain consistent?

So it’s a good question. So just for everyone who may have not had a chance to be at the beginning of the call, effective tax rate for last year was 31.4 and for the quarter was 27.7, and as you have pointed out Guy, that was mostly driven by geographic earnings mix. What I would say is, all factors being equal, in terms of the full year rate, and the way you should think about it, given that we are starting from such a low level, I think its reasonable to assume that we come in below last year's rate. But we will see how the year evolves.

Okay. That's really helpful. Thank you, Harvey.

Sure, thanks.

Hey good morning.

Hey Jim.

Perhaps returning to FICC, FX rates are quite strong, as noted by you and others. Year-over-year, credit and mortgages are weak, but we've seen an increase in trace volumes, and credit spreads have remained relatively stable. The challenge seems to be a lack of sufficient volatility, or perhaps low absolute rates are negatively impacting spreads, along with decreased inventory levels. I’m trying to consider what might constitute a more favorable environment—do we simply need to see higher rates?

I think this last quarter was really a case of investors evaluating, clients really evaluating, where they used to be, with respect to their portfolios. There was obviously less refinancing activity during this quarter versus a year ago. But I would say the key driver is the debate over rates and how people are thinking about their portfolios. I think if we saw a path towards normalized rates over time, I think you could see a pick-up.

We need to wait and see how rates evolve and gain more confidence in their predictability. Regarding the banking cycle and mergers and acquisitions, we've noticed significant activity in the first quarter. Based on discussions with clients, do you believe there is still significant potential remaining? Historically, this suggests we have more room for growth. I would like to hear your perspective on this.

You're right. If we consider the benchmark path cycles, there is definitely potential for increased M&A activity. In my conversations with CEOs and Boards, the momentum still seems quite positive. Large transactions within industries often serve as catalysts for additional transactions. Our strategies are well positioned to drive synergies, and the financing markets continue to be appealing. There is certainly room for growth here, and our recent discussions have been very promising, especially when compared to historical benchmarks.

Okay, great. That's helpful. Thanks.

Thanks.

Hi. Good morning. I wanted to revisit the equity client execution, as the result is quite different from expectations, even though it is about double the average of the last eight quarters. Can you explain whether this was a unique set of opportunities, a few large transactions, related to the block transactions mentioned earlier, or if this reflects a new standard?

Look, we will see how the subsequent quarter goes. I would say that, look, if we looked at last year's first quarter, it was definitely a more challenging market-making environment. Again, this is really just one where, geographically, from a derivatives perspective, the ability to commit capital. Things just really lined up quite nicely for our franchise; and again, it was broad-based. So the environment was good everywhere. Doesn't mean it can't get better and doesn't mean it can't decline, but it was good everywhere this quarter.

Okay. And then on a kind of a global macro view back in 2011, I guess the prospect of a Greek default inside the Eurozone and crisis and we seem closer to it than ever. Is it now in your view, a non-event, if and when it happens, that everyone has had enough time and preparation to get ready for it?

It’s a complicated question. First of all, Greece has been on people's radar for a long time, allowing for ample digestion of the situation. On the positive side, the environment in Europe today is dramatically different compared to 2011, especially regarding the discussions around other peripheral countries. We are closely monitoring the situation. However, on the concerning side, it's an experiment that hasn't been tested yet, so we will need to see its effects on the markets. Compared to 2011, the risk now seems much more contained, as people have had years to focus on this issue.

Okay. Thank you.

Good morning Harvey.

Hey Brennan.

So quick one on thinking about equities here coming into 2Q, typically strong, given dividend season in Europe. How much do you think that QE on the continent is going to play into that this quarter?

It clearly played a significant role in boosting confidence in Europe, which immediately reflected in a notable rise in European equity markets. We will monitor how much this influence persists throughout the quarter, but it is evidently a current focus for our clients, and we will see how sustainable it is. The commitment to quantitative easing is substantial.

Sure. And then, sorry about bringing it back to equities here, but one more; can you just speak to what sort of impact Asia had on the quarter, particularly given some of the market structure changes we saw in the region?

Certainly, Asia was a contributor, but Europe was a more significant factor. The trend in Asia has shown notable improvement, and as those markets continue to open up, I believe the dynamic nature of capital flows will keep increasing. While it was beneficial in Asia, this success was widespread across our equity business. Looking ahead, we are quite optimistic about the opportunities in that region.

Terrific. Thanks a lot.

Hey, good morning Harvey.

Hey, good morning Steven.

So I just had a question on CCAR and your preferred issuance plans. With total capital under CCAR specifically, now the binding constraint for the firm. Even though you're already operating at that 150 basis point preferred target, is it fair to expect that you will look to close the gap, or improve your CCAR position by issuing more preferreds or more qualifying debt?

We announced this morning that we are in the market with preferred securities, and that transaction will be closing later today. This raises an important question about how we interpret the CCAR results and consider factors like pricing our balance sheet, deploying our capital, and optimizing our capital structure. You should expect us to evaluate all options regarding how we position the firm going forward in relation to our capital structure, ensuring that we construct it in the most efficient manner for our clients and shareholders.

That's really helpful Harvey. And actually, in that same vein, since you mentioned about capital allocations under CCAR, it might be helpful if you could clarify, regarding how you allocate the capital under your attributable equity framework. Under CCAR lines, do you use for your stressed end of period or your minimum ratio for determining the level of required capital for assessing the adequacy of the ROEs for various trades?

Right. So some of this obviously, we consider proprietary in terms of how we think about the dynamic nature of capital management. But for the folks who haven't studied, and obviously Steven is a very thoughtful consumer of the information. In terms of our return on attributed equity framework, what we have discussed with the marketplace, is basically all those factors that contribute to regulatory capital constraints, Basel-III advanced, standardized, supplementary leverage ratio, elements of CCAR. We had weightings to those, given their significance and we basically have constructed an algorithm that helps guide us, both in executing certain transactions, and obviously how we evaluate businesses over the long run. But we haven't discussed the specifics of how we incorporate those variables.

Hey, good morning.

Good morning Devin.

Good morning. Just one the ROE outlook and the drivers, obviously your margin is a big one, and the pretax margin for all of last year is 36%. It was 37% this quarter, which I thought was impressive. So we just look at the businesses, that have more of a granular level, are there are areas where you feel like you're getting to about as good as it will be, and then where do you see the biggest areas for additional leverage to the margin?

So the discussion around how we manage the businesses and where we think about driving additional leverage, that's a continual conversation at Goldman Sachs that's going to happen all the time; because we are always reviewing the businesses, and making sure we are driving them to the ultimate outcome. Now, to the operating leverage you're seeing, that's firm-wide, and really is the result of, again, the years of investment we made in technology, how we scaled the resources, the cost-cutting programs that we announced several years ago that was raised, and several billion dollars. And so, you are now just starting to see all that translate through. But we are constantly evaluating the businesses for opportunities, both to grow and to hold.

Okay. Thanks, and then just coming back to Europe one last time, the stability that's helping client activity, is there any way you can just help size that for us relative to the recent past? We talked about derivatives, but where else does that pickup, and any perspective around how much bigger it was this quarter, relative to the recent past?

So I highlighted it to give you some sense of the underpinnings of the activity that's driving it. But again, in equities, it really was broad-based client activity, geographic and across the business and within individual product lines.

Yes hi. Just coming back to equity derivatives, I was wondering if you could just give a little bit more flavor in terms of products, if the strengths on the execution side came maybe more from the flow side, or was it more from the delta one side or structuring side or dividend swaps; can you just talk a little bit through the products in order for us to get a better understanding of what we should think about going forward trends, in some of these areas? Because clearly, some of them are a bit more bulky than others, if I may?

Really Kian, it’s truly client activity across each of the businesses. So I wouldn't highlight any particular product line within the derivative businesses. Obviously, when you have a big up move in European equity markets like you did with QE, obviously that's an opportunity for clients to get involved, and there’s lots of things they look at, both from a perspective and a more structured perspective. I think if you try and answer your question around things like where, people are more interested in derivatives that had maybe multi-variables, sure. But again, it was broad-based, it wasn't any one particular driver.

There is no significant difference in structuring with this flow, as your mix hasn't changed much.

I won't talk to our mix, because the firm obviously, we have the intellectual capital on the systems, and the capacity to point that capital for clients. And so, I think we are always well positioned for those parts of the cycles in the market. But again, broad-based in equities.

And lastly, on commodities. Clearly, commodities had an uptick in volatility, but at the same time, you highlight volatility as a business which year-on-year was down. I am just wondering, if you could just explain a little bit to me, why commodities was relatively weak on a year-on-year basis?

So you may recall that last year, and I was going back to the first quarter 2014, commodities had a very strong quarter, a lot of that is we discussed at the time, was due to the extraordinary volatility of natural gas. And it drove a lot of client activity in the sector, and that was really the first time you and I started talking about the fact, that we were really seeing the absence of competitors on the field, and a huge uptick in client dialog. And so you're just coming off a very strong 2014 first quarter, but commodities remains a very active space for us, and our dialog with clients is quite strong.

Okay. That explains it. Thank you very much.

Thanks Kian.

Thank you. I want to ask you about the largest increase in five years in tangible book value that you highlighted in the press release. Given the increase in returns and ongoing constraints on capital deployment, do you see this as a fundamental driver for growth over the next couple of years?

The environment is something we participate in. However, we have focused on investing in our client franchise while also building operating leverage. This is reflected in the 14% year-over-year growth in quarterly revenues, which is positively impacting the bottom line due to significant operating leverage.

And then, when you look at the comp ratio at 42%, once you made some improvement with what you've done in the past, but when you look at it on the average for the year, you have recently highlighted, then on the 38% kind of number. In that, you would look for the year being closer to what you've done in the past couple of years. When you see that you almost have $0.50, $0.60 of earnings per share that's basically pushed forward as you review performance in your compensation plans over the rest of the year?

So its our best estimate today, Mosby, and we will evaluate the year as we go through and obviously again, as we have discussed in the past, the culture of pay for performance at Goldman Sachs will evaluate it continuously as we go through, and it will be driven by performance.

Thanks.

Thanks Mosby.