Goldman Sachs Group Inc (GS) — Q4 2015 Earnings Call Transcript

Good morning. This is Dane Holmes, Head of Investor Relations at Goldman Sachs. Welcome to our fourth 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 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'll walk you through the fourth quarter and full year results and I'm happy to answer any questions. Before outlining our results, I would like to discuss the previously announced settlement for legacy mortgage activities. As you know, we took a total net provision for litigation and regulatory matters in the fourth quarter of $1.95 billion. The RMBS Working Group matter was the most significant outstanding piece of litigation facing the firm. As you would expect, following a settlement, there has been a significant decline in our recently possible loss number. We are currently estimating a more than 60% decline compared to third quarter levels of $5.3 billion. Now turning to the fourth quarter, net revenues were $7.3 billion. Net earnings were $765 million, and earnings per diluted share were $1.27. With respect to our annual results, we had firm-wide net revenues of $33.8 billion, net earnings of $6.1 billion, earnings per diluted share of $12.14, and a return on common equity of 7.4%. Revenues were down slightly compared with last year, and expenses were significantly higher due to approximately $4 billion of net provisions for litigation and regulatory matters. Despite these headwinds, we grew book value per share by 5%. The growth combined with our risk reduction efforts strengthened all of our regulatory capital ratios. Excluding the litigation charges related to the RMBS Working Group, our 2015 return on common equity would have been 380 basis points higher. 2015 presented both challenges and opportunities. The challenges were more acutely felt in the back half of the year, as concerns about global growth intensified, which is reflected in public equity markets, with the MSCI rolling down 5.7% over the last six months of the year. Credit markets also reflected these concerns, particularly within the non-investment grade space and most acutely within the commodity sector. For example, U.S. high yield spreads were 157 basis points wider in the second half of 2015. At the end of 2015, the trailing 12-month default rate for U.S. non-investment grade bonds more than doubled year-over-year, climbing to 4.3%. These factors negatively impacted the broader opportunity set for our clients and consequently for the Firm. To varying degrees, the firm faced headwinds within certain of our FICC businesses, underwriting within investment banking, and our investing and lending activities. However, these significant headwinds were largely offset by client activity in other businesses. Many of our clients decided to pursue M&A as the best means for creating shareholder value, and now M&A volumes for the industry increased by 47% in 2015. The Firm's volumes increased by 81%, a significant expansion of our market share. Our global equities franchise also posted strong results for the year. Clients continue to place significant value on the integration of our various services; electronic, cash, derivatives, and prime brokerage, as well as our global footprint. Our performance in 2015 highlighted these strengths. In addition, the combination of continued strong performance for our clients and the diversified set of offerings drove a record year for our Investment Management business. We ended the year with record assets under supervision of $1.25 trillion and robust net inflows, which totaled $94 billion. Ultimately, 2015 reinforced a longstanding operating principle, that there is tremendous value in having a diversified set of global businesses. More importantly, it is the value of being a leader in these businesses that really counts. Now let's discuss the individual businesses in greater detail. As it relates to the quarter, Investment Banking produced net revenues of $1.5 billion, slightly lower than the third quarter. A pickup in M&A was offset by a decline in underwriting activity. For the full year, Investment Banking net revenues were $7 billion, up 9% from 2014 on the back of a 40% increase in financial advisory revenues. This was partially offset by lower equity and debt underwriting revenues. Our franchise remains very strong. 2015 was our second highest annual revenues for Investment Banking. We ended the year ranked first in global announced and completed M&A. Our completed M&A volumes were approximately $350 billion higher than our next closest competitor, a record gap since we've been a public company. We were also ranked first in global equity and equity-related common stock offerings for 2015. Breaking down the components of Investment Banking in the fourth quarter; advisory revenues were $879 million, a 9% improvement relative to the third quarter reflecting an increase in the number of completed M&A transactions. We advised on a number of significant transactions that closed during the fourth quarter, including SunGard's $9.1 billion sale to Fidelity National Information Services, General Electric Capital Corporation's $9 billion sale of its Transportation Finance business to BMO Financial Group, and HCC Insurance Holding's $7.5 billion sale to Tokio Marine Holdings. We also advised on a number of important transactions announced during the fourth quarter, including DuPont's combination with Dow Chemical in a $130 billion merger of equals, Newell Rubbermaid's $20 billion acquisition of Jarden Corporation, and SanDisk's approximately $19 billion sale to Western Digital. Moving to underwriting, net revenues were $616 million in the fourth quarter, down 11% sequentially as debt issuance slowed. Equity underwriting revenues of $228 million were up 20% compared to the third quarter as IPOs increased from very low levels last quarter. Debt underwriting revenues decreased 21% to $440 million due to a decline in leveraged finance activity. During the fourth quarter, we actively supported our clients' financing needs, participating in Visa's $16 billion investment-grade offering to support its purchase of Visa Europe, McDonald's $6 billion investment-grade offering, and Worldpay Group's $3.8 billion IPO. Our Investment Banking backlog improved from third quarter levels and finished at its second highest level. Turning to Institutional Client Services, which comprises both our fixed and equities businesses; net revenues were $2.9 billion in the fourth quarter, down 10% compared to the third quarter. For the full year, $15.2 billion of net revenues were roughly consistent with 2014. FICC Client Execution net revenues were $1.1 billion in the fourth quarter, down 23% sequentially and included $54 million of DVA losses. Excluding DVA, revenues were down 10% quarter-over-quarter as many businesses were impacted by either lower client activity or more difficult market-making conditions. Credit decreased significantly as the market was characterized by widening high yields spread in the U.S. and low levels of liquidity. Interest rates and currencies were lower sequentially as client activity declined. Mortgages continued to be challenged as spreads widened and the prospect for higher rates and client activity remained generally low. Commodities was essentially unchanged as client activity was muted and energy prices remained under pressure. For the full year, FICC Client Execution net revenues were $7.3 billion down 13% year-over-year, where challenging market conditions and lower levels of client activity in our micro businesses, credit and mortgages, offset stronger client activity and a favorable backdrop for our macro businesses, particularly rates and currencies. In equities, which includes equities client execution, commissions and fees, and securities services, net revenues for the fourth quarter were $1.8 billion, flat sequentially and included $14 million in DVA losses. Equities client execution revenues were roughly consistent sequentially at $562 million. Commissions and fees were $763 million, down 7% relative to the third quarter as global client volumes declined. Securities services generated net revenues of $430 million, up 13% sequentially. For the full year, equities produced net revenues of $7.8 billion, up 16% year-over-year. In 2015, we benefited from several factors: a better market backdrop and a more favorable environment from securities services. Turning to risk, average daily VaR in the fourth quarter was $71 million, down from $74 million in the third quarter. Moving on to our investing and lending activities, collectively these businesses produced net revenues of $1.3 billion in the fourth quarter. Equity securities generated net revenues of $1 billion, primarily reflecting the company's specific events, including financings, sales, and gains in public equity investments. Net revenues from debt securities and loans were $299 million, which was largely driven by net interest income. For the full year, Investing & Lending generated net revenues of $5.4 billion driven by $3.78 billion in gains from equity securities and $1.66 billion of net revenues from debt securities and loans. In Investment Management, we reported fourth quarter net revenues of $1.6 billion. This was up 9% from the third quarter, primarily as a result of $190 million in incentive fees largely from alternative asset products. Management and other fees were up 2% sequentially to $1.24 billion. For the full year, Investment Management net revenues were a record $6.2 billion, up 3% from 2014, on record management and other fees and higher transaction revenues. During the fourth quarter, assets under supervision increased $64 billion to a record $1.25 trillion, primarily due to net inflows into liquidity products. On a full year basis, we had long-term fixed-income flows of $41 billion, equity inflows of $23 billion, and alternative inflows of $7 billion. Moving to our performance, 73% of our client mutual fund assets ranked in the top two quartiles on a three-year and 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, remained roughly flat at $12.7 billion for 2015 and translated into a compensation to net revenues ratio of 37.5%. Fourth quarter non-compensation expenses were $4.1 billion and incorporated $1.95 billion in litigation and regulatory expenses. The quarter also included a $123 million donation to Goldman Sachs Gives, our donor-advised charitable fund. For the full year, non-compensation expenses were up 30% due to $4 billion in provisions for litigation and regulatory matters. Excluding litigation provisions, non-compensation expenses would have been down 4% year-over-year. Now I'd like to take you through a few key statistics for the end of the year. Total staff at year-end was approximately 36,800, up 8% from year-end 2014. This is a significant increase, so let's break down the drivers. Of the 2,800 incremental staff, a little more than half was due to our continued investment in regulatory compliance and other federation initiatives, largely in technology and operations. The remainder was focused on business growth initiatives, particularly with Investment Management. Our effective tax rate was 30.7% for 2015. Our global core liquid assets ended the year at $199 billion. While our balance sheet was roughly flat year-over-year, Level 3 assets declined by 33% to $24 billion. Our Common Equity Tier 1 ratio was 12.4% under the Basel III advanced approach. It was 13.6% using the standardized approach. Our supplementary leverage ratio finished at 5.9%. With respect to our method to G-SIB surcharge, we currently estimate that we are at or near the lower bucket, given a decline in Level 3 assets and derivative notionals over the course of the year. And finally, we repurchased 8.9 million shares of common stock for $1.65 billion in the quarter. For the full year, we repurchased $4.2 billion. Year-over-year, our average fully diluted share count declined by approximately 15 million. In addition, we increased our quarterly dividend to $0.65 per share in the second quarter and paid out approximately $1.2 billion of common dividends during the year. In total, we returned $5.4 billion of capital to shareholders in 2015. Before taking questions, a few closing thoughts. Clearly, it has been a challenging environment for the entire industry. 2015 marks the fourth consecutive year that we have posted revenues of approximately $34 billion. Excluding litigation charges related to the RMBS Working Group, it is also the fourth consecutive year that we have produced strong relative results and returns that exceeded our cost of capital. We have been able to post consistent, strong relative results despite the difficult operating environment, which is a statement of the strength of our global client franchise, the caliber of our people, and our culture of teamwork and adaptability. Over the past four years, we've also grown book value per share by 7% per annum, returned nearly $25 billion in capital to our shareholders, and reduced our basic share count by 75 million shares or 14%. Most importantly, we've been able to accomplish these things while maintaining leading positions across all of our businesses, transforming our financial profile, prudently managing our risks, adapting to regulatory change, continuing to invest in our future, and positioning the Firm to provide significant operating leverage when the environment improves. There's no doubt that the second half of 2015 had its fair share of challenges, which significantly impacted market sentiment and client activity. It's quite natural for all of us to be influenced by recent events and we maintain a healthy respect for them. We certainly don’t control the opportunities set; however, we do control several things: how we build our client relationships, how we invest in our people, how we adapt to change, how we allocate our capital, manage our risks and control our costs, and finally, how we invest in the future. We believe our Firm's commitment to excellence in these areas has been and will continue to be what drives our performance over the long term. Thank you again for dialing in and I'm happy to answer your questions.

I guess you're in a better position than most to ask this impossible question, but from your vantage point everything you see, are we on the cusp of a tougher credit cycle, balance sheet recession? Are we looking at the wrong things meaning, I'm about to ask you your energy exposure and I should be asking you your sovereign exposure to Italian sovereigns or Italian banks? I'm just curious to your thoughts on where we are besides the market going down?

Look, obviously the first couple of weeks of the year have been difficult from a market perspective and the last half of the year and continuing the dramatic decline in commodity prices broadly has been disruptive for the market. I think if you talk to our folks, obviously that sector of prices remain where they are, it's going to be under stress, that's an inevitability. But it does feel at this stage where perhaps the market is discounting some of the benefits of the declining commodity prices. We'll have to see how the market evolves. Look, these things are never going to be a straight line and so it's not surprising to some extent that the markets are responding to China and the reduced activity volatility in markets this way. In terms of our exposures to that sector, they haven't moved materially since early cost across the entire oil and gas sector, Glenn. Funded and unfunded, we had just more than $10 billion of exposure, but to really dial it in for you, funded exposure to non-investment grade entities in that sector was $1.5 billion as we finished the quarter. So from our perspective, we feel well positioned and in this kind of market environment, it's a type of market environment where your clients really want you to stay close to them and that's what we're doing.

Is there a possibility that the revenue from fixed income, currencies, and commodities can stabilize and even see slight growth over the next couple of years, considering the evolving monetary policy and landscape, despite some clients experiencing losses?

We don't typically operate our businesses based on the best-case scenario, but there is certainly a strong case for increased activity in fixed income. The stable to improving global growth, particularly in the U.S. and Europe, could provide a boost. It's natural for spreads to widen during certain phases of the credit cycle after a period of strong performance. Currently, the market, despite being under some pressure, is carefully selecting transactions, and there is significant interest in specific areas. Looking ahead over the next couple of years, when considering factors like the competitive landscape and potential activities around hedging, we can envision a strong argument for growth in fixed income. While this isn't how we typically manage our businesses, we will respond as the situation evolves. There is definitely potential for upside.

Okay, I appreciate that. Last one it takes two seconds. Did you say that you're at or near the 250 bucket? Was that your comment about the G-SIB at or near the lower bucket, is that what you meant by that?

Yes, that's correct. I mean that's our estimation. That's obviously not confirmed by the regulators, but that's where we believe we stood at the end of the year.

Good morning, Harvey.

Morning.

So on Investment & Lending, could you remind us how much of the equity portfolio you need to divest before the 2017 Volcker deadline? And just given the current choppy markets, what's your level of confidence that the Firm can divest those assets by 2017? And also remind us what the process for getting an extension from the Fed is if you can't meet the 2017 deadline? Thank you.

Thanks, so roughly now we're under $5 billion of capital that is sitting in funds alongside our clients, which are obviously legacy funds. The exact number's roughly right around $4.7 billion. With our expectation given these are legacy funds is that we'll continue to monetize those assets and we'll see how that progresses. There's a lot of runway between here and the compliance date in 2017. We haven't at this stage contemplated seeking any additional extensions and I don't believe the industry has at this stage.

Okay, thanks. And then maybe just some thoughts on the incremental operating leverage in the model. I mean the Firm has been very disciplined in expenses despite effectively four years of no top-line growth. Just curious, how much more you can pull the expense lever to drive margin expansion or do you need some revenue growth there going forward?

We have made significant strides in managing our expenses and initiated cost-cutting measures early on. As you know, we began these efforts several years ago, which have persisted in the face of challenges for certain businesses while also investing in those that are thriving. Currently, our headcount has increased by 8% this year, and compensation benefits have remained steady, indicating that we're effectively managing our resources. We will keep monitoring this, and while we strive for greater efficiency, we've already achieved a lot in this area. We believe the Firm is well positioned for revenue growth, and even though it seems a while ago, this was evident in the first quarter of last year when a slight year-over-year revenue increase resulted in nearly a 15% return on equity. Therefore, we are confident about the potential for further upside leverage.

Okay, thank you.

Thank you.

Thanks for taking the question. Just on the G-SIB surcharge, I think you mentioned you know part of that was exiting from Level 3 assets, I don’t know if there's any granularity or clarity on what that was or what you got out of, but just curious on the any color around that?

So generally speaking, you remember during the course of the year that there was a change to the FASB accounting which was a driver in terms of the NAV and the look through the funds and the other driver obviously, to get back to Christian's question, which is as we monetize things they become public equities. As you know, the public equity has been hovering between $3.5 billion and $4 billion also and that's part of the monetization process and obviously once the public equity, you have complete transparency on pricing.

Okay, got it. And then just on the expenses, I think you guys have mentioned you have done a pretty good job of balancing the investing versus the environment, but just want to get your sense when you think about what you're focused on the regulatory, the IT side that you need to invest versus areas where if we are in weaker markets and activity starts to dry up, where can you pull back on the cost front? And so whether it's on the non-com side, although it seems like that's running pretty low ex the legal stuff, or on the comp side?

From a compensation perspective, it will always be driven by performance, particularly at the firm-wide level and then cascading down from individuals to businesses. That's where you'll see the connection to specific performance. We will always strive to be efficient. Currently, we are making a significant investment in regulatory compliance, which we believe is critically important and offers us a competitive advantage to be best in class. Therefore, you can expect us to keep investing in technology and businesses, as we believe this will contribute to our performance in the long term.

And last one, just on I&L, given that portfolio and just given maybe the market backdrop, if you can just remind us of what portion I guess mostly on the equity side, would be public that you're going to see more like mark-to-market versus the portion that might be on the private side that might be more driven by models or economic growth that's not going to swing around as much?

Yeah, so coming into the end of the year, the public portion or public equity portion of the I&L balance sheet was $4 billion of notional.

Okay. Thanks a lot.

Sure. Thank you.

If you look at the size of the balance sheet, it came down by about $20 billion versus the end of the third quarter. Just thinking going forward how do you think the size of the balance sheet trends and then also with respect to SLR exposure?

Well, so obviously all of our capital ratios give us a great deal of flexibility to respond to client demand, so we feel like we're well positioned. Now, we talk about there's a lot in the past. We went through a pretty significant early shift in shrinking the balance sheet and that was really about a replacing effort. And so we're going to be very sensitive to marginal deployment of capital ensuring that it's accretive in the long run and so you're going to be as we pretty sensitive to balance sheet growth, but obviously given the strength of our capital ratios, we have a lot of capacity.

And I guess following up on the SLR exposure specifically, you're obviously in excess of the 5% needed pre-CCAR, but for CCAR if you needed more, because do you have the ability to bring down some of the SLR exposure with only a modest impact to revenue?

So, it's interesting the way you ask the question. I think you're basically saying, listen can we re-price the balance sheet in an accretive way? If we could, we should, so we're doing that work today. I think if the world became more constrained then by definition re-pricing would be necessary. A lot of it'll be driven by constraints, but if we found ourselves constrained to any particular category, we will make a long-term decision about how we wanted to address that. Look for us as you know, CCAR stress has been a constraint and you saw us react to that a bit ago when we shrunk the balance sheet so dramatically.

Okay. All right, thank you.

Thank you.

I have a couple of questions, one regarding I&L again. In the past, you've provided some insight on how much has been realized or marked-to-market, and I understand the $4 billion on the equity component. I'm curious if you can share the breakdown between realized equity and marked equity.

Yeah, so as you know Betsy, we talk about in the context of event-driven and non-event-driven and that's what I talked about at the conference in the fourth quarter. So looking at I&L as I said during the quarter, net interest income was really the bulk driver of the debt line, and in terms of I&L relating to non-event driven most of the activity was really event-driven or public marks. So, things like refinancings, companies going public and then the subsequent public marks.

Okay and then on a question regarding the stress test, a lot of people thinking out loud about what potential scenarios the Fed could throw at us and I'm just wondering on prior stress tests, are you given full credit for the hedges that you have on in the various asset classes that you're trading in?

We have no transparency into that level of detail with respect to the Federal Reserve but they're pretty comprehensive in their analysis, so one would assume everyone gets credit for their hedges.

Right, in your own analysis that you're running obviously, you give yourself credit for hedges?

Yes. In the stress scenario they would perform, so we give ourselves credit, I mean, yes.

Right, of course. Just to make sure.

The company's scenario on our own submissions.

Correct in both.

Yes, of course. Just like we'd model the Firm under any stress scenario.

So, when we're thinking about the commodity business that you've got, maybe you can talk through a little bit on how you're positioned for the trend that we've been seeing here year-to-date?

So, we've been very committed to the commodities franchise and obviously we have a very strong banking franchise, and so this is a part of the cycle. And I'd say, broadly across commodities where clients are going to be in need of advice, they are going to need capital market solutions, they're going to need potential hedging solutions depending on where they sit in the cost structure or scheme of things. I think a lot is expected when you marry those two strengths together with our research and analytic tools, I think we feel very well positioned to provide our clients with advice and value and solutions.

Do you see yourself taking share in this environment?

In the fixed income context of commodities, as I mentioned earlier, it's clear that we gained market share in Investment Banking throughout the year. You likely noticed the significant increase in M&A activity, which highlighted our team's strong performance. While it can be difficult to gauge FICC activity during low points, it's evident that we have captured substantial share in commodities, especially given the high level of activity and the global trend of companies reducing resources in their commodity sectors.

Okay. Thanks.

Thank you, Betsy.

Hi. I guess, I'll go to energy and how big a deal is this oil price decline to you guys? I mean you've mentioned you only have $1.5 billion in funded non-investment grade exposure but your total exposures are over $10 billion. Where could you potentially otherwise get hurt from the decline in oil prices other than that funded non-investment grade exposure? And where could the industry otherwise get hurt or you might have to pay attention to some of the counterparties that you have?

We are currently confident about our counterparty risk. As I mentioned previously, our exposure to commodity trade houses is under $200 million. The earlier figure of $10.6 billion includes $6.4 billion that is not funded; the rest is funded and consists primarily of investment-grade exposure. This means that our maximum potential exposure to non-investment-grade companies is $4.2 billion, which reflects absolute exposure and does not account for potential recoveries. Overall, we believe our capital position is solid. While I haven't reviewed all the peer banks, we are taking this seriously and are not being complacent. We feel well-positioned, especially since we have smaller exposures.

What sort of reserves are we looking at?

I think, Mike for us, if this translates into somehow, which we don't see today, but you never discount any possibility, if this somehow translates into a real drag on a long-term economic activity or economic growth. But as I said before when I was asked the question, it’s just an opinion, lots of folks have been on this side of this discussion. When we talked to our people internally, it feels like the degree to which the market is focused on energy exposures has managed to discount the long-term tailwind to the consumer and a reduction in cost across the globe. But that’s how the markets we act into are now. So there may be information content in that too.

So what sort of reserves do you have against that $10 billion exposure? I guess some of its mark to market but some of it's not.

So of the $10 billion obviously we’re being thoughtful about our exposure. I can tell you for example, the non-investment grade side, those reserves were in high single-digit percentages for that part of the portfolio.

So lastly just are you able to hedge some of that exposure? Are you helping your clients to hedge? Are you getting additional business activity to do this, and if you could just elaborate on the benefit to consumers because certainly people aren’t paying much attention to that if that’s there?

I can’t quantify the benefit of consumers to you, but obviously over time, that translates into more purchasing power because obviously it's a good thing that people are paying less in the punt. The obvious offset to that and maybe more acute in the U.S. is obviously there is a lot of pain in this sector, and that will lead to increased unemployment specifically in this sector and it has infrastructure spend impact. In terms of hedging, we can hedge on a case-by-case basis; it really depends specifically on the underlying and where we can and we think we should. Obviously, we do. As it relates to client activity, one of the things about this move because it came down so quickly, is it really did not give a lot of our clients the opportunity to hedge to the downside. Obviously, in these low price levels across commodities, you would expect to see a pick-up in the consumer side of hedging activity and we expect to start seeing that. But these moves have been pretty dramatic and usually what happens when they are this sudden is there is a bit of stepping back. But certainly we’re well positioned to provide hedges across the broad commodity space.

Thank you.

Thanks, Mike.

So I wanted to broaden out the market share of activity question that came up before with respect to commodities. More broadly, with respect to FICC globally we’ve seen so much retrenchment including a big domestic player recently. So, any signs yet that the retrenchment of competitors in the area is helping market share or helping pricing? And to what extent is what you’re seeing there or the expectation of what you’ll see there really driving some of that investing in the business that you’re talking about?

Well, we certainly have seen it across parts of the businesses, it’s been somewhat episodic. We talked it before we’ve seen it in securities services and prime brokerage, a bit of a retrenchment. I think that was more regulatory driven as people began to focus on balance sheet and capital related to that business. We’ve seen it in parts of equity derivatives during the course of really now last year, year and a half. And then in fixed income, one of the things that shouldn’t get lost about the fixed income discussion in 2015 for our Firm is that, while it was a difficult market for the micro products for credit and mortgages, it was actually an improved year for interest rates for currencies. And while commodity wasn’t improving, it came off very strong year prior, I think that we’re seeing it when activity picks up. Now, in terms of the announcements and the retrenchment from competitors, one of these things is it's not surprising that you need to have a couple of or several tough years and that announcements will generally lag. I think we may see this over the next couple of years now that we’ve been in this period of a tough couple of years in FICC and where the vast majority of the industry has had multiple years of performing below their cost of capital. So all these constraints are now really starting to come into the fray, particularly as we get into the 2018, 2019 compliance periods. Sorry, that was a long answer but it was a big question, but it was a long answer.

No, it’s a helpful answer. So I mean it sounds like you’ve lost none of your confidence in the opportunity there, it just takes a while?

Well, in terms of the competitive set, I think that’s our read today. Look, in terms of monitoring the businesses, we’re always monitoring the businesses. I think one of the things that, one of the things that we haven't talked a lot about, we haven't talked directly about is our philosophy and how we manage cyclical businesses. Everyone has to acknowledge that financial services is a cyclical industry and one of the things that we've been very thoughtful about is not over investing at the top of the market. So, you didn't see us do that in 2009 when FICC had a record year and making sure that we don't overshoot in the bottom part of the cycle. Now we were early to the cost-cutting because we felt the activity levels declining after 2009, and that's how we managed through the cycle and you've seen us do this in the equity businesses and sometimes these cycles are long. We cut thousands of people in our equity franchise in the early 2000s but right now given all the work we've done on the cost side, we don’t feel like we need to catch up. So, but we'll see how the year goes; if the trends in fixing can continue, we will continue to manage the business as efficiently as possible.

And then just a follow-up question since no one's asked it, I'll ask. I know we're only a few weeks into the year and the market backdrop has been, God awful, but how would you characterize activity levels since the beginning of 2016?

It's only two weeks, so I'm not going to really extrapolate it. We generally don't root for the S&P 500 to be down 8% in the first two weeks of the year though.

Maybe we should talk a little bit about M&A with the volatility that we've seen in the market. I think some have been concerned I guess about the impact on M&A I guess both in the near term and what it means for the cycle? Just maybe your broad thoughts on where we are in that cycle and what you're seeing in the conversation levels today?

So, again obviously we had a pretty significant pickup in activity over the last year and Goldman Sachs market share grew dramatically with that. I think you have to take a step back and you have to ask yourself what are the factors that drove the M&A environment over the past 18 months and are they still in place? Those core factors is really limited organic growth, companies were struggling to find top-line growth. You had positive but modest economic growth in major economies and companies had done quite a bit of work both on cost and refinancing going into that cycle, and there was a high level of CEO and Board confidence. Those were the factors that drove the big pickup in activity. As we sit here today after a couple of weeks of volatile markets, we wouldn't say that those factors are significantly diminished. We saw a very volatile August and yet in the fourth quarter, M&A activity continued, and we finished our backlog higher than last year. So, I think that we'll have to see obviously if markets stand the stress and you get into questions about financeability and other headwinds, and then if we saw a loss of confidence. But we wouldn't say that two weeks of volatile markets would stop a pretty powerful M&A trend. We will see how these markets keep going.

I would like to follow up on asset management. You reported $48 billion in flows for liquidity products in the fourth quarter, which seems quite significant. Can you share what drove this? Is it a seasonal trend or are you experiencing market share growth? Additionally, as profitability improves with rising rates, do you see this as an opportunity?

When you look across multiple quarters in asset management for us and you look at the flows and you look at the investment of the competitors, I think you’d say we’re gaining share. Obviously it's been a strategic focus for us to grow that business. In that quarter in particular, I think it was a combination of a volatile market and increasing rates, which brought money and obviously we're a leader in the money market business and so it was a catalyst for inflows.

Just a quick question on energy follow-up here. I think you said $10 billion of total exposure. Roughly two-thirds in investment grade, is it right for us then to apply that sort of two-to-one investment grade, bull investment grade to your funded book as well, and sort of back into about $3 billion funded IG exposure?

Sure, let me provide you with the numbers so you have all the details. The total potential exposure is $10.6 billion, with $1.8 billion funded and $8.8 billion unfunded. Of the funded non-investment grade, it's $1.5 billion, and there’s an additional $2.7 billion that could be funded on that side. That's the total exposure, and you can complete the rest of the information regarding the investment grade.

Terrific.

And you can fill in the rest of the grid on the investment grade stuff.

So Basel published the updated guidance for the market risk calculations last week. I recognized the document and some of the calculations are pretty, the document says calculations are involved, I didn't know if you've done any preliminary analysis on the impact this might have on your pro forma market risk assets?

Yes, you're talking about the fundamental view of the trading book that came out last week. So as you said it is a pretty big document, I think it was over 90 pages. We had the team going through it, I don’t have any specific quantification for you. I think it'd be too early for me to put that out there and we still haven't even seen an NPR from the Federal Reserve. So we'll have to see how this evolves. I would say the high level read is that from the early documents and the early discussion it seems like the regulators in the industry may continue to progress in terms of trying to find the right balance. But at this stage for us, I don't see it being a significant impact but we'll give you more detail.

All right, I suppose over the last few quarters it does look like the market risk assets have been steadily declining. I didn't know if that reduction was in anticipation of what might be tougher rules or are there other factors that are really driving that decline?

No, definitely certainly not in anticipation of this. I mean just to be clear, we'll approach this rule like we've approached all the other rules. We don't want to try to adjust our business potentially have a negative impact to your clients. The one good thing, regulators have been very thoughtful about the runway to rule adoption. This is something that we have till 2019. So the industry is going to have time to make adjustments and I think that's in everyone's best interest because it actually will be less disruptive to market, the incentive of this rule is significant and we've seen that in all the rules and so you'll see us approach this rule the way we approached all the other rules. But we haven't even seen as I said a Fed NPR so we'll see how that goes. But any reduction in market risk assets is really a complexion of client activity.

Got it, okay, and just one quick follow up. I did see that the advance Core Tier 1 did in fact decline quarter-on-quarter. I assume it's a function of the increase in operational risk tied to the settlement but didn't know if it was attributable to something else?

No that's correct. So the settlement added $21 billion to operational risk assets and it had a corresponding decline in the ratio of roughly 40 basis points.

Good morning, Harvey. Just a couple of questions. I guess starting on M&A, we've heard across both you and to a lesser extent some of your competitors about the potential for market share gains as some non-U.S. participants back away. But I think that's mostly focused on the trading side of things. Given your market share gains in M&A this year, do you get the sense that that's also true with Investment Banking in specifically M&A transactions?

No, I haven't had a chance to dig through all the lead tables and I may not have this perfectly accurate but the last time I spoke to our team about this, I think it was really that there's a segment of banks which lost share to some of the boutiques, and there’s firms like ourselves which obviously gained market share broadly across the board, and we took share from everyone else.

Okay, and then just on FICC and trading, you've given us some helpful commentary and I realize it's early days in the year in the quarter, but I guess I'm curious, so what the level of rate positioning within your client base has been, did that change dramatically late in the fourth quarter with the Fed's action and has it changed much so far this year?

Not a significant factor, really nothing to comment on that. Obviously, the Fed reserve data did a very good job of communicating to the marketplace the first rate increase in December and I think to a great extent that it being a non-event, which is a good thing. And so early in the quarter it was influencing client activity, but by the time the event occurred, obviously it wasn’t significant.

And just finally for me, I don’t think you've given these. Can you provide us the fully phased in capital ratios at the end of the year?

Sure, so under the advanced, we were 11.7 and under standardized 12.9. I remember that on an apples-to-apples basis, that's a little bit conservative just given the way some of the items actually transitioned to fully phased in, but that's where we stood at.

Everyone, thanks for dialing in today. And myself and the rest of the team, we look forward to seeing you during the course of the year. If you have any follow-up questions, please reach out to Dane and the team. Take care, and have a great day.