Goldman Sachs Group Inc (GS) — Q1 2016 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 conditions 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 2015. 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. 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 to 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 first quarter results and I'm happy to answer any questions. Net revenues were $6.3 billion; net earnings, $1.1 billion, and earnings per diluted share, $2.68. Net earnings to common included a $161 million benefit related to the successful tender of our APEX securities. The tender added $0.36 per diluted share. The first quarter of 2016 was challenging. It started with renewed uncertainty about the global economic outlook, with the possibility of a recession even being raised. These concerns included growth prospects from China, plummeting oil prices, a strengthening U.S. dollar, and multiple geopolitical events, to name a few. All these came into focus during an eventful first quarter. These concerns translated into significant price pressure at the beginning of the quarter across both equity and fixed income markets. The Dow declined by 6% in the first week. This is the worst start in its nearly 90-year history. The index ultimately reached its low point in mid-February, declining 10%. Equity markets in other geographies endured even more material declines during the quarter, with the Shanghai down as much as 25% and the Nikkei down as much as 21%. Credit spreads also widened significantly intra-quarter, particularly for high yield and energy-related issuers. Global Central Bank activity was front and center again during the quarter. After raising rates in December for the first time in more than nine years, the market heavily debated the Federal Reserve's future actions. In the eurozone, the European Central Bank took additional stimulus measures well beyond what was initially expected by the market. And finally, the Bank of Japan moved interest rates into negative territory. With all these factors at work, it isn't surprising that it resulted in a difficult operating environment for our clients and, by extension, constrained opportunities in each of our business segments. Within Investment Banking, for example, industry-wide equity underwriting volumes declined by 57% year-over-year. Performance was challenged for many of our ICS clients. For example, nearly 80% of the largest active U.S. equity mutual funds underperformed their benchmarks in the quarter. As you would expect with markets flat-to-down worldwide, our equity investing business was negatively impacted. And finally, incentive fees declined during the quarter due to limited harvesting opportunities. With that as a backdrop, let's now discuss individual business performance in greater detail. Investment Banking produced first quarter net revenues of $1.5 billion, 5% lower than the fourth quarter as we saw lower client activity across M&A and equity underwriting. Our Investment Banking backlog decreased since the end of the year but is still up relative to a year ago. Breaking down the components of Investment Banking in the first quarter, Advisory revenues were $771 million. A 12% decline relative to the fourth quarter reflects a decrease in the number of completed M&A transactions. Year-to-date, Goldman Sachs ranked first in worldwide announced M&A. We advised on a number of important transactions that were announced during the first quarter, including Syngenta's $43.6 billion cash tender offer from ChemChina; Valspar's $11.3 billion acquisition by Sherwin-Williams; and ADT's $12 billion acquisition by Apollo. We also advised on a number of significant transactions that closed during the first quarter, including BG Group's £47 billion acquisition by Royal Dutch Shell; BT Group's £12.5 billion acquisition of EE Limited; and PETCO Animal Supplies' $4.6 billion sale to a consortium of investors. Moving to Underwriting, net revenues were $692 million in the first quarter, up 4% sequentially as a pickup in debt underwriting more than offset a slowdown in equity issuance. Equity underwriting revenues were $183 million. This was down significantly compared to the fourth quarter due to a decrease in offerings industry-wide. Debt underwriting revenues were up 16% to $509 million and benefited from strong investment-grade issuance. During the first quarter, we actively supported our clients' financing needs, participating in Newell Rubbermaid's $8 billion financing to support its acquisition of Jarden, Vista's $4 billion loan and bond offering to support its acquisition of Solera, and Devon Energy's $1.5 billion follow-on offering. Turning to Institutional Client Services, which comprises both our FICC and Equities businesses, net revenues were $3.4 billion in the first quarter, up 20% compared to the fourth quarter. In the quarter, we early-adopted the new accounting standard for DVA, which is now captured in other comprehensive income. DVA for the current quarter was immaterial. FICC Client Execution net revenues were $1.7 billion in the first quarter, up 48% sequentially, as client activity improved in many businesses from weak fourth quarter levels. As I mentioned, the operating environment across the FICC complex was quite difficult due to macro uncertainty and volatile markets. This led to a challenging backdrop for our clients with weak investment performance and drove difficult market-making conditions for the firm. The environment in the first quarter of 2016 stands in stark contrast to the environment in the first quarter of last year. Consequently, there was a substantial downward revenue pressure year-over-year. Interest rates and currencies were significantly lower. Client activity and interest rates held up relatively well. However, activity within currencies declined compared to a strong first quarter of last year. Credit also decreased significantly as market conditions remained difficult, particularly in Europe. Commodities was weaker as client activity was muted with energy prices remaining low. Mortgages continue to be challenged as spreads widened for some products and client activity remained low. In Equities, which includes equities client execution, commissions and fees, and security services, net revenues for the first quarter were $1.8 billion, up 1% sequentially. First quarter results in Equities were roughly consistent with the back half of last year but significantly weaker compared to a robust performance in the first quarter of 2015. Net revenues declined 23% year-over-year and reflected the impact of a challenging environment for our clients and the firm. Equities client execution net revenues of $470 million were down significantly year-over-year. Higher volatility and global equity market weakness at the beginning of the quarter impacted investor conviction and risk appetite. Commissions and fees were $878 million, up 9% year-over-year as client activity increased in our lower touch electronic channels. Security services generated net revenues of $432 million, up 10% year-over-year on improved spreads. Turning to risk, average daily VaR in the first quarter was $72 million, up slightly from $71 million in the fourth quarter. Moving on to our Investing & Lending activities, collectively, these businesses produced net revenues of $87 million in the first quarter. In equity securities, markdowns on public investments entirely offset net revenues in private investments. Net revenues from debt securities and loans were $87 million. Revenues were driven by net interest income. This was partially offset by increased provisions on our corporate energy exposures. In Investment Management, we reported first quarter net revenues of $1.3 billion. This was down 13% from the fourth quarter, primarily as a result of lower incentive fees and management and other fees. During the quarter, management and other fees were down 6% sequentially to $1.2 billion due to a change in the mix of client assets and strategies. Assets under supervision increased $35 billion sequentially to a record $1.29 trillion, primarily due to net inflows into liquidity and long-term fee-based products. We had $16 billion of net inflows into liquidity products, $10 billion of long-term net inflows, primarily driven by fixed income and equity products, and $9 billion of market appreciation. 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, declined by 40% versus the first quarter of 2015. The significant reduction in compensation and benefits expense reflects the more challenging revenue environment and translated into a compensation to net revenues ratio of 42%. First quarter non-compensation expenses were $2.1 billion, significantly lower than the fourth quarter and 6% lower than the first quarter of 2015. This is the lowest quarterly level since the second quarter of 2009. Now I'd like to take you through a few key statistics for the first quarter. Total staff was approximately 36,500, down 1% from year-end 2015. Our effective tax rate for the first quarter was 28%. Our global core liquid assets ended the first quarter at $196 billion and our balance sheet and level 3 assets were $878 billion and $24 billion, respectively. Our Common Equity Tier 1 ratio was 12.2% under the Basel III Advanced approach. It was 13.4% using the Standardized approach. Our supplementary leverage ratio finished at 6%. And finally, we repurchased 10 million shares of common stock for $1.55 billion in the quarter. In conclusion, the first quarter was obviously a difficult period for our clients, the markets and our opportunity set. While clearly we don't control the opportunity set, we proactively took action in key areas that we do control: our cost structure and our capital. In addition, this is the first quarter in a while that we faced significant headwinds across each of our business segments. Given that we operate in a cyclical industry, it shouldn't be surprising that there will be difficult quarters. That being said, we don't create deep client relationships in a quarter, we don't hire our people for a quarter, and we certainly don't build businesses for a quarter. Our success has been predicated on having a strong culture that promotes both a long-term perspective, while simultaneously being very focused on managing to the current environment. That long-term focus has been the foundation for building a leading global investment bank and creating superior results for our shareholders. As we look forward, we are committed to remaining nimble and efficient operators, disciplined capital allocators and prudent risk managers. Our commitment to these principles has been and will continue to be the basis for our performance over time. Thanks again for dialing in, and I'm happy to answer your questions.

Hi. Thanks very much.

Hey, good morning, Glenn.

Good morning. Maybe we could talk about Fixed Income first. I'm just looking big picture. Revenue is a little more than half the big banks and that was obviously not always the case. I'm just curious, are there specific things about your business mix and client mix that doesn't compare as much versus the past in activity levels, things like credit being real slow right now? And if you feel like any of the balance sheet reductions or Volcker implementation has impacted the forward earnings power?

Obviously, I don't have great transparency into the competitors' footprints. I don't think that any of the things you mentioned, sort of the balance sheet actions we've taken because they've been very surgical – although meaningful they've been very surgical over time and very thoughtfully executed. I don't think those are issues and, obviously, all firms have adjusted to Volcker. So, I don't think those are drivers. I think when you look at the year-over-year, obviously, we had a very strong first quarter 2015 relative to the peer set. And I know revenue is the most transparent benchmark you have. But when you look at the performance in the first quarter, obviously we outperformed in the first quarter of last year and obviously much more challenging for us this quarter.

Yeah, totally fair. Okay. Maybe if we switch over to Investing & Lending. I want to focus on the equity side specifically. In some markets, you had the markets go down and then come back. Asia didn't snap back. So, I wonder if you could talk about the contribution of that in the quarter. And then, more importantly, for the equity dynamic going forward, like maybe size the portfolio fair value versus cost basis, see if there are any marks in the quarter that, knock on wood don't repeat next quarter? And then just see if you can update us on what's left to sell down to get compliant?

So, okay, that's a multipart question. So if I miss anything, get back.

All right.

No, it's fine. So in terms of the I&L balance sheet, let's just start there. The I&L balance sheet is $99 billion. Of that, in terms of – you spoke about equity, roughly $15 billion of that is corporate equity. In terms of the equity line, both private and public, basically the public portfolio was down roughly $140 million during the quarter and that was offset by private marks. Of those marks that were positive, they were virtually all event-related. And you remember, that's the language you use, Glenn, to describe the fact that there's a sale or a refinancing and then there were negative marks in the portfolio obviously also. So that's really the structure in terms of the course of the quarter. In terms of Volcker, because I think you're asking about the equity funds?

Yes. Correct.

So, in terms of Volcker, basically if we start at the top of, let's just say the waterfall, there's $7.5 billion in covered funds. You then have to take out approved Volcker activities. Then you take out the public money. And the way we've asked you to look at it is there's roughly $4.5 billion remaining. And that money obviously sits alongside our clients in these funds. Is there anything else you asked that I missed?

No, that's perfect. Thank you.

Good morning, Harvey.

Morning, Christian.

So you mentioned a mix shift in asset management impacting revenues. Can you give a bit more color on this and if you expect it to reverse going forward?

So quarter-to-quarter and year-over-year as we work through, obviously, there are various client segments we work with, whether they're retail clients, private wealth, also institutional clients. And what we're really seeing is a mix shift more to institutional mandates during the period. That had an impact. I think longer term, obviously, I can't predict the longer term. We're looking to basically provide service to all those clients as best we can through long, long cycles. But you're seeing obviously the positive inflows which are quite good. So if you ask me to think of the future, I would point more to the flows than the asset mix.

Okay, thank you. And then on the GE deposits that you got in, just curious how we should think about what kind of economics you can earn on that and any timeline for deployment?

So the transaction closed on Friday. It went quite smoothly. We're up and running under the GS moniker. I would encourage you to think of this really as we've described it, which is, this is all part of our funding diversification. In that sense, we always, as you know, look to have a diversified funding base. This is just an extra toolkit for us in the financing and so we'll view it over time. But in terms of driving revenues, it's really part of our liability management strategy.

Okay, helpful. And then a very quick modeling question for me. Tax rate was a bit lower in the quarter. Just curious how we should think about the go-forward tax rate?

Yeah. So in terms of the go-forward, I guess if I was to give you a best estimate, I'd say something similar to last year.

Hi. Thanks a lot.

Hey, Mike.

Hi. Harvey, maybe first just on the revenue backdrop, I just wanted to get your sense when you look at the January/February trends versus, say, March/April, maybe areas where you're starting to see some improving trends. I know in any given quarter it's kind of tough on, I think, the market share standpoint, but I feel like when revenues are weak you can't really tell market share and then when revenues rebound, you can figure out who gained and who lost. But just given some of the competitive dynamics, just wanted to get a sense if you're starting to see any of that in terms of the market share?

So, I just want to make sure understand – I answer your question completely. In terms of the quarter, the way I would describe it is March was better than February and February was better than January. It's early in April, so it's obviously pretty early in the quarter, but I would say that it really feels like many of the factors that were impacting the market in the first quarter, particularly early on, seem to have abated and although the market feels a little fragile from all that, it feels like – for the most part, that feels like that's behind us. But we'll see how the year progresses. In terms of the longer-term observation around the competitive dynamic, again, in a quarter like this, hard to see it when our clients are experiencing such volatility and such stress, but I think based on announcements and parts of the business where we're seeing client flows move, engagement with clients is quite good and we're getting good feedback. So I think a quarter like we just had actually only makes the competitor forward look better, but we'll see.

Okay, that's helpful. And then just on, I guess, I&L and Investment Management, obviously I&L had some pressure and then Investment Management, just like the performance fees were weaker than expected. When you look at what has happened through the quarter and the rebound in the markets, I'm trying to just gauge on the parts of the business that are as simple as markets are up and so you should start to see some improving trends versus maybe on like the I&L, you mentioned the provision on the debt side. So how significant or how much follow through are we going to see that could maybe weigh on that part of the business? And same thing on the incentive fees or the performance fees in Investment Management. I don't know if there's a way to gauge the types of products that generate the performance fees, how much are absolute versus relative or what products are below hurdles?

Yes, so as it relates to I&L, just to level set everyone, obviously we created that disclosure to provide more transparency, and that is, as you described it, the most price-sensitive asset parts of the balance sheet. And so that's why I provide it that way. So, as I mentioned, for example, there are parts of the portfolio, as you know, that are public equity securities where, again, we may sit alongside our clients. As those are monetized out of a fund, there are restrictions and lockup periods. And so that portfolio, as I mentioned, was negative roughly $140 million during the course of the quarter. And so there will be some element idiosyncratic movement. Sometimes that portfolio will outperform. When you look at history, it has generally outperformed. Even if you take the last eight quarters including this quarter, the entire I&L segment has generated $11 billion in revenues. In terms of incentive fees, it's going to be specific, obviously, to performance, which has been solid, but obviously markets are going to have an influence on incentive fees also.

Okay. Thanks a lot.

Thank you.

Can you hear me?

Matt, are you there?

Yep. Can you hear me?

Yeah. We can hear you now.

Okay. Sorry about that. Just a big picture question. Can you just talk a bit about the disconnect between the markets, the improvement that we're seeing there and what still feels like sluggish client activity, maybe better than January/February, but here's the S&P up a couple percent year-to-date, credit spreads have tightened. I guess the question is, like, is it a timing issue where we need more stability for activity to pick up in a bigger way, or is it the underlying economy's not strong enough? Just any big picture thoughts you have on that disconnect?

So something that I think you're certainly seeing a pickup – if you look at IPOs, I think there were something in the first couple weeks of April approaching 40 IPOs during the first couple weeks. So certainly elements of the marketplace which obviously slowed down very specifically. But I think after a tough first quarter like the whole market has experienced, I think that there may be a slow reaction function in terms of how various market participants engage the marketplace. But it feels like, as I said before, the most significant factors impacting the first quarter seem to have abated, at least for now.

Okay. And then just kind of on an incremental basis, like where do you feel like the engagement – you mentioned the IPOs picking up, but I guess a timeline? Usually you see trading pick up first and then M&A tends to lag, or what do you think we see beyond IPOs in terms of areas that start to pick up first, assuming we get a pickup in activity?

I think generally I would agree with your statement over very long periods of time, but I think in terms of the M&A cycle that we're in now, while off a little bit from the levels of 2015, the level of dialogue there feels quite good. As I mentioned, our backlog across advisory, equity and debt is up year-over-year after a strong year. So the dialogue and level of engagement feels quite good at this stage. Certainly there was an element to the first quarter which had a bit of a chilling effect for a period, but right now the dialogue feels good. We'll see how it goes in the future.

Okay. And then just separately on expenses, obviously good cost control in a tough revenue quarter. You did mention about continuing to manage to a difficult revenue environment if that continues, but maybe just expand on that? We've seen some things in the media about further cost cuts coming. So, anything you can elaborate on the cost side would be helpful.

So obviously we're – look, we always have our eye on ways we can look to operate more efficiently. We've talked about it a lot, that this is a performance-driven culture, and the performance wasn't great in the first quarter and as a result you saw compensation and benefits expense down 40% year-over-year. Again, that's our culture, and so you're going to see those adjustments. In terms of other cost initiatives, I know there's been a lot of stuff in the press. I guess I would really summarize it as follows. I would just say we're shareholders and we're doing things that you would expect shareholders to do.

Okay. Thanks a lot.

Thank you.

Can you hear me?

Matt, are you there?

Yep. Can you hear me?

Yeah. We can hear you now.

Okay. Sorry about that. Just a big picture question. Can you just talk a bit about the disconnect between the markets, the improvement that we're seeing there and what still feels like sluggish client activity, maybe better than January/February, but here's the S&P up a couple percent year-to-date, credit spreads have tightened. I guess the question is, like, is it a timing issue where we need more stability for activity to pick up in a bigger way, or is it the underlying economy's not strong enough? Just any big picture thoughts you have on that disconnect?

So something that I think you're certainly seeing a pickup – if you look at IPOs, I think there were something in the first couple weeks of April approaching 40 IPOs during the first couple weeks. So certainly elements of the marketplace which obviously slowed down very specifically. But I think after a tough first quarter like the whole market has experienced, I think that there may be a slow reaction function in terms of how various market participants engage the marketplace. But it feels like, as I said before, the most significant factors impacting the first quarter seem to have abated, at least for now.

Okay. And then just kind of on an incremental basis, like where do you feel like the engagement – you mentioned the IPOs picking up, but I guess a timeline? Usually you see trading pick up first and then M&A tends to lag, or what do you think we see beyond IPOs in terms of areas that start to pick up first, assuming we get a pickup in activity?

I think generally I would agree with your statement over very long periods of time, but I think in terms of the M&A cycle that we're in now, while off a little bit from the levels of 2015, the level of dialogue there feels quite good. As I mentioned, our backlog across advisory, equity and debt is up year-over-year after a strong year. So the dialogue and level of engagement feels quite good at this stage. Certainly there was an element to the first quarter which had a bit of a chilling effect for a period, but right now the dialogue feels good. We'll see how it goes in the future.

Okay. And then just separately on expenses, obviously good cost control in a tough revenue quarter. You did mention about continuing to manage to a difficult revenue environment if that continues, but maybe just expand on that? We've seen some things in the media about further cost cuts coming. So, anything you can elaborate on the cost side would be helpful.

So obviously we're – look, we always have our eye on ways we can look to operate more efficiently. We've talked about it a lot, that this is a performance-driven culture, and the performance wasn't great in the first quarter and as a result you saw compensation and benefits expense down 40% year-over-year. Again, that's our culture, and so you're going to see those adjustments. In terms of other cost initiatives, I know there's been a lot of stuff in the press. I guess I would really summarize it as follows. I would just say we're shareholders and we're doing things that you would expect shareholders to do.

Okay. Thanks a lot.

Thank you.

Can you hear me?

Matt, are you there?

Yep. Can you hear me?

Yeah. We can hear you now.

Okay. Sorry about that. Just a big picture question. Can you just talk a bit about the disconnect between the markets, the improvement that we're seeing there and what still feels like sluggish client activity, maybe better than January/February, but here's the S&P up a couple percent year-to-date, credit spreads have tightened. I guess the question is, like, is it a timing issue where we need more stability for activity to pick up in a bigger way, or is it the underlying economy's not strong enough? Just any big picture thoughts you have on that disconnect?

So something that I think you're certainly seeing a pickup – if you look at IPOs, I think there were something in the first couple weeks of April approaching 40 IPOs during the first couple weeks. So certainly elements of the marketplace which obviously slowed down very specifically. But I think after a tough first quarter like the whole market has experienced, I think that there may be a slow reaction function in terms of how various market participants engage the marketplace. But it feels like, as I said before, the most significant factors impacting the first quarter seem to have abated, at least for now.

Okay. And then just kind of on an incremental basis, like where do you feel like the engagement – you mentioned the IPOs picking up, but I guess a timeline? Usually you see trading pick up first and then M&A tends to lag, or what do you think we see beyond IPOs in terms of areas that start to pick up first, assuming we get a pickup in activity?

I think generally I would agree with your statement over very long periods of time, but I think in terms of the M&A cycle that we're in now, while off a little bit from the levels of 2015, the level of dialogue there feels quite good. As I mentioned, our backlog across advisory, equity and debt is up year-over-year after a strong year. So the dialogue and level of engagement feels quite good at this stage. Certainly there was an element to the first quarter which had a bit of a chilling effect for a period, but right now the dialogue feels good. We'll see how it goes in the future.

Okay. And then just separately on expenses, obviously good cost control in a tough revenue quarter. You did mention about continuing to manage to a difficult revenue environment if that continues, but maybe just expand on that? We've seen some things in the media about further cost cuts coming. So, anything you can elaborate on the cost side would be helpful.

So obviously we're – look, we always have our eye on ways we can look to operate more efficiently. We've talked about it a lot, that this is a performance-driven culture, and the performance wasn't great in the first quarter and as a result you saw compensation and benefits expense down 40% year-over-year. Again, that's our culture, and so you're going to see those adjustments. In terms of other cost initiatives, I know there's been a lot of stuff in the press. I guess I would really summarize it as follows. I would just say we're shareholders and we're doing things that you would expect shareholders to do.

Okay. Thanks a lot.

Thank you.

Hi. The CEO letter talks about secular changes versus cyclical changes and you guys have been steadfast saying that the markets are simply in a cyclical lull, they'll recover. They haven't recovered but you've kept your infrastructure. So at what point do you say maybe these cyclical lulls are more permanent and you need to take more dramatic actions? And it looks like year-over-year your trading is the worst among the five big U.S. wholesale banks.

So I think I just want to clarify one thing. Because I think one of the messages that maybe gets mistranslated as it comes across is – and let's just pick FICC, because I think that's really what you're talking about when you talk about trading. We have expressed a commitment to FICC. What we mean by that, very explicitly, is we're committed to our clients and we're committed to providing superior returns over the cycle. Commitment does not mean inaction, and I think that's what gets a little bit confused in this message. And actually, as far as I can tell, Mike, all of our U.S. peers, they're committed to FICC, too. But back to Goldman Sachs for a second. If you think about the things we've done over the last couple of years, since the middle of 2013 we've taken the ICS balance sheet down 25% and FICC RWAs, market and credit down 30%. On the cost side – we've been very focused on the capital side, and on the cost side since the beginning of 2012, we've taken FICC related head count down 10, and we've taken compensation down by more than 20%. So, I wouldn't say that there's been any inaction. However, I would reiterate that we've been quite committed to our clients and committed to the return. Now, look, this has been, and I admit it, because I agree with you, Mike, this has been a tough period and this has been a long cycle. But we have a long history of managing our business across the cycle. In 2009, we didn't overinvest in the top, and we're going to be thoughtful about not underinvesting but we are certainly responding to the last several years of decline in (30:04) revenue.

I guess, as a follow-up, I mean, what else can you do? You've danced pretty well the last three to four years without revenue growth, but it seems like you're getting to the end of what you can do and your return on equity is now in the single-digit range, and I think consensus has it in the single-digit range for the year. I know you would not want to see that. So what are your other options?

Well, look. I think you're right to point out that for four years running we are one of the very small handful of firms that have had double-digit ROEs. This is a quarter, I certainly wouldn't sit here and tell you, we are happy about this quarter, but we will do what it takes over time to make sure that we deliver for our clients and maximize the returns for our shareholders in a prudent way. So we are quite focused.

All right. Thank you.

Thanks, Mike.

Hi. Good morning.

Good morning, Betsy.

Couple of questions on the fixed income line or the debt line on the I&L?

Yeah.

So, typically I think the NII is around $225 million quarter, and I know you posted $87 million, and you indicated the delta is largely due to energy. I'm just wondering, should I take that to mean that the reserve, or the provision, or the mark-to-market in energy was around $138 million or is there more there?

So the NII was roughly $240 million and then the offset within provisions, and the majority the offset, about two thirds was in energy related.

Okay. So that feels like it would probably double the reserve ratio that you had posted last quarter. Is that – it would more than double it. Is that a reasonable assumption? Or maybe you could talk us through how you're thinking about them?

No, it is not. When you actually look at it – I think the best way to look at this is with the funded portion of the non-investment grade portion of the energy portfolio. It was high-single digits last quarter, and it remains high-single digits.

Okay. And that's because you either used some of the provision to – you wrote off some of your exposure? Is that accurate or...

Well, the exposure – why don't I just walk you through it?

Sure.

So – yeah. So in the oil and gas sector, this period, including funded, unfunded, investment-grade and non-investment grade was $10.7 billion. That's up from $10.6 billion in the fourth quarter. Now let's just focus on non-investment grade. Non-investment grade is $5 billion. That's up from $4.2 billion. In part, obviously that's driven up by ratings downgrades and actions by the ratings agencies during the course of the quarter, and the funded portion of that is $1.6 billion, and that was up about $100 million. So you can kind of matrix back through all that, and you can see the shift in the portfolio was a result of the ratings agencies.

Got it. And then just ticky-tacky, is the fully phased in for the capital ratios, the CET1, the SLR?

So on the fully phased-in ratios, they are flat quarter-over-quarter, advanced is a 11.7%, and standardized is 12.9%.

Okay. Great. All right. Thank you.

Thank you, Betsy.

Hey, good morning. So I'm going to ask a question that's really going to drill down on one that came a couple of minutes ago on the degree of commitment to FICC in particular. Goldman is obviously a leader in applying technology to traditional voice trading businesses and other things, and you've been pretty vocal in the past about how you transformed equities, and foreign exchange, and cut head count while picking up market share and the process. It seems like FICC has really reached a tipping point recently because of regulatory change and what's going on in the markets and yet the digitization process is maybe trickier in FICC. And, so I was hoping you could give us some color on how much transformation do you expect in the capital structure and the expense structure of fixed income for your business?

Well, first and foremost I'd say the thing that drive the strategy is not digitization in and of itself, it's how we engage our clients. You're right to point out that the equity business went through a pretty significant evolution. While that evolution in historical perspective feels short, it was a multiyear process that really began in 1999 and it finished in the mid 2000s and continues to evolve. I don't know necessarily that I would agree with that we're at a tipping point. It's all about opinions. But it feels like we're in an evolution where obviously clients are looking for efficiencies and we're looking for efficiencies, but the reality is that a vast majority of the fixed income market is more bespoke; it won't lend itself to that. But to the extent to which we can deliver to our clients and drive efficiencies, we're obviously very focused on it.

So, is it right though, for us to think that there is going to be a significant transformation in the cost structure and the capital structure that you apply to FICC over the next couple of years? Or would that be too dramatic?

Well I think, look, you've seen some of the evolutionary steps we've taken in terms of the balance sheet reductions and the risk-weighted assets that I talked about earlier. It may be the case that over periods of time, depending on how much client activity there is, but the extent to which it shifts to electronic channels like we've seen under the regulatory framework for swap execution facilities, those transitions happen very, very quickly, and we adjust very, very quickly. Thank you.