Goldman Sachs Group Inc (GS) — Q3 2017 Earnings Call Transcript

Good morning. This is Dane Holmes, Head of Investor Relations at Goldman Sachs. Welcome to our third 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 2016. 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, Marty Chavez, will now review the firm’s results. Marty?

Thanks, Dane, and thanks to everyone for dialing in. I’ll walk you through the third quarter and the year-to-date results; then, I’ll be happy to answer any questions. In the third quarter, we produced net revenues of $8.3 billion, net earnings of $2.1 billion, earnings per diluted share of $5.02 and an annualized return on common equity of 10.9%. Taking a step back to review our year-to-date results. We had firm-wide net revenues of $24.2 billion, net earnings of $6.2 billion, earnings per diluted share of $14.11 and a return on common equity of 10.3%. Year-to-date, our firm-wide revenues are up 8% or $1.8 billion versus the same period last year, reflecting a broad contribution across most of our businesses. Revenue strength in investment banking and investment management helped to offset weaker FICC performance. Our investing and lending activities posted strong performance, driven by the quality of our portfolio, increasing asset prices and the ongoing expansion of our lending and financing footprint. We are committed to expanding our global client franchise and correspondingly our revenue production, despite the challenging operating environment. As Harvey discussed at a recent conference, we had detailed plans across each of our businesses to drive stronger client relationships and shareholder value creation in the current operating environment. With more than $5 billion of revenue opportunities identified, we are executing across those multiple plans. As it relates specifically to this quarter’s performance, revenues increased 6% sequentially and 2% year-over-year. A year-over-year increase is particularly noteworthy, given the strength of our performance in the third quarter of 2016. Importantly, our emphasis on cost efficiency and commitments to operating leverage for our shareholders continued into the third quarter. These efforts have positioned the firm to accrue a compensation-to-net revenue ratio of 40% for the year-to-date, down 100 basis points versus this point last year. As a result of revenue growth and expense discipline, our pre-tax earnings are up 16% to $8 billion and our ROE is 160 basis points higher at 10.3% for the first nine months of the year. With that as a broad overview, let’s now discuss individual business performance in greater detail. Investment banking produced third quarter net revenues of $1.8 billion, up 4% compared to the second quarter including strong results in advisory. Our investment banking backlog decreased since the end of the second quarter as replenishment of M&A transactions was lower. Breaking down the components of investment banking in the third quarter, advisory revenues were $911 million, up 22% compared to the second quarter as deal closings accelerated. Year-to-date, Goldman Sachs ranks first in worldwide announced and completed M&A. We advised on a number of important transactions that were announced during the third quarter including Worldpay’s merger with Vantiv for a combined enterprise value of $28.8 billion, CVC’s 5.8 billion euro sale of its majority stake in Ista to Cheung Kong Property Holdings and Home Shopping Network’s $2.6 billion sale to Liberty Interactive. We also advised on a number of significant transactions that closed during the third quarter including, DuPont’s combination with Dow Chemical and a $130 billion merger of equals; Baker Hughes’ $32 billion merger with GE Oil & Gas, and Hewlett Packard Enterprise’s $8.8 billion spinoff and merger of non-core software assets with Micro Focus International. Moving to underwriting, net revenues were $886 million in the third quarter, down 10% on a sequential basis. Equity underwriting revenues were $212 million, down 18% quarter-over-quarter as IPO volumes declined. Debt underwriting revenues of $674 million included strong acquisition finance activity. Results were down 7% relative to a very robust second quarter. Year-to-date Goldman Sachs ranked 1st in worldwide common-stock offerings, and also had a leading position in leveraged finance. During the third quarter, we actively supported our clients’ financing needs participating in Amazon’s $16 billion debt offering to support its purchase of Whole Foods; Japan Post’s $10.8 billion follow-on offering; and Discovery Communications’ $6.3 billion bond offering to support its purchase of Scripps Networks. Turning to institutional client services, which comprises both our FICC and equities businesses, net revenues were $3.1 billion in the third quarter, up 2% compared to the second quarter, reflecting a recovery in FICC performance. FICC client execution net revenues were $1.5 billion in the third quarter, up 25% sequentially. While volatility and client conviction remained low, improvements across all of our businesses aided performance. Following a more challenging second quarter, rates improved significantly amid better U.S. economic data and expectations for central bank actions. Commodities posted a modest improvement sequentially. Despite the increase, third quarter results still represented a bottom decile performance. Credit improved given better performance in our financing solutions business. Mortgages and currencies were up modestly quarter-over-quarter. Now moving to equities, net revenues for the third quarter were $1.7 billion, down 12% sequentially. Equities client execution net revenues of $584 million were down 15% compared to the second quarter. There was a limited opportunity set in derivatives, and low volatility weighed on results. Commissions and fees were $681 million, down 11% versus the second quarter, as U.S. volumes decreased industry-wide. Security services generated net revenues of $403 million, down 9% sequentially, reflecting typical second quarter seasonality. Balances were slightly higher quarter-over-quarter and funding spreads remained relatively tight, given the close to 90% of our stock borrowed for clients were in very liquid collateral. Turning to risk, average daily VaR in the third quarter was $47 million, down from $51 million in the second quarter, driven by lower commodity price risk. Moving on to our investing and lending activities, collectively these businesses produced net revenues of $1.9 billion in the third quarter. Equity securities generated net revenues of $1.4 billion, reflecting sales, corporate performance, and gains in public equity investments. Of the $1.4 billion, roughly 60% was driven by public mark-to-market and events such as sales. Given the favorable market backdrop, we’ve been actively harvesting our portfolio. Net revenues from debt securities and loans were $492 million, which included approximately $450 million of net interest income. With respect to the I&L balance sheet, we ended the third quarter with $116 billion in total assets. Given our continued efforts to expand our lending footprint, loans receivable were the biggest growth driver, up $8 billion quarter-over-quarter to $61 billion. In investment management, we reported third quarter net revenue of $1.5 billion, flat with the second quarter. Assets under supervision increased $50 billion sequentially to a record $1.46 trillion. The increase primarily reflected $13 billion of long-term net inflows, $14 billion of liquidity product net inflows and $23 billion of net market appreciation. Now, let me turn to expenses. As mentioned earlier, compensation and benefits expense for the year to date, which includes salary, bonuses, amortization of prior year equity awards and other items such as benefits was accrued at a compensation to net revenues ratio of 40%. This is 100 basis points lower than the accrual in the first nine months of 2016. Third quarter non-compensation expenses were $2.2 billion, up 2% from the second quarter. Now, I’d like to take you through a few key statistics for the third quarter. Total staff was approximately 35,800, up 5% from the second quarter and reflected seasonal hiring. Our effective tax rate for the year to date was 22.6%. If you exclude the tax benefits related to the settlement of equity awards, our effective tax rate for the year to date would have been roughly 29%. Our global core liquid assets ended the third quarter at $220 billion and our balance sheet and level 3 assets were $930 billion and $21 billion, respectively. Our common equity tier 1 ratio was 12% under the Basel III advanced approach on a transitional basis and 11.7% on a fully phased-in basis. It was 13.3% using the standardized approach on a transitional basis and 13% on a fully phased-in basis. Our supplementary leverage ratio finished at 6.1%. Increased lending and derivative exposures drove declines in the advanced and standardized ratios whereas the SLR was lower sequentially given increases in the balance sheet. And finally, we repurchased 9.6 million shares of common stock for $2.2 billion in the quarter. On the subject of CCAR, we extensively engaged with our shareholders to solicit views on potential disclosure. Not surprisingly, we got different perspectives on the topic. It is clear at this point that we are the only CCAR bank that hasn’t disclosed. Accordingly, we are disclosing our 2017 CCAR buyback authorization of $8.7 billion. Of course, the Fed’s non-objection to our capital plan is similar to authorizations we received from our Board and our shareholders; it is a limit, not a requirement. We will determine our share repurchases in connection with the opportunities and risks that are present in the market. This includes but is not limited to the $5 billion of revenue opportunities we recently presented on. To close, let me spend a moment on the $5 billion of growth initiatives. They incorporate opportunities from across our global franchise including investment banking, FICC, equities, investment management and lending. The breadth of these opportunities demonstrates the growth potential of each of our businesses. Client feedback continues to be quite positive; and importantly, there is tremendous energy internally around these initiatives. We believe successful completion of these opportunities would drive an incremental $2.5 billion in annual pretax earnings at a 30% marginal ROE. We look forward to updating you on these initiatives as they evolve. And you should have confidence that the full capacity and capability of this firm is concentrated on delivering on these and other initiatives. Before we move on to Q&A, I want to thank Dane Holmes. As you probably know, Dane will become the firm’s new Global Head of Human Capital Management in January. He has been a trusted advisor to me and we are all excited about his new role and his continued ability to drive positive outcomes for the firm and our people. We also want to welcome back Heather Miner as the new Head of Investor Relations. Many of you will know Heather from her eight years in IR previously. We both look forward to maintaining an active dialogue with our shareholders and the analyst community. With that, I want to thank you again for dialing in, and I am happy to answer all of your questions.

Good morning. So, the balance sheet keeps growing in I&L and it keeps producing, so God bless. A question on the debt side. How much do you think of that balance sheet is relationship lending versus straight investment versus more of an asset management-like revenue? And of that $450 million in NII, do you still feel like $400 is about the quarterly run rate, given current balance sheet?

Well, Glenn, so let’s go through the lending part of the I&L portfolio. There is, as we said, $61.5 billion of loans receivables held for investment, and that figure increased $7.5 billion on the quarter. And so, looking into the components of that increase, I would say $1 billion of that is related to increased lending in our private wealth management business, and then $5 billion of it as a broad category, we will call it corporate and relationship, and that includes project financing, financing for asset managers, relationship lending, mortgage warehousing. When we think about the net interest income and our investing in lending line; that has grown significantly over time, and we see it as a stable and growing revenue source.

And your comments on capital ratios and SLR, do they constrain your ability to continue to do this? You mentioned your buyback is pretty darn big. Should we be thinking those as trade-offs, or can you do both?

Given regulatory constraints, as indicated by the CCAR results, we currently have limited access, and CCAR has been a key limiting factor. The test is subject to change, and we are unsure how it will evolve. However, based on our own risk assessment, we have sufficient access, which enables us to support our clients. We will maintain our established approach, ensuring that our capital and liquidity decisions remain flexible, with a primary focus on maintaining strong capital and liquidity to support our clients and foster growth. We've adapted to the returns, as you have, and we have gone through a period of recalibrating capital in line with regulations, which is beneficial for overall safety and stability. Now, we are shifting our focus to growth. Given the opportunities we are presenting to the market, we would prefer to allocate our capital resources to support these opportunities targeting 30% or greater marginal ROEs, rather than repurchasing our shares.

Appreciate that. One last small one, acquisition of Genesis Capital in the quarter, commercial lender, could you talk about where that fits in?

Sure. So, the Genesis is similar in the businesses that we’ve been doing for a considerable period of time in our investment management business. And so, the loans fit within all of our risk parameters and we saw an opportunity for accretive returns, plugging it into our platform and our control and saw the opportunities as to grow it by plugging it into our platform.

Good morning, Marty. Maybe first question, just on investment banking, the results came in strong, you mentioned on the M&A side some deals closing and then, you also just mentioned the pipeline down, just any context around that? Because I think on the equity side, it seems like the IPO pipeline is strong, so just maybe any color on the M&A front? And then, given that tax reform is a bit more in that line, just any change or change in the number of conversations in different industries, if we get that as a potential catalyst heading into 2018 or 2019?

So, as I mentioned, Mike, the backlog is down sequentially and down year-to-date, and that’s just natural side effect of the strong closings that we had in the third quarter; some of those deals had actually been in the backlog for a couple of quarters. And so, I won’t distinguish the formal backlog from the pipeline. The pipeline, as you noted in equity underwriting is strong also in our conversations with clients on the advisory side. There’s no sense of slowdown. We’re seeing a pickup in client dialogue, particularly I would note in technology, media, telecom, as well as industrials and natural resources. And so, it’s strong for all of the reasons that you would expect that CEOs are confident, equity market support valuations and acquisition currencies, the financing markets are open, the overall levels of financing costs are relatively low by historical standards. That’s all constructive on tax reform which you also mentioned, that is certainly a part of our engagement with clients. And I will also note however that clients, it seems to us, have moved towards saying, well, tax reform would be a good thing but it’s not stopping us from considering strategic acquisitions and sales right now.

Okay, that’s helpful. And then just as a follow-up, MiFID II is on the horizon heading into 2018. I know, there’s still a lot of shifting strategies in the industry, in conversations, but any kind of indication on how you think that impacts on the industry and you guys, either from a research standpoint, trading standpoint or market share?

Sure, I’ll cover all of that. First, I want to emphasize that we believe the impact of MiFID II will make it essential to have both unique content and a broad global presence, which our businesses possess. As you know, this is a major undertaking, and there is a significant go-live date for large banks in early January. On the execution side, we are focused on staying close to our clients, understanding their needs for liquidity and execution capabilities, and designing solutions accordingly. We have the necessary software and personnel, and we are making progress in this area. Regarding research, it is crucial to maintain that unique content and comprehensive research, and discussions around pricing for our research products are advancing. In our asset management sector, we and other asset managers have recently announced our intention to pay for research. We are aware of ongoing discussions between the SEC and European regulators that could lead to some form of change, and we are closely monitoring that situation. Overall, I want to reiterate that MiFID II will heighten the importance of having scale, depth, and breadth, and I believe our franchise is unmatched.

Good morning. You mentioned a little bit of detail within the loan growth this quarter on an earlier question. But, I guess just bigger picture, what kind of goalpost will you be providing to us on the $5 billion of revenue targets, as we think out the next couple of years here?

Regarding the $5 billion revenue targets, it's crucial to reiterate that these do not rely on any improvement in market conditions or changes in regulations. Out of this $5 billion opportunity we are pursuing over the next three years, $2 billion annually relates to lending. We highlighted various aspects of that market in our discussions in September, including our private wealth management business, GS Select, and different forms of institutional lending. As you would expect, we've been working on growth initiatives for a long time, and you've seen the results in areas like asset management and debt underwriting. We have significant experience and are dedicating time and energy to developing frameworks, tracking progress, measuring milestones, and allocating resources towards those milestones. We will provide regular updates as these opportunities progress over the next three years.

And I appreciate the added disclosure, I wasn’t sure everybody did on the CCAR here, and I would just throw out there I think improved disclosure on these initiatives over time, as they take hold, especially the lending and maybe some more breakout effect I think over time would be helpful. You gave the commentary around it but I think having some numbers around as well would be helpful.

Well, we definitely are taking that on and going back to what we described in September, there is a breakdown, various aspects of the revenue opportunity as well as balance sheet and capital against it. And so, we will absolutely be having a continuous dialogue with you on that as we progress.

Can you talk about the potential for reduced regulatory cost, if there is deregulation? And I’m not really asking about risk appetite or how you might change with that but really just overhead cost to comply with regulations today, and what it could be in the future?

So, Mike, we, like all of us in the industry, are noting the various treasury reports for instance, the recommendations. We’ve seen some progress against the recommendations of the first treasury report, for instance. To give just the couple of examples, the OCC has asked for a perspective on the Volcker rule. There has been some news from Basal committee on net stable funding ratio and there are few other examples as well. And so, we are seeing that. And certainly some of the U.S. regulators have been very specific in their discussions about simplifying some aspects of the rules and some others, the CFTC. And so, there is a sense that there is this movement in the topic. But, I would say that for us, absolutely these things are great, if and when they happen. They are not embedded in any of our plans. If and when they occur, they’d be a tailwind to our plans. And as you know, we take a broad and holistic approach to all of these things, not only by training our people but by building all of these regulatory processes into the way we do business. So for instance being able to do these simulations of our balance sheet and income statement and cash flows several months, 18 months into the future is an important part of how we make decisions and not really seeing it is something that we break out, specifically as a cost and as a cost that would be reduced but certainly I’m happy to say that our focus as just did beyond the implementing of the regulations, which is something we will always do as they arise to growth.

Well, as a follow-up on expenses, $3 billion or $5 billion growth initiatives, what are the upfront expenses, were there any in the third quarter and do you expect any special charges or how much the ramp-up?

So, on the $5 billion of revenue opportunities, we describe for you the blended marginal margin of those opportunities. And there is a bit of a drag upfront, really relating to hiring to people. So, as we mentioned in September, our lateral hires are year-to-date up – they doubled from the same period last year and we broke out the kinds of professionals we’re hiring. And you see that coverage and distribution is the major focus of that. As we progress on the initiatives, perhaps there will be some modest upward pressure on the comp ratio but we wouldn’t see that being material in the context of the firm. And we also don’t see any significant charges for this growth.

Could we talk about a couple of things? One is Marcus, I know in the deck last September, you indicated that you’re looking to drive that to $12 billion footings over the next couple of years. Could you just give us a little bit more color on the average kind of person that you’re looking for, and what kind of yields you’re expecting and how you think through the impact of a recession on that business?

So, on Marcus, we recently passed $1.7 billion in originations, and we’re on track to reach $2 billion, 10 weeks now, by the end of this year. Our focus is absolutely on prime borrowers. The FICO score realized is definitely above 700. These are small ticket items. And as we’ve said and this continues to be the case, this is organically growing business, we’re doing it slowly and deliberately. I’ll note that while we have and have had for a long time strong risk analytics, particularly credit risk analytics underlying the business, we’re not leading with underwriting in this business; we’re leading with a better product and service and digital experience for consumers, and that remains the focus. I would also add on the realized losses, they have been less than what was put into the plan. And we are well aware, as all of us are of where we are in the credit cycle. Even though Marcus is a new business for us, the people who are building and leading that business for us are industry veterans and consumer finance, and we’re plugging them in with our long track record of being thoughtful, prudent risk managers for both Marcus and credit risk. And we’ve also supplemented our teams with people who have consumer finance experience across the board from branding and marketing to the 360 degree customer view and of course to all of the control function. And we’re extending the risk culture we’ve always had into this business where we worry about everything and plan for all of the contingencies and don’t take it for granted, and especially remind ourselves every day we’re not leading with underwriting, we’re leading with a better product.

That would be useful if you could provide a bit more detail on that. I understand you are planning to share additional information regarding the breakdown of the FICO mix, yields, and loss content when we receive another card portfolio. I would appreciate that when it becomes available. My second question is about the dividend. I know you mentioned an $8.7 billion buyback for the full year. Will you update us on the dividend outlook?

Yes, Betsy, I’m happy to mention that as well. So, the Fed’s non-objection to our plan had in the capital plan the option to raise the dividend by $0.05 per share in the second quarter of next year.

Thank you for your question. Good morning. Could you elaborate on the $5 billion of additional equity related to your growth targets? I understand you mentioned $28 billion of loan balances, but I assume there is also some impact on your balance sheet from your trading activities. Can you provide some insight into that?

Sure. Regarding the initiatives, we mentioned our requirement for $5 billion in equity. I'm glad to explain further. As with all our plans for you and the market, we approach this by examining the activities where these businesses will operate. Approximately $2 billion of the $5 billion annual opportunity over three years is connected to lending. Most of this balance sheet is in our Marcus, institutional lending, private wealth management, and GS Select businesses, which collectively amount to $28 billion in balance sheet. To arrive at the equity, we analyzed the businesses involved and projected the risk-weighted asset density from those operations. On the FICC side, which represents $100 million of the annual opportunities we identified and are pursuing, I view this differently; FICC capital is dynamic. We actually see substantial potential for increasing the velocity of our FICC portfolio. Thus, it is primarily portfolio-driven and dynamic, and I do not observe a significant specific equity component related to that.

Thank you for your response. Following up on Mike's question about MiFID, I appreciate the insights. It appears that your recent lateral hires, particularly in the EMEA and FICC sales functions, are quite significant. Do you believe this is related to positioning for MiFID? Is the FICC sales effort expected to gain more importance, prompting you to make these investments? Or am I misinterpreting that information? Any clarification would be helpful. Thank you, Marty.

I wouldn’t see the hires which we’ve been talking about and which as you noted are weighted towards sales distribution. I wouldn’t see them so much as MiFID-related. I am sure that’s in there; of course it’s in there but it’s not the driver. Really there, it’s the coverage gaps that we’ve been talking about. And we saw the opportunity and noted our ability to bring in the talent. So, of the hires, of the offers we’ve been making, the acceptance rate’s over 80%. And we’ve looked and we’ve talked about this in September in some detail, specifically in FICC, looking at all of the clients and noting the ones for whom they say we are a top 3 FICC provider and the ratio of the clients where were a top 3 FICC provider is in the neighborhood of the 30% for banks and asset managers and insurance companies, and this is considerably higher for some other segments. And so just closing those gaps is something that of course requires all the resources of the firm. But it’s a people business and so especially the people, and so that’s the main driver of the hiring.

I want to address Betsy’s question about expected losses over the cycle. One of the concerns I heard when discussing your growth opportunities with investors is that the implied margins on the loan asset balances do not seem to fully account for the potential losses throughout the cycle. Could you provide more insight into this? Perhaps you could discuss Marcus and a couple of the other lending categories and share your loan loss expectations.

Yes. Regarding loan loss expectations, I'll begin with the Marcus example, which focuses on prime borrowers and is a key part of our strategy. We utilize our analytics in this area. The Marcus business is new for us, while our existing loan level analytics relate to various types of securitizations. We maintain a prudent and comprehensive risk management approach and careful reserving practices. The allowance for loan losses against that portfolio receives thorough scrutiny from all of us and will continue to do so as part of our process. Additionally, I mentioned that the realized losses have been less than anticipated in our plan so far, reflecting our current business growth cycle. Now, looking at a different example, our PWM business caters to high net worth individuals, which involves a very different set of dynamics. These borrowers are of the highest quality, and the loans are significantly over-collateralized.

Fair enough, okay. And maybe just changing the subject and maybe I’ll pursue some of these questions on credit with you offline. But on FICC, you noted that commodities were still sort of bottom decile. I guess that means in terms of your historical quarter revenue experience with commodities, but it sounded like it was better linked quarter. I was hoping that you could give us a little bit of color, on the one hand what got better but on the other hand, why you still believe that you’re doing sort of bottom decile quarters here.

To begin, the commodities business showed some improvement from the second quarter, which was our worst quarter ever in 73 quarters. Now, with the third quarter, we've reached 74 quarters, but unfortunately, the performance in the third quarter remains within the bottom decile of those 74 quarters, and it's on track for the worst full-year performance since our IPO. I want to take a moment to go over the sequential and year-on-year drivers, as well as the nine-month comparison, which provides more context than just looking at quarter-to-quarter comparisons. Sequentially, our FICC business did improve, which is positive, but we acknowledge that it is not something we aspire to; we know we can and need to perform better. The sequential comparison in FICC ICS shows that rates drove most of that improvement. In the latter part of the third quarter, better U.S. economic data, central bank actions, increasing volumes, and breaking out of a 10-month trading range contributed to this. The rates business is the primary driver. Additionally, while we faced challenges in commodities inventory, those challenges were somewhat better in the third quarter compared to the second quarter. Our bar number also declined by $4 million sequentially, primarily due to decreased commodity positions and continuing declines across products. For the year-on-year comparison, four out of five FICC businesses saw lower performance, with only mortgages showing an increase. Key factors for the year-on-year decline include reduced client activity in FICC, especially in macro businesses, and the inventory difficulties in commodities. If we look at the first nine months of this year in FICC compared to the same period last year, we see a different picture. The 23% decline over nine months has half of its cause in commodities inventory issues, with half of that decline occurring in the second quarter. This highlights the complete picture of our situation.

Okay. That’s really helpful. Thank you. And since I was the guy who gave you such a hard time about the buyback disclosure last quarter, I should certainly thank you for doing it now.

Maybe if you could just talk about your deposit gathering efforts, how that’s progressing so far?

Sure. So, deposit gathering is an important part of our financing strategy. It’s continuing to diversify our sources of funding. Our Treasurer, Robin Vince gave quite allusive discussion of this in our Fixed Income Investor Call. We’re happy to say more about it. In the deposit gathering, note that of course as you know, we acquired an online savings account platform that had previously been a part of GE, and we’re gratified to see the growth in those deposits on really essentially no marketing of it. And so, in those deposits, even though there have been Fed reserve raising fund rates over the last several months, the experience in the online savings account has been that the rates gone from 105 basis points to very recently 130, which is near the top end. And so that tells you something, it’s an attracting funding source for us relative to the wholesale market. It also tells you something about realized beta that we’ve experienced so far.

But then, what were the flows like in the quarter?

I’m not going to get into the specifics on the flows. But I think, Heather, that’s a good one to get back on.

I’ll address that shortly, but I want to highlight the growth in total deposits, which is about $7 billion quarter over quarter, beyond just the online savings account. Regarding your question on SLR, there's been considerable discussion about potential changes to the SLR ratio. As we mentioned in the second quarter, if the various treasury recommendations regarding the treatment of central bank cash, treasuries, and initial margin at CCPs are implemented, it could lead to an estimated 70 basis-point improvement in our SLR from the second quarter, and I anticipate it would be similar in the third quarter. If these changes occur, we may need to reassess our approach to our prime brokerage and matchbook businesses. It’s been noted across the industry that these changes could effectively create additional SIFI-like capacity in terms of SLR for our various SLR-intensive businesses. While these changes have the potential to provide tailwinds, we have not factored them into our $5 billion annual revenue plan.

I appreciate that I was just thinking about the constraint in the CCAR from Tier 1 leverage, which would limit any benefits from the SLR. And I’m just trying to get a sense of do you think that would also change to help free up that capacity or not?

I would love to know the answer to that question. CCAR is a continuously evolving process. One way to look at it is that the ideal outcome would be for all the constraints in CCAR, such as Tier 1 and SLR, to be exactly binding by the same amount; that would represent perfect optimization. However, it’s evolving, and we don’t know exactly how it’s going to play out. There was a white paper and a governor's announcement before their departure that outlined various proposals, which we have reviewed closely, and I’m sure you have as well. We found the proposal to be thoughtful, but many important aspects still need to be clarified, and they will have to be in an upcoming notice of proposed rule-making. That will give us insights into your question.

I wanted to start with two questions about investment management. First, regarding the quarterly trends, could you explain what caused the decline in management fees linked quarter, especially considering the strong equity markets and the continued healthy increase in assets under management? Then, looking at the long-term perspective related to the $1 billion revenue target for business investment management, we’ve noticed significant secular headwinds and fee pressures. I've received numerous inquiries from clients about what gives you the confidence to achieve that $1 billion incremental revenue target, and I would appreciate any additional insights on those opportunities.

Sure. So, let me start with the first part of your question. Yes, as you noted, we have grown assets under supervision by $50 billion. About half of that was market appreciation. And then looking into the other half; that was again almost evenly split between gathering long-term assets, mostly fixed income and then, also an increase in assets in our liquidity products. And so, on the effective fee, the effective fee actually has been stable sequentially. And so, really the answer to your question is, it’s in the other part of management and other fees; there’s some puts and takes that were slight offsets when you do the quarter on quarter comparison. Going to the second part of your question on the investment management opportunities that we outlined, which was as we said a $1 billion annual revenue opportunity. Look at that in three parts and the three parts are roughly balanced. But the key to all three parts is what has been the key to that business and the successful asset gathering over the long haul that you’ve seen, which is that it’s broad and it’s deep across asset classes as well as different products and distribution channels, retail and institutional. And so, to go back to the breakout of the $1 billion in annual revenue growth, splitting it into the three parts, I’ll start with GSAM. So, there, it’s growing our alternatives platform, advisory and insurance, EPS and liquidity products. On PWM we’re hiring advisors, investing in the platform including digital experiences, adding products and services there. And the third part is Ayco, it’s our corporate executives counseling business. And there, we absolutely see opportunities in incoming from our clients on expanding those financial planning services, in two ways. First to more of the people inside the companies that we’re already working with; and then in addition to more companies. So really stepping back, it’s the franchise which is unique in the case of investment management. It’s broad product portfolios, there’s room to grow across the board, and it’s diversified and hence the opportunity set.

Thanks Marty, that was really helpful color. And then, just switching over to just one question on the capital discussion, I think as relates to Jim’s earlier question on thinking about various binding constraints, just given your historically strong discipline on managing to what’s your most binding capital ratio, I was a little bit surprised to see the deterioration in the SLR linked quarter. I’m just wondering, if you can give us some insight in how you’re thinking about the need to focus more on some of the growth opportunities which maybe you had, not emphasized as much given your continued strong capital discipline. And separately, we did see your GSIB surcharge also increase last quarter, or your systemic risk score, and I’m wondering how you’re thinking about managing to that as well.

Sure. So, I’ll start with the SLR, fully-phased. So, as you know, it declined by 20 basis points sequentially, and that is growth in the balance sheet. And you also saw that in the increase in the balance sheet from 907 at the end of the second quarter to 930. And there, it’s supporting our clients in deploying the balance sheet when we see the opportunities to do so. It was, as you know, in CCAR 2017, the binding constraints, and that’s something that we are deeply aware of. But as we know, much depends on the next evolution of CCAR. And also potentially on recalibration of SLR, there’s been different views from different regulators on recalibrating SLR or not recalibrating SLR, we don’t know exactly how all of that’s going to evolve. Now, can you remind me of the second part of your question?

Just around the GSIB score, I think in the past you’d been at 2.5% and it increased to 3% last quarter and how you are thinking about managing that score as you think about some of the growth initiatives?

Sure, right. So, also in the third quarter, as the GSIB buffer, we’re again in that 3% range and it’s something that we look at every day and work with divisional leaders as we see opportunities to have a strong balance sheet and capital and deploy it and invest in our business and long-term growth. We can do both. We can both grow the business and return capital. But at the margins, I would say growth is more valuable. And as for where as you know, the GSIB print at the end of this quarter is an important one, and I can’t predict where it’s going to end up in this quarter.

So, maybe first one here, the securities basis loan arrangement with Fidelity that was announced last quarter was pretty interesting. And I am curious, is that starting to ramp? And it also sounded like there could be more arrangements in the future with additional wealth management firms that don’t have those capabilities. So, really just trying to get sense of the broader securities-based loan strategy, the firm with outside firms and then how big that is within kind of the private wealth piece of the balance sheet opportunity?

We mentioned the growth initiatives that present an annual revenue opportunity of $500 million from PWM and GS Select combined. We are excited about GS Select and are focused on leading with a fully digital offering. This business is still in its early stages, and we are pleased with the recent announcement regarding Fidelity. They recognized the innovation in our platform and the potential for providing excellent service. As you may know, we offer loans of up to $25 million, which are significantly over collateralized, presenting an interesting opportunity. While it's too early to share specific progress, this is part of the initiatives we've outlined, aggregating PWM and GS Select for a total $500 million revenue opportunity and $11 billion of balance sheet over three years, with an implied yield evident from this.

Okay, that’s helpful. And just follow-up here. It sounded like some of the hiring that firm is doing ahead of revenue, could influence the comp ratio a bit but it is sounded like that’s going to be modest. Can you maybe just more broadly speak to what you are seeing in the competitive environment in comp dynamics right now? It seems like there are some of the European firms are more aggressively recruiting again in some of the areas that Goldman is also looking to expand. So, maybe that’s temporary but I’m just curious kind of how that feeds through as you think about kind of the outlook for the comp ratio?

Sure. So, I would say that the most important thing to think about for us and we believe for our shareholders is the operating leverage and comp ratio is obviously a part of that. You will notice the first half 2:1 ratio between the revenue growth and the expense growth and you’ll also see that ratio in our nine-month results versus nine months of the last year. As revenues grow, I would not expect that ratio to be linear, and we would see even more operating leverage. In the competitive dynamics, as we mentioned and this is continuing, lateral hiring is up significantly, it’s doubled from last year. And we are continuously happy to see, but no way take it for granted that we are very successful and attracting the talent.

Question, lot has been talked about amongst you folks as well as your peers about the lack of volatility in the marketplace, particularly in FICC. With the federal reserve moving into a full unwind next year, have you guys mapped out what the volatility could do because of this changing position by the federal reserve and what it might do for the revenues for your FICC business?

We focus a lot on volatility, but we also place considerable emphasis on client activity, which is crucial for us. Regarding the Federal Reserve's announcement, their communication has been very thoughtful and transparent, and we expect this to continue as part of their operations. While we cannot predict the future, we do prepare numerous contingency plans. The Fed has provided clear guidance, committing to $10 billion in monthly reductions that will increase by $10 billion every three months, eventually reaching $50 billion and allowing assets to roll off their balance sheet. They’ve specified a stable mix of treasuries and agencies, which may have some variations based on maturities. This level of detail and communication is quite significant. It's also important to note the positive economic backdrop; the U.S. economy is performing well with improving GDP growth, and many would argue that the U.S. is at or beyond full employment. However, unwinding quantitative easing is unprecedented, which could lead to unexpected volatility. Currently, we do not observe unwind risk priced into the markets. There could be scenarios where diminished client confidence makes market making challenging, but there is also the possibility of positive outcomes with increased conviction and activity, which could serve as catalysts for the FICC business. Rising inflation, shifts in central bank policies, and clarity on various U.S. policies, such as tax and regulation, could all contribute to better catalysts. The Fed has indicated that the economic environment is strong, which is generally positive for business.

Great. For the second question, can you provide insights on the total dollar amount of the capital return discussed today? Regarding the dividend payout ratio, do you have any guidance on where you see it settling in a more normalized scenario over the next 12 to 24 months, where you would feel comfortable with that ratio?

So, all we know for now is that a $0.05 increase is included in our capital plan, which the Fed has approved. The dividend payout ratio has remained around 15% for some time, and I can't predict what it might be in the future. For now, the $0.05 is all we have, and while we continue to focus on buybacks, as mentioned previously, it is crucial for us to prioritize executing on opportunities with a 30% plus marginal return on equity over repurchasing our shares.

I’m going ask two questions. One was, when you think of the investing and lending especially on the equity side where you said you all given the market conditions or you said kind of harvesting aggressively. Is part of that related too, because if you look at the increase, there’re about $1.8 billion increase in what you had in the equity security gains. There’s about a $1.3 billion decline in fixed income so you kind of have offsetting effect with those two things, which is letting your overall revenue still grow this year. So, just to know if you all were doing that just because of market conditions, are you trying to balance the mix and so should we expect this when we have some volatility in other sides of the business?

Well, you definitely noticed those offsetting effects and we did too obviously. I would say in that area of our business, we’re fiduciaries. And so, we see it as in the interest of our clients to harvest these investments and the asset price levels in the market are supportive. So, it’s a good time. That portfolio as you know while we report on the results quarterly, we think of it over much, much longer time horizon than quarterly.

Then my second question is, if you look at the seasonal progression of that comp ratio, given that you do have this investment lending gains your revenues are still kind of at the same level you had last year. So, should we still see the drop off in comp ratio kind of at the end of the year as you true up your bonuses and get all that squared away?

Revenues are increasing both sequentially and year-on-year, with an important year-to-date growth of 8%, which is quite significant. The comp ratio is crucial to our business, and we dedicate considerable time and effort to assess and set it appropriately. The ratio stands at 40% for the nine months year-to-date, which is 100 basis points lower than last year, and this is our best estimate at this moment.

Yes, usually seasonally we drop down around 30% in the fourth quarter, so just to know if that was still reasonable assumption or is there anything different about this year that would cause that to vary from several prior years where we’ve seen that trend?

Of course that trend is there, I would just say go back to the commitment to operating leverage, something we think about everyday of the many things we think about every day. But really, I can’t say more about where we are going to end up this year other than it’s the best estimate, taking in all the information that we have right now.

Perfect. So, year-over-year, operating leverage would be something to make sure we kind of still assume, so that would make sense. Thanks, appreciate it.

Hi, Marty. I have a question regarding capital return following the disclosure you provided. The share repurchase authorization has increased by 30% year-over-year. When we examine your DFAST CCAR results, your capital level saw a slight increase year-on-year, and the losses reported in DFAST also increased modestly. What enabled you to return more capital in this year’s CCAR? Was there a change in how the Fed assessed RWA inflation or something else? Historically, you've indicated that there was a check mark for your minimum ratio; is that still accurate?

Yes. So, the main difference is just the different starting points in the capital ratios.

And there was no other real changes from the Fed side and…

Not much was surprising, right? The Fed indicated certain things would occur over a two-year period, and that’s indeed what happened. There really weren’t any major surprises; it’s just the different starting points.

Thank you for calling in, and look forward to meeting with many of you over the balance of the quarter. If you have any additional questions, please contact Heather, and for those of you who were not able to connect with, enjoy the upcoming holiday season, and thank you.