Goldman Sachs Group Inc (GS) — Q4 2018 Earnings Call Transcript

Good morning. This is Heather Miner, Head of Investor Relations at Goldman Sachs. Welcome to our fourth quarter earnings conference call. Today, we will use a new earnings presentation, which can be found on the Investor Relations page of our website at www.gs.com. No information on forward-looking statements and non-GAAP measures appear on the earnings release and presentation. This call cannot be reproduced or rebroadcast without our consent. Today on the call, I am joined by our Chairman and Chief Executive Officer, David Solomon; and our Chief Financial Officer, Stephen Scherr. As noted on the agenda on Page 1 of the presentation, David will provide introductory remarks about our strategic priorities, perspectives on the macro environment and an update on 1MDB. Then Stephen will walk through our financial performance. They'll be happy to take your questions after that. I'll now pass the call over to David. David?

Thanks, Heather, and thanks to everyone for joining us this morning. I'm very happy to be here with you, and I look forward to joining this call on a more regular basis. I'm going to start off this morning by reiterating that I'm fully committed to an active and ongoing dialogue with our shareholders and our broader stakeholders. I'm excited about our new call format and presentation, which is an initial step as we continue to enhance engagement and disclosure. As shown on Page 2, it is important to underscore that our overarching priority is to execute our core mission: Serving our diverse client franchise, which includes corporations and governments, institutions and individuals; executing on our client-centric model will drive long-term sustainable value creation for our shareholders. We remain committed to delivering a full range of services to our clients, including advice, market liquidity, investment management and financing. As many of you know, John, Stephen and I are conducting a comprehensive front-to-back review across each of our businesses, including 3-year forward plans to identify opportunities to strengthen or expand our client footprint and to operate more efficiently. We are also pursuing new ways to deepen our existing relationships and expand our client footprint by developing new products and business platforms. Specifically as it relates to FICC, we have a leading institutional market-making franchise. Clients tell me we have differentiated people and capabilities, particularly in the intermediation of large complex risks. But let me be direct. We're fully cognizant of the reduction in the industry wallet over the past decade. And as Stephen mentioned at the Bank of America Merrill Conference, we will not be complacent waiting for the market to return. We are running the business with a clear perspective of its revenue potential. Over recent years, we've made significant progress on improving capital utilization and reallocating capital away from FICC commensurate with its potential in order to grow strategically important and higher returning businesses. We will continue to optimize capital in the business. We also see an opportunity to further reduce expenses. We're investing in automation as we expect many businesses within FICC to evolve similarly to equities. All these efforts will position our franchise to remain a provider of choice while improving returns for our shareholders. Secondly, we have a world-class alternatives investing franchise, which has generated strong returns over 3 decades. We have one of the most unique sourcing platforms given our global footprint of broad network. Our franchise presents us with extraordinary opportunities to partner with clients to invest their capital alongside our own. Based on our track record, there is an opportunity to raise additional third-party funds across equity, credit and real estate, thereby augmenting fee income. Simultaneously, we can continue to monetize on-balance sheet investments and optimize capital consumption. Next, on cash management. As we evaluated opportunities to improve services to our clients and expand our franchise, cash management presents an illogical area for us given the breadth of our corporate relationships and the size of that wallet. In addition, the pace of technological change in the payment space gives us confidence that it is the appropriate time for us to address this opportunity. We are now 6 months into a 2-year build, and our firm will be the first to use a cash management platform later in 2019. In addition to validating the product, doing our own operational payment flows will reduce costs and operational risk. Assuming all progresses as planned, we expect to launch the product to clients in 2020. Lastly, as we bring markets and the business of Investment Management closer, we will continue to evolve markets from a single product to a multiproduct platform. We now serve 3 million customers through our lending and savings products in Clarity Money. We plan to further enhance the platform to include a multitiered mass affluent digital wealth offering, which is currently in development. We are confident this collaboration will be a catalyst for the successful execution of this strategy over time. Across these and other investments for growth, combined with a significant focus on operating efficiency, we are beginning to deliver on our commitment to enhance the durability of our revenues and our earnings. We continue to review our strategic priorities with our board and plan to communicate a more comprehensive update to the market in the coming months. Additionally, later this year, we plan to share specific metrics and financial targets we will use to hold ourselves accountable. Ultimately, we will operate the firm to drive leading shareholder returns over the cycle. Before we discuss our results, I'll make a few observations on the operating environment. Recently, there has been quite a disconnect between the weak market sentiment and the optimism we continue to see in corporate boardrooms. The fourth quarter, particularly December, was characterized by a decline in investor sentiment with respect to the global growth outlook. A concern that central banks would continue to tighten into a slowing growth environment caused weakness in equity and credit markets and resulted in an increase in volatility of many macro assets. While this has created challenges for many of our institutional investing clients, it is also driving potential future opportunities for active managers to add value. Our economy still sees global growth of 3.5% next year, including 2.4% in the U.S., 1.6% in the Euro zone, over 6% in China and an acceleration to 2% in Latin America. Notwithstanding the mixed market and macro backdrop, we remain actively engaged with our clients across our franchise. Corporations continue to seek advice for strategic transactions, and there is a need for both equity and debt financing. Financial markets are open, and investors continue to need execution services, intellectual capital, hedging and liquidity solutions. Clients continue to need comprehensive asset wealth management advice, and individuals need simple and transparent financial services that add value. Next, I'd like to take a moment to address the ongoing investigations related to matters with the Malaysian sovereign development fund, 1MDB. I want to proactively address some of your questions that I know are on the minds of our stakeholders. First, we are cooperating with the Department of Justice and other regulators and are focused on a timely but deliberative process. We believe that we have established important facts in our own review of this matter over the last 3 years, and we, of course, would like to provide more information to you. But for now, this is still an open investigation, and we will naturally respect that process. It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government. Tim Leissner, a partner at our firm, by his own admission, was one of those people. For Leissner's role in that fraud, we apologize to the Malaysian people. As you would expect, we have looked back and continue to look back to see if there is anything that we as a firm could have done better. At the same time, I want you to know that before each transaction, considerable due diligence was conducted. When control functions asked if each transaction involved intermediaries, they were told no. As detailed in the government's charging documents, Leissner purposely concealed from the firm his scheme with Malaysian government officials, IPIC officials, 1MDB and Jho Low. Unfortunately, all assurances received by Goldman Sachs have proven to be false. During this period, 1MDB's outside auditors, with access to the books and records, issued clean audit opinions. We declined Jho Low's request to open a private wealth account in 2010 because we could not verify the source of his wealth. Out of prudence, we also declined to advise or represent Low on other opportunities he presented to us between 2011 and 2014. That said, during the same period of time, Jho Low's involvement in a number of transactions unrelated to 1MDB was known to many financial institutions, including us. Clearly, a lot more is known about Jho Low today than at that time. This has been a difficult time, but I'm proud of how our firm has remained focused on our clients. Our client franchise remains extremely strong. There are always important lessons to be learned from difficult situations, and it is a priority for me that we are self-critical and reflective to ensure that our culture of integrity, collaboration and escalation only improves from this experience. Please appreciate that I've tried to be as forthcoming as possible on my comments on 1MDB. I know that many of you will have additional questions, but as you can understand, I can't say much more. With that, let's switch gears and review our performance as highlighted on Page 4. For 2018 full year, the firm reported solid results. We generated firm-wide net revenues of $36.6 billion, our highest in 8 years. We delivered a return on equity of 13.3% and a return on tangible equity of 14.1%. Importantly, we are making significant investments to further expand our client franchise, grow revenues and enhance the long-term earnings profile of the firm, the cost of which is being funded by the embedded operating leverage in our businesses. In summary, I'm extremely pleased with our performance. We delivered a solid year, and our 2018 results leave us on strong footing to pursue our strategic objectives in 2019 and beyond. The team I have assembled to execute on our priorities, including John and Stephen, have an increased sense of urgency and discipline to help move our business forward.

Thanks, David. Let me begin with an overview of our financial results on Page 5 of the presentation. The firm reported fourth quarter net revenues of $8.1 billion, resulting in $36.6 billion for the full year. We had net earnings of $2.5 billion in the quarter and $10.5 billion for the full year and earnings per share of $6.04 in the quarter, resulting in $25.27 for the full year. Before I begin the detailed discussion of our results, I want to cover a few adjustments to our financials. First, to increase transparency and make our results more consistent with our competitive set, we now present our net revenues before credit provision. We have added a credit provision line to the income statement, and prior periods have been reclassified to conform to the current presentation. This has no impact on our bottom line results, but will provide a basis for clear comparison. Second, expenses related to consultants and temporary staff previously reported in compensation and benefits expenses are now reported in professional fees. This also has had no impact on the bottom line, but does result in $280 million being transferred between the line items for the full year. This change also reduced headcount by approximately 3,400. In addition to the changes in the presentation of our financial statements, I would call out the following 2 items. First, our fourth quarter results included net provisions for litigation and regulatory matters of $516 million. Our total provisions for litigation and regulatory matters in 2018 amounted to $844 million. This obviously elevated our operating expense line for the year. Second, our tax rate for 2018 was 16%. This rate includes a $487 million discrete benefit from a true-up of our prior estimate of the impact from 2017's tax legislation. The benefit reflects the impact of updated information, including subsequent guidance issued by the Treasury. The 16% rate also includes the $269 million benefit related to equity-based compensation for the year. These 2 items, the tax true-up and equity-based compensation, account for approximately 6 percentage points of the decrease in our tax rate from our projected normalized rate of approximately 22% to 23%. It is important to highlight that pretax earnings increased $1.3 billion or 12% in 2018. This equates to an increase of approximately 130 basis points in return on common equity after normalizing for taxes year-over-year. This improvement in our operating performance was despite materially higher litigation expenses. Now let me turn to the results overall. As David mentioned, the environment in 2018 turned out to be mixed. The first 3 quarters demonstrated continued strength in global equity and credit markets despite geopolitical uncertainty. The fourth quarter witnessed higher levels of market volatility, increased client engagement and negative performance across virtually all asset classes. Our overall performance in 2018 demonstrates the value of our diversified business model and the strength of our client franchise. This is reflected in the balanced revenue contribution from across our businesses. Furthermore, 61% of 2018 net revenues were generated by fee-based or more recurring sources versus 48% just 5 years ago. To sum up, we are actively managing our costs while investing in opportunities for growth, which is reflected in our commitment to operational efficiency. Turning to Page 6 and our individual segments. Investment Banking had an outstanding performance in 2018, producing near-record results. In the fourth quarter, the business produced net revenues of $2 billion, up 3% versus the third quarter as a significant pickup in M&A completions helped offset a decline in underwriting revenues as the difficult market backdrop slowed issuance volumes globally. Advisory revenues were $1.2 billion, up 31% relative to the third quarter, reflecting growth in completed M&A transactions. We ranked #1 in announced and completed global M&A for both the fourth quarter and the full year, advising on nearly 400 transactions that closed during the year, representing approximately $1.2 trillion of deal volume. We also participated in announced transactions totaling nearly $1.3 trillion, which included over $450 billion from transactions below $5 billion in deal value, reflecting progress in broadening our client coverage. Moving to Underwriting. Market volatility, declining equity prices and wider credit spreads weighed on issuer sentiment as net revenues were down 21% sequentially in the fourth quarter to $843 million. For the full year, Investment Banking net revenues were $7.9 billion, up 7% from 2017 on increases in both Financial Advisory and Underwriting. Our Investment Banking franchise overall remains very well positioned and continues to grow. The strong performance reflects our continued focus on building long-term client relationships and our ongoing investment in talent and capabilities. We are ending 2018 with an Investment Banking backlog meaningfully higher than where we finished 2017, notwithstanding a decline versus last quarter. Turning to Institutional Client Services on Page 7. Net revenues were $2.4 billion in the fourth quarter, up 2% compared to the fourth quarter of last year. That's despite higher volatility and a difficult market backdrop, particularly in FICC. For the full year, ICS generated $13.5 billion of net revenues, up 13% compared to 2017, driven by healthier volumes, better wallet share and improved execution in certain of our businesses, notably in commodities. FICC client execution net revenues were $822 million in the fourth quarter, down 18% versus 2017 amid challenging market conditions, particularly in credit and, to a lesser extent, in rates. While the fourth quarter was challenging due to the market environment, the overall business improved in 2018. Moving to Page 8. In Equities, as it relates to the fourth quarter, the story is a better one. Net revenues were up $1.6 billion, up 17% year-over-year. Equities client execution net revenues were up significantly versus a challenged fourth quarter of 2017, with better performance in cash. Commissions and fees were 9% higher, attributable to increased client activity, following the significant uptick in volatility, particularly in low touch where we continue to gain market share. For 2018, Equities produced net revenues of $7.6 billion, up 15% year-over-year. During the year, we continued to benefit from industry consolidation and ongoing efforts to increase client connectivity. Our share of global equity market volumes increased by over 100 basis points versus 2017 and included growth across all regions, reflecting a multiyear positive trend. Moving on to equity Investing & Lending on Page 9. Equity securities generated net revenues of $1 billion in the quarter, reflecting continued strong results in private equity investments. For the full year, equity Investing & Lending generated net revenues of $4.5 billion. Our global private and public equity portfolio consists of over 1,000 different investments and remains diversified across geography and investment vintage. We continue to reinvest to drive future long-term performance. Moving on to debt Investing & Lending on Page 10. In the fourth quarter, net revenues from debt securities and loans were $912 million, largely driven by net interest income of roughly $800 million. For the full year, debt Investing & Lending generated $3.8 billion of net revenues, including net interest income of approximately $2.7 billion. We are beginning 2019 with an annualized net interest income run rate of $3.2 billion. Our debt Investing & Lending balance sheet ended the quarter at $113 billion, which includes $94 billion in loans and $11 billion in debt securities. Our lending franchise continues to remain conservative with approximately 85% of our loan portfolio secured as of year-end. This quarter, we took provision for loan losses of $222 million, reflecting loan growth. Turning to Investment Management on Page 11. The business produced net revenues of $1.7 billion in the fourth quarter, which were flat sequentially. Management and other fees were $1.4 billion; incentive fees were $153 million; and transaction revenues were $186 million. For the full year 2018, Investment Management net revenues were a record $7 billion, up 13% year-over-year, largely driven by growth in incentive fees and management and other fees. Assets under supervision finished 2018 at $1.54 trillion. For the full year, assets under supervision increased $48 billion resulting from $37 billion of long-term net inflows primarily in fixed income and equity assets and $52 billion of net inflows into liquidity products. Those were offset by net market depreciation of $41 billion primarily in equity. Over the trailing 5 years, we attracted total cumulative organic long-term net inflows of approximately $215 billion. The business remains well positioned for growth as we continue to invest in people and make bolt-on acquisitions to enhance our product offering to better serve our clients. Now let me turn to Page 12 for expenses. As we continued to invest in our businesses, we will not lose focus on our expense discipline. It remains a priority for David, John and me. Before going through the details, I'll reiterate that we are undertaking a full review of our firm-wide expense base. Relatedly, and as part of the front-to-back reviews, we are holding businesses to a higher level of accountability with a focus on operating efficiency. For 2018, operating expenses were $23.5 billion, up 12%. Nonetheless, we maintained a stable efficiency ratio of approximately 64% as revenue growth funded investments in our business. Moving on to taxes. As mentioned earlier, our tax rate for 2018 was 16%. Based on our current interpretations of the rules and legislative guidance to date, we expect our 2019 tax rate to be between 22% and 23%, excluding the impact of equity-based compensation. Turning to Page 13 on Capital. Our Common Equity Tier 1 ratio was 13.3% using the standardized approach and 13.1% under the advanced approach, up 20 basis points and 70 basis points, respectively, versus the third quarter. The improvement in the advanced ratio reflected 80 basis points related to lower credit risk-weighted assets due to inclusion of the firm's default experience into the determination of probability of default calculation. Our supplementing leverage ratio finished at 6.2%. For the full year, we repurchased 13.9 million shares of common stock worth $3.3 billion, contributing to a reduction in our basic share count of 8 million shares for the year, reaching a record new low. In addition, we paid out approximately $1.2 billion of common dividends over the course of the year. In total, we returned $4.5 billion of capital to shareholders in 2018. Before taking questions, a few closing thoughts. We entered 2019 well positioned despite the recent market volatility. We remain committed to serving and growing our global client franchise, building on the progress made in 2018 and further expanding our addressable market in 2019 and beyond. To achieve this, we continue to invest in our franchise to broaden and improve our client capabilities through technology, talent and by engaging in new disruptive activities. Lastly, the management team is motivated by the initial learnings from our front-to-back reviews. Our early work indicates the need for certain change, but also reinforces the strength and breadth of our franchise. We will share more with you in the coming months. The continued push to evolve our businesses will enable us to grow and deliver attractive long-term returns for our shareholders. With that, thanks again for dialing in, and we'll now open up the line for questions.

I would like to discuss I&L. It's a combination of equity, and I understand your remarks about the public component being relatively small and that realizations were predominantly from real estate. However, I am interested in how markets function in the private segment, especially given the significant decline in public markets. Could you remind us how much you rely on DCF cash flow, EBITDA growth, compared to public comparables?

Sure. Thanks, Glenn. I appreciate the question. So in the I&L space, and I'll focus on the equity side as that's in your question, the private portfolio obviously is now a much larger component of the whole relative to public securities. And when we look at valuation in that private portfolio, about 50% of that revenue comes from events relating to the underlying companies and 50% relates to the operational progress in that particular business. And I'll just give you a couple of examples just to give you a sense of it. In the private portfolio, we saw sales across a number of different names: Hearthside Foods, Ipreo, PSAV, Paycor, Centaur Gaming. All of those were either sales or partial sales. And together, those contributed to more than $500 million of revenue in the overall results of the firm. Those are sales or partial sales, but there are other situations in which there are incremental rounds of equity that comes into a particular name, where there's other financing that goes on around a name. Two names that I'll point out, which were significant contributors to the P&L in the I&L side on equity was Woowa, which is a Korean investment; and a name you'll no doubt know, which was Uber, as there was a transaction in the tender into SoftBank into which we and others participated. That contributed to an uplift in the P&L relating to that name. Much of what happens in the context of the I&L portfolio is not related to modeling per se but rather is generated off of an event, an observable event that goes on. The other half relates to general performance of the business. And on that, we deploy different metrics in terms of how we arrive at valuation. There’s a long history in the investing side, particularly in equity, in both sourcing interesting and unique opportunities for businesses that demonstrate stability and growth trajectory.

That's very helpful, and it leads into my follow-up. I appreciate the idea of opening up I&L. I'm interested in the vintage disclosure; it's difficult to assess. Have you made any significant raises in the prime funds over the last couple of years? More importantly, where do you stand in the process? Do you need to hire more staff? Do you need to expand distribution? Or is it just a matter of organizing your documents and launching a new fund?

I'll begin, Glenn, by mentioning that we've been involved in these businesses for quite some time. For instance, in our traditional merchant banking private equity sector, we have raised a fund over the past 18 months. This includes raising an $8 billion to $9 billion fund named Goldman Sachs Capital Partners VII, which primarily consists of client money. We currently have a plan for several fundraising efforts over the next couple of years. This is an established plan that we have been executing. We see a significant opportunity to enhance our resources and expand our approach to raising more capital, leveraging the uniqueness of our platforms and sourcing capabilities. We anticipate meaningful growth without being overly ambitious with our targets. We are in the process of clearly outlining this strategy. While some hiring and additional resources will be necessary, the foundational investing platforms are already in place, and there is ample opportunity to take advantage of that.

Stephen, maybe one more, just on the I&L business. It's tough to predict. But when I think about some of the sales that you mentioned and how that drove the benefit in the quarter, can you give us any kind of color or indication of maybe what the value is in the portfolio versus the cost base? Just to get some sense on maybe what the potential, like realizations as you have these sales over the next year or 2 could potentially be?

Sure. Thanks for the question. I think it's difficult for me to give you a sense of the delta regarding where we carry it. I would ask you to rely more on the progression and the stability and sustainability of this business just in terms of what it has produced for many quarters in the context of investing. The strength of that franchise is a major component piece, particularly in equity and in debt side of I&L. In this business, we are making debt investments or expanding credit in and around the adjacencies of the firm. We’re doing that high up in the capital structure, and we've developed a portfolio that is about 85% secured. We think that's part of a more durable, more visible, more recurring set of revenue part of the overall I&L picture itself.

Okay. And then just as a follow-up. Just on the expense side. So obviously 2018, I think you got some moving pieces with some of the legal. But just when you think about some of the investments that you guys have been making in some of the new growth initiatives on the technology side, how should we be thinking about the run rate going into '19 and '20 in an environment where obviously the market has been a bit more volatile?

Sure. So let me make one sort of opening comment on expenses generally and these investments. We are very cognizant of where we are in the market, volatility in the market and the like. And we will be mindful of the pace of our investment spending in the context of the market. We know where our priorities lie. If you look at '18, we had an increase in overall expenses of about $2.5 billion. About $700 million of that related to compensation, $1.8 billion related to non-compensation expense. All of the investment spending in the different projects, whether that's in Marcus or corporate cash management or the building of incremental platforms inside the securities and trading business, is in that $892 million. As I said, 2019 will be a continuation of the investment. My view is that the rate of growth in that expense, while it will grow, the rate of growth will be less than the rate of growth that we saw in '18, and we’re going to continue to look to utilize existing operating leverage in the business as a source of that investment spend.

David, maybe just stepping back a little. Curious what you think will drive superior long-term shareholder returns. I think over the last two years, the firm has executed pretty well. You delivered better than peer revenue growth, better than peer core ROEs. Despite that and put into their side, the stock has underperformed even before the 1MDB issues. So what changes going forward? Is there some reason you think the market will finally start to give the stock credit for revenue growth at ROE? Or are there just other metrics you should be focused on to drive shareholder returns?

Sure, and I appreciate the question. Obviously, we're cognizant of the way the market is looking at our business mix, and we're also cognizant of the stock performance. It's very hard for me to predict, and I won't try to predict when the market will recognize our returns and our progress, but it's our job to stay focused on delivering those returns for shareholders. And over time, if we do, I'm confident that we'll see the results balanced. We've been very focused on diversifying the platform and moving forward. If 3 to 5 years ago, we said we would have a year where our FICC ICS revenues were less than $6 billion, we were making significant investments in building out a digital consumer platform and we happened to have litigation expenses, we would have been told that's not possible. The reason that we have delivered $36.6 billion of revenues and a 13.3% return is that we have been working to broaden our business, expand our addressable wallet, and increase the durability of our revenues. We have moved from less than 50% more recurring revenues to over 60% today. We continue to remain committed to that. We see things we can do in the existing businesses where we feel confident that we can push returns higher, especially with a focus on running the firm more efficiently. One of the things that we need to do better is to give you more information explaining what we are, how we do it. We hope over time, if our focus on expanding and diversifying the business while staying excellence, the market will follow.

I appreciate the candor and what I sense is a sense of urgency in your voice. On FICC, you talked about optimizing the business. So just help us level set here kind of what are the margins or ROEs in the business today. What can you do to help that business get to an ROE that's closer to the firm-wide ROE? And then on FICC top line, if increasing electronic volumes and improving wallet share aren't driving material revenue growth, what do you think will drive revenue share growth going forward?

Okay. I really like our FICC business; it's important. But we're not confused by the fact that the market intermediation wallet for large institutions has materially declined over the last five years. What’s been interesting for me over the last two years is that Investment Banking clients have always told me how extraordinary our people are and how our teams work together. In the last two years, I’ve had the chance to spend time with Securities division clients and with clients of Fixed Income, they say exactly the same thing. Your people are really differentiated. Your execution and capability is really differentiated. We have a strong client franchise business, but it's in a business where there's been significant change in the wallet opportunity. Our wallet market shares before the financial crisis were around 8%. Today, they are around 12%. There was an aberration during 2009, but we continue to build this franchise and remain focused on it. We accept the size of the wallet share that exists, and it's our job to run the business well, allocate capital efficiently and run that business from a cost perspective. We continue to do that while investing in the client franchise.

Christian, to pivot off David's comments, our objective here is to identify the appropriate TAM for FICC. The addressable market has not demonstrated revenue conversion in the last couple of years. Part of that relates to expanding our corporate coverage and corporate touchpoint as it relates to FICC, using channels that exist and relationships that exist in Investment Banking. We are taking part of the front-to-back process to size the right inputs against that wallet, determining the amount of debt and liquidity we need to put against the business and the amount of capital to allocate. This is an evolutionary process that we have begun, and it’s now more urgent and purposeful, and we have a clear view about how to get to the right place and how to allocate resources.

First, I just want to say I think it really serves shareholders well that you're doing this new, more fulsome strategic review and outlook. So I just want to thank you for that.

Thank you, Guy. I appreciate that.

I just want to follow up on FICC. I was hoping you could quantify the capital reallocation and expense reallocation that you both alluded to in your prepared remarks and in answering questions?

In the last five years, we've taken expense down 30%, RWAs by 40%, and there has been a substantial reallocation of capital. I hope to be back to you in the coming months with a clear indication of the specific allocation of resources. That’s a part of the ongoing front-to-back review.

If I can try a 1MDB question. So how much of this is related to the U.S., like were the securities – were any of the securities – U.S. securities or any of the buyers in the U.S. or any of the transaction structure in the U.S.?

These securities were all sold to non-U.S. buyers, and we're not structured nor destined to be sold to U.S. buyers.

First, I'll talk about employees. The morale for employees is high. They do not appreciate dealing with the situation in 1MDB and are extremely angry about the fact that we had a partner involved in such significant fraud. But the business has performed well. I think employees recognize that this is something that we're going through a deliberative process of resolving. In terms of clients, we are engaged with them and would say the impact on our client franchise at this point has been minimal. We monitor closely their sentiment, and while I recognize that external noise exists, we are executing well for our clients.

Before taking questions, I want to confirm that from a market perspective, we see significant opportunities going forward and remain committed to our efforts.