Goldman Sachs Group Inc (GS) — Q3 2020 Earnings Call Transcript

Good morning. This is Heather Kennedy Miner, Head of Investor Relations at Goldman Sachs. Welcome to our third quarter earnings conference call. Today we will reference our earnings presentation, which can be found on the Investor Relations page of our website at www.gs.com. Note information on forward-looking statements and non-GAAP measures appear on the earnings release and presentation. This audiocast is copyrighted material of the Goldman Sachs Group Inc. and may not be duplicated, reproduced, or rebroadcast without our consent. Today I’m joined by our Chairman and Chief Executive Officer, David Solomon, and our Chief Financial Officer, Stephen Scherr. David will start by reviewing third quarter and year-to-date performance. He will also provide an update on our client franchise, the macroeconomic backdrop, and our progress on returning to office. Stephen will then discuss our third quarter results in detail. David and Stephen will be happy to take your questions following their remarks. I’ll now pass the call over to David. David?

Thanks Heather, and thank you to everyone for joining us this morning. I’d like to start by saying that all of us at Goldman Sachs hope that you, your friends, and family remain healthy amid the continuing challenges with COVID-19. Let me begin on Page 1 of the presentation with a summary of our financial results. In the third quarter, we produced net revenues of $10.8 billion, up 30% versus a year ago. The strength and breadth of our client franchise continued to be evident this quarter as we delivered net earnings of $3.6 billion, record quarterly earnings of $9.68 per share, and a return on equity of 17.5% and return on tangible equity of 18.6%. Our third quarter results contributed to strong year-to-date revenues of $33 billion and an ROE of 8%. Litigation costs burdened our year-to-date returns by over 500 basis points. Returns were also impacted by higher reserve build for credit losses in the first half. The third quarter continued to demonstrate the strength of our diversified business. We benefited from an improving market backdrop, high levels of client engagement, continued countercyclical performance in market making, and positive momentum across our strategic initiatives. We maintained our leading global position in M&A as announcements increased in the quarter from a relatively dormant period earlier in the year. We maintained strong lead table positions in underwriting, including a number one ranking in equity underwriting and a top three ranking in high yield, with both markets very active during the quarter. We again delivered robust performance in global markets in both FICC and equities on solid client activity across our global platform, reinforced by recent market share gains across asset classes in the first half of 2020. In asset management, we recognized strong gains from our public and private equity positions. We also generated strong investment performance and positive net interest income in our credit portfolio, and we continued to have success with our West Street Strategic Solutions Fund, where we’re on track for $14 billion of total commitments. We are delivering our full spectrum of alternatives capabilities and have launched marketing on new funds in private equity, growth equity, and real estate. In wealth management, we continue to provide valuable advice to our ultra-high-net-worth PWM clients. We also made progress integrating our new personal financial management business to provide our high-net-worth clients with a broader set of capabilities, and we’ve been pleased to see synergies between both groups, which have resulted in 700 referrals this year, representing over $2.5 billion of an asset opportunity. In consumer, we continue to have success expanding our platform to serve individuals digitally, both directly and through partnerships. During the quarter, we launched Marcus Insights integrating Clarity Money’s capabilities into the Marcus app to give consumers a more comprehensive view of their finances, and we continued to make progress building checking and investment capabilities, which will launch next year. On the partnership side, we launched seller financing with Walmart and expanded on our June platform launch with Amazon. Additionally, our partnership with Apple continues to grow, and we look forward to leveraging our credit card platform for additional partnerships over time. Turning to the operating environment on Page 2, we continue to navigate an uncertain backdrop brought on by COVID-19, which has an unclear trajectory. From a macroeconomic perspective, the markets continue to benefit from the unprecedented monetary and fiscal support by central banks and governments globally. In the third quarter, the Federal Reserve announced its new approach to average inflation targeting and forecasted that short-term rates would remain locked near zero for the next several years. In that same vein, in the U.K. where the economy is expected to contract by over 9% this year, the Bank of England opened the door to negative rates as a potential policy tool. Meanwhile, U.S. labor markets continue to show headline improvement with the unemployment rate declining to 7.9% in September, down nearly 50% from peak levels in April, reflecting approximately 13 million people out of work. That said, according to the latest job reports, those improvements were largely driven by reversals of temporary layoffs, while permanent job losses have risen to nearly 4 million people, reflecting some of the deeper challenges in our economy. Additionally, there continues to be enormous uncertainty globally in the trajectory of the virus, which may impact the pace of the economic recovery as we head into the fall and winter. In particular, we see continued challenges in a number of impacted industries, including restaurants, hospitality, and oil and gas. Despite these uncertainties, since our July earnings call our economists’ expectations for 2020 U.S. GDP improved by 120 basis points to an expected contraction of 3.4%, while global growth estimates slipped 50 basis points to an expected 3.9% contraction. Looking into next year, estimates have strengthened with expected growth of nearly 6% in the U.S. and 7% globally. In spite of the ongoing challenges, we are seeing higher global equity markets and tighter credit spreads, perhaps as a reflection of the speed of economic recovery. During the third quarter, the S&P 500 rallied by 8%, touching new highs in September and leaving the index up 4% for the year. This yearly gain, however, was concentrated in the top five tech companies, which rose 42%, while the remaining 495 names in the index declined by 2%. Equity market volatility also remains elevated with the average VIX this quarter more than 60% higher than the third quarter a year ago, though well below levels seen in March and April. On the credit front, U.S. investment-grade spreads tightened by roughly 20 basis points and high-yield spreads tightened by almost 90 basis points during this quarter. As we go forward, we remain vigilant about risks in the markets and potential weakness in the broader economy. Given the uncertain macro environment, we are focused on serving our clients to help them navigate this evolving backdrop. Before turning to Stephen, I’d like to spend a moment on our approach to return to office. We have employed a number of new protocols to operate as safely as possible around the world. We do this as public and private healthcare organizations work tirelessly to develop therapies and vaccines, which I fully believe in time will allow all of us to return to a more normalized environment. We are focused on helping our people come back safely as being together enables greater collaboration, which is key to our culture. We continue to employ an adaptable approach which considers individual circumstances and local health recommendations to give our people the flexibility and the tools they need to return to the office safely. We continue to make measured progress. In Hong Kong and Tokyo, we have around 60% of our people working from the office. In most of Europe, we’re at around 50%, and in the U.K. we’re at nearly 30%. In New York, we’ve seen a gradual uptick since Labor Day with roughly 2,000 people working in the office as of last week, and we currently have 30% of our people rotating through the New York office on a weekly basis. That said, we will continue to be nimble and remain in close contact with the relevant authorities in cities where we operate and are ready to shift gears if the evolving situation with COVID-19 warrants. Under all circumstances, we continue to keep the health and safety of our people as a top priority. In closing, I would like to thank the people of Goldman Sachs who have remained dedicated to serving our clients while managing the firm’s risk, liquidity, and capital to ensure our ongoing financial strength and operational resiliency. While 2020 has been a difficult year in many ways, I’m incredibly pleased with the state of our client franchise and the progress we’ve made in executing on our strategic priorities, and I look forward to providing a more comprehensive update on our investor day goals at our fourth quarter earnings call in January. With that, I’ll turn it over to Stephen.

Thank you David, and good morning. Let me begin with our summary results on Page 3. During the third quarter, the firm performed well across all four of our business segments. In investment banking, our corporate clients remained very active in raising debt and equity capital. We also saw an increase in strategic dialog following a more dormant period for M&A activity earlier in the year. In global markets, client engagement remained high as we gained share during the year and enabled clients to manage risks across asset classes. In asset management, strong growth was driven by higher management and other fees as well as gains from our long-term equity and credit investments following a more challenged first half of the year. We also saw double-digit revenue growth in our consumer and wealth management segment as we expand our service offering to individuals across the wealth spectrum. With those headlines, let me now turn to our specific business performance on Page 4, beginning with investment banking. Investment banking produced third quarter net revenues of nearly $2 billion, up 7% versus a year ago. Financial advisory revenues of $507 million declined 27% versus last year on fewer transaction closings in the quarter, reflecting the lower level of client activity in the first half of the year. Nevertheless, year to date we participated in over $630 billion of announced transactions and closed approximately 225 deals for $810 billion of deal volume. We maintained our number one position in both announced and completed M&A lead tables by a meaningful margin. Importantly, the pace of M&A announcements has picked up considerably in recent months. Our announced deal volume in the third quarter was up more than fivefold versus the second quarter and our investment banking client dialogs remain active. The bigger headline in investment banking, again in the third quarter, was equity underwriting where we generated $856 million in revenues, more than double the levels seen a year ago, marking our second highest quarter ever. We ranked number one globally in equity underwriting as our year-to-date volumes climbed to $80 billion across 436 deals, including 77 initial public offerings. In global IPOs, we ranked number one and picked up approximately 180 basis points of market share versus last year. We also saw strong activity this quarter in follow-ons and new products, including our participation in 21 private transactions, a high-profile direct listing, and a number of SPAC IPOs, providing clients advice and access to capital in various forms. In debt underwriting, net revenues were $571 million, up 9% from a year ago. Though volumes normalized from the record pace seen in the second quarter, the high-yield market in particular saw healthy levels of new issue activity. Our activity also included a number of novel structure transactions, particularly among industries most impacted by COVID-19 such as airlines, where we uniquely enabled clients to leverage a broader collateral base to access capital. As a result, we’ve been able to support our clients and grow our market share, generating a solid number four ranking in global debt underwriting year to date. This performance reflects our long-term strategic focus on this business as well as the velocity of underwriting commitments on our balance sheet. Looking forward, our investment banking backlog increased significantly versus the second quarter. Growth was supported by a ramp in M&A activity, as I noted earlier, as well as replenishment from equity and debt underwriting transactions. In particular, new M&A announcements are creating a pipeline for acquisition financing in the coming quarters. We are optimistic on activity across a broad set of sectors, including TMT, FIG, consumer, healthcare, and industrials. Revenues from corporate lending were $35 million, reflecting lower results in relationship lending which includes the impact of tighter credit spreads on hedges. As I have noted before, for risk management purposes we maintain single name hedges on certain larger lending commitments. Given the significant credit spread tightening over the last two quarters, we have now reversed the vast majority of the $375 million in hedge gains we saw in the first quarter. Also of note in relationship lending, we have seen material pay downs versus the first half. Total notional drawn on revolvers is now down 60% from the peak and nearing normalized levels. Moving to global markets on Page 5, where our businesses continued their strong performance, net revenues were $4.6 billion in the third quarter, up 29% versus a year ago amid attractive bid-offer spreads, a supportive market making backdrop, and continued elevated client activity. We expanded our market share this year as our focus and commitment to serve clients during this volatile period drove results across asset classes and geographies. During the first half, McKinsey reported that Goldman Sachs Global Markets delivered the best institutional client performance among our global peers. Our strength was aided by number one rankings in both G10 rates and credit and the number one global ranking in equities, which included the number one position in EMEA and ties for number one in Asia and Japan. Turning to FIC on Page 6, third quarter net revenues were $2.5 billion, up 49% versus the third quarter of ’19. Growth versus last year was driven by a 65% increase in intermediation, which more than offset a 9% decrease in financing revenues. In FIC intermediation, we had solid client flows and grew revenues in four out of five businesses versus last year, leveraging our balance sheet to intermediate risk in a disciplined way. In credit, performance was supported by strong client activity in the U.S. and tighter investment grade and high-yield credit spreads. We also saw sustained volumes across our automated bond pricing engine. In rates, revenues rose amid stronger risk management while client activity was solid, particularly around global central bank actions during the quarter. In commodities, strong performance was driven by our metals business and oil products amid persistent global supply imbalances. In mortgages, revenues rose amid higher levels of client activity in agency products, bolstered by solid risk management and tighter spreads. In currencies, revenues were stable as we continued to serve our global client franchise with contributions across both G10 and emerging markets. Lastly in FIC financing, we saw lower revenues in repo and structured finance. Turning to equities, net revenues for the third quarter were $2.1 billion, up 10% versus a year ago. Equities intermediation net revenues of $1.5 billion rose 36%, aided by higher client volumes across derivatives and cash, reflecting the scale and breadth of our client franchise. In derivatives, we saw solid activity in flow, structured, and corporate transactions across both the U.S. and Europe. In cash, we helped clients execute across both high and low-touch channels. Equities financing revenues of $585 million declined 25% year over year due to higher net funding costs, including the impact of lower yields on our liquidity pool. Importantly, average client balances rose to near record levels. Across global markets, we continued to invest in technology platforms to enhance client experience, build on our strength in risk management, and drive resource efficiencies. Like digital trends across many industries, COVID-19 has accelerated client adoption and onboarding across our automated platforms. While it remains difficult to predict client activity and we do not have insight into the forward opportunity, we take confidence in the market share gains experienced by the business through a deepening set of client relationships, which has been a priority for the global markets leadership team. This progress should support revenue sustainability as we go forward. We also believe the upcoming U.S. election, the variability of economic growth outlook, and the 2021 global LIBOR transition may bolster client activity across markets. Additionally, to the extent that sustained low interest rates have their intended effect of stimulating economic growth and recovery, client activity may be further invigorated. Moving to asset management on Page 7, in the third quarter we generated segment revenues of $2.8 billion, up over 70% versus a year ago. Our third quarter revenues were driven by the continued market rebound, event-driven activity, and positive corporate performance of our portfolio companies. Management and other fees totaled $728 million, up 10% versus a year ago driven by higher average assets under supervision, partially offset by a lower fee rate due to mix shift given growth in liquidity and fixed income products. Equity investments produced $1.4 billion of net gains, aided by appreciation in our public investments and valuation marks related to event-driven activity across our private equity portfolio. More specifically, on our $3 billion public equity portfolio, we generated nearly $800 million in gains from investments, including BigCommerce, Avantor, Sprout, and HeadHunter. On our $16 billion private equity portfolio, we generated gains of more than $400 million from various positions, with the majority driven by events including corporate actions such as fundraising, capital markets activity, and outright sales. Additionally, we had operating revenues of $230 million related to our portfolio of consolidated investment entities. Finally, net revenues from lending and debt investment activities in asset management were $589 million on revenues from NII and gains on fair value debt securities and loans. This reflected mostly tighter credit spreads on our portfolio of corporate and real estate investments which continued to rebound from the broader market sell-off in the first quarter. Let me now turn to Page 8, where we continue to provide transparency on the composition and diversification of our asset management balance sheet. On the left side of this slide is our equity investment portfolio by sector, geography and vintage. Our private portfolio remains highly diversified with over 800 positions where excluding Global Atlantic, given its announced sale, none are larger than $425 million. We also provide insight into our $21 billion portfolio of CIEs primarily comprised of real estate investments, of which $12 billion are financed predominantly by non-recourse debt. The portfolio remains diversified by geography and real estate sector. On the right side of the slide, we show our $31 billion in lending and debt investments in the portfolio within the asset management segment, which includes $14 billion of debt investments and $17 billion of loans that are largely secured. I’ll now turn to consumer and wealth management on Page 9. In this segment, we produced $1.5 billion of revenues in the third quarter, up 13% versus a year ago, driven by higher wealth management AUS and higher consumer banking revenues. Wealth management and other fees of $957 million rose 9% versus last year, reflecting increased client transaction activity and higher assets under supervision, which rose 8% to $575 billion, including $24 billion of positive net inflows over the past 12 months. Consumer banking revenues were a record $326 million in the third quarter, jumping 50% versus last year, reflecting net interest income from credit card lending, strong year-over-year deposit growth, and lower deposit rates. Consumer deposits totaled $96 billion, reflecting $4 billion of growth in the quarter. The slower pace was expected as we continued to limit U.K. new account growth in light of regulatory caps and reduced the rate on our U.S. market savings accounts given the lower interest rate environment. While we exhibited improving beta in our deposit book, we saw very limited outflows of deposits consistent with our expectations, despite two rate cuts during the quarter. Funded consumer loan balances remained stable at $7 billion, of which approximately $4 billion were from Marcus loans and $3 billion from Apple Card. We continue to prudently risk manage these portfolios and have moderated growth relative to initial budget estimates. While we remain attentive to the embedded risk, we continue to be pleased with the credit performance of these portfolios. Next, let’s turn to Page 10 for our firm-wide assets under supervision. Total AUS decreased slightly to $2 trillion during the quarter, but are up approximately $275 billion versus a year ago. Our sequential decline was driven by $90 billion of liquidity outflows following strong inflows in the first half, that offset by $51 billion of market appreciation and $18 billion of long-term inflows. On Page 11, we address net interest income and our lending portfolio across all segments. Total firm-wide NII was $1.1 billion for the third quarter, up versus a year ago primarily reflecting growth in the firm’s balance sheet particularly in global markets, as well as the benefit from deposit growth and repricing in consumer and wealth management. Importantly, as I have noted in the past, our overall results are less sensitive to lower interest rates than many traditional banks. Our balance sheet is modestly asset sensitive given our mix of high turnover or floating rate assets and predominantly hedged or floating rate liabilities. Nevertheless, even if interest rates remain low, we expect NII to gradually expand over time given our ability to prudently grow loans and further reprice consumer deposits. Next, let’s review loan growth and credit performance across the firm. Our total loan portfolio at quarter end was $112 billion, down $5 billion sequentially driven by a $7 billion decrease in corporate loans from pay downs in relationship lending and a $1 billion reduction in Marcus installment loans, offset by modest growth in wealth management and credit card loans. Our provision for credit losses in the third quarter was $278 million, meaningfully lower than the $1.59 billion taken last quarter and down 4% versus a year ago. This lower provision versus the second quarter reflects relative stability in our portfolio and improvements in the broader economic backdrop, which is the dominant driver of inputs to our modeling of pool reserves. At quarter end, our allowance for credit losses for both loans and commitments stood at $4.3 billion, including $3.7 billion for funded loans. Our allowance for funded loans was stable versus last quarter at 3.7% for our $100 billion accrual portfolio, including an allowance for wholesale loans of 2.8% and for consumer loans of 16.1%. The provision of $278 million includes wholesale impairments of approximately $230 million primarily relating to select credits in the TMT, industrials, and natural resources sectors. During the quarter, we recognized firm-wide net charge-offs of $340 million, resulting in an annualized net charge-off ratio of 1.3%, up 40 basis points versus last quarter. Next, let’s turn to expenses on Page 12. Our total quarterly operating expenses of $6 billion increased 6% versus last year, with compensation expenses up 14% year-over-year amidst higher revenue growth net of provisions, and non-compensation expenses down 2%. Higher compensation expenses reflected year-over-year growth in revenue net of credit provisions. Our non-comp expenses were slightly lower versus last year as we continued to invest in new businesses, including transaction banking and credit card as well as the United Capital acquisition, now rebranded Personal Financial Management. While we benefited from lower expenses of approximately $100 million from the temporary reduction in travel, entertainment, and advertising expenses due to COVID-19, we also saw an approximately $90 million reduction in litigation and professional fees and a roughly $50 million reduction in double occupancy-related costs from our new facilities in London and Bangalore. These were offset by a roughly $60 million increase in activity-related expense from brokerage, clearing, and exchange fees, as well as a roughly $85 million increase related to technology investments across the firm. Our reported year-to-date efficiency ratio was 69.6%, which was burdened by nearly 10 percentage points of litigation expense. We continue to make progress on our expense savings initiatives as set forth at investor day and will continue to assess our ability to go further than what we outlined in January. Finally, our reported tax rate was 28% for the year to date, reflecting the impact of non-deductible expenses. As noted previously, we expect our tax rate under the current tax regime to be approximately 21% over the next few years. Turning to our capital levels on Slide 13, our common equity Tier 1 ratio improved to 14.5% at the end of the third quarter under the standardized approach, up 120 basis points sequentially. The improvement was driven primarily by earnings as well as lower market RWAs, reflecting reduced market volatility and lower credit RWAs. Our ratio under the advanced approach increased 110 basis points to 13%, also on earnings and RWA reductions from lower market volatility. We are confident in our capital position, now 90 basis points above our 13.6% stress capital buffer requirement. Looking forward, we continue to believe that the 13% to 13.5% standardized CET1 target range provided at investor day is appropriate for our firm on a medium-term basis as we execute our strategic initiatives, build more durable fee-based revenues, and reduce the stress loss intensity of our business. To that end, we will continue asset harvesting, including our announced sale of Global Atlantic. While our capital ratio will likely remain elevated near term given continued regulatory restrictions on share repurchases, we would expect our management buffer to decline over time, particularly as markets express less volatility. Importantly, we stand ready to commit capital and balance sheet to support our clients, and we expect to resume share repurchases once permitted consistent with our longstanding capital management policy. Turning to the balance sheet, total assets ended the quarter at $1.1 trillion, roughly flat versus last quarter. We maintained very high liquidity levels with our global core liquid assets averaging $302 billion, up modestly versus last quarter, reflecting the current backdrop. We expect our GCLA will evolve in the context of client demand for our balance sheet and overall market conditions. On the liability side, our total deposits decreased to $261 billion, down $8 billion versus last quarter driven by planned roll-off of higher cost brokered deposits and more modest growth in retail deposits. Our long-term debt declined by $9 billion during the quarter, driven by maturities. We expect issuance to remain relatively low for the remainder of the year, although we may consider pre-funding some planned first-quarter 2021 issuances. In conclusion, our strong first quarter results reflect the diversification of our client franchise, resilience of our business model, and flexibility in our highly liquid balance sheet. Despite the continued overhang from COVID-19 and challenges from the work-from-home environment, we continue to leverage our technology platforms and intellectual capital to support our clients. During this difficult time, we remain dedicated to executing our strategy in our core business and driving forward the new initiatives and operating efficiency programs we laid out in January. Importantly, we have been proud to see our dedicated client engagement efforts continue to pay off, resulting in gains in mind share and market share as we help clients navigate this volatile environment. On the forward, our risk managers will remain in a conservative posture given the uncertain trajectory of the virus and early stages of the recovery to ensure we are well positioned to proactively support our clients. While our path to our medium-term targets will inevitably not be a straight line, we remain confident that execution of our strategic plan will drive better client experience, more durable revenues, and higher returns for shareholders over time. With that, thank you again for dialing in, and we’ll now open the line for questions.

Hi, thanks very much. Obviously, great trading results. I’m curious if you could characterize how you think about any incremental risk you take to execute all that, and if there’s any impact on future stress tests. I’m just looking to balance client franchise with any risks associated with it. Thanks.

Sure Glenn, thanks. I would say the performance of the trading businesses in the third quarter, frankly like it was in throughout most of the first part of the year was really done with an eye toward high velocity turn on balance sheet; that is, we were very well prepared to commit capital to facilitate intermediation but saw our mission equally as moving and trading on that risk very efficiently, and so we could see the kind of turnover that we needed. We didn’t see a dramatic pick-up in risk occasioned by that pattern and that strategy, and I think that leaves us in a good position with respect to what we will submit as part of the second version of CCAR, and I don’t see our risk as being unusually elevated in the context of producing these kinds of results.

That sounds great. I might have missed it, but I'm not sure if you provided the split between realized and unrealized figures. I believe I noted everything you mentioned regarding the equity investment line, but I couldn't determine how much of it was actually realized. Following up on that, have you thought about monetizing more given that the markets are at all-time highs? Your portfolio is quite seasoned, with two-thirds of it in the four to eight-year range, so I'm curious about how you plan to balance the capital intensity of those investments with their earnings potential and what your current options for capital deployment are. Thank you.

Sure, no problem. Let me just go through the breakdown in equities. Of the $1.4 billion in revenue, our public portfolio generated $781 million in revenue, and the private part of the equity portfolio generated $642 million. Now importantly, when you look at the private portfolio, $284 million of that $642 million was generated on events, so that’s sales, monetizations, IPOs, and the like, and $52 million - only $52 million - was non-event driven, that is looking at the baseline performance of the underlying company and making a judgment about where value is appropriately pegged, and so event being the dominant component of the private portfolio. The balance, I should point out, of $306 million relates to CIEs. As it relates to the public portfolio, we observe the market no differently than you do. Obviously, there’s a certain component of that public portfolio that remains restricted. A decent amount of it remains unrestricted, and we will look for opportunities as we have been to monetize those stakes. By the way, I say that not just simply in the context of an attractive market valuation in which to sell but equally in the context of the kind of broader strategic mission we’ve been on, which is to lower the balance sheet intensity and capital intensity of that as we shift to more third-party investing itself, and so that you a bit of the lay of the land as to the two components to your question.

Thanks so much. Appreciate it.

Good morning David and Stephen. Maybe sticking with the trading question, Stephen, you gave some pretty interesting color on why you think trading revenues should be sustainable into 2021. Can you expand on those a bit? I’m particularly interested in your point around LIBOR transition? Just give us more detail there and sort of why you think Goldman is well placed to capitalize.

Sure, so why don’t I start with trading. I think at the core, our view on sustainability is not with a crystal ball and a forward forecast as to what the opportunity set will be. It is more rooted in the fact that over the course of the year and looking at data through the first half, we have picked up meaningful market share in and among various client sets across all of the businesses in our trading business. This was a very concerted effort on the part of the leadership of that business to go at finding ourselves moving up the ladder in the top 1,000 clients that matter to the trading division. The sustainability of our performance for me is rooted more in the fact that we’ve picked up share gains. We were there for clients particularly during the most volatile moments of the second quarter across all asset classes without withdrawing, and I think it sets us up to capture whatever the opportunity set is on the forward. My comments in the prepared remarks is that as I look forward to the fourth quarter, we can count on any number of issues to be the source of some volatility, whether that’s U.S. election, LIBOR transition, the trajectory of COVID - any one of those, and part of the reason that we are at capital levels we are, part of the reason we have maintained higher liquidity than we ordinarily would, is such that we can serve clients should that volatility occur without putting ourselves offside on any one of those metrics. I think that’s part of the color I’d give you both in terms of what’s sustainable, and equally why we feel confident that we’ve put our financial resources in a proper frame to play on the volatility itself. Just lastly on your question about LIBOR transition, we’ve had a dedicated team - I mean, people who are 100% dedicated to this effort from the beginning. We’ve put ourselves in a position where we’ve done issuance, we have prepared ourselves in terms of counterparty contracts and the like, and I think we’re very well prepared. Obviously, we don’t skew in ways in which commercial banks do with LIBOR based elements in mortgages and the like, but in the scope of what is our business, we feel quite well prepared for that onset.

Great, thank you. Maybe switching to acquisitions, again maybe David this one is for you, given the frenzy at Morgan Stanley on deals, just curious how you’re thinking about M&A, maybe what businesses or initiatives would benefit from an acquisition, and then if you can just touch on how you think your relative currency and capital position places you to do a transformative deal.

Christian, I appreciate the question, and of course we laid out a medium-term plan with a set of goals, and you and others continue to ask us about this. We’re on a journey to continue to strengthen our returns and broaden our business to create a more diverse business with more sustainable revenues over time. We now have the business, we think, fully set up and organized after we re-segmented last year and made some changes internally so that the platforms that we think we can really operate from are well positioned to grow, and this includes our two more traditional platforms that everybody is always focused on, investment banking and global markets, which really for lack of a better term is a corporate investment bank. We have a big asset management platform which is global, broad, deep, multi-product all over the world, and we think there are opportunities to continue to grow that organically for sure, but certainly we’d consider inorganic opportunities to grow that if we thought that they were enhancing. And then, we obviously are building a broader consumer wealth platform to serve individuals and we certainly think there can be opportunities to accelerate the growth of that. In fact, last year we made an acquisition in United Capital that we think accelerated our expansion into high net worth wealth in a meaningful way, and we’ve now been integrating that quite successfully. So we continue to look broadly at things that can extend our strategy and accelerate the pace. It’s clear if you look at the actions of others that the market has been tolerant of tangible book value dilution in the context of something they think is on strategy and advances the trajectory of the business, so we’ll continue to look and see if there are opportunities; but other than that, it would be hard for me to say anything more at this point.

That’s helpful, thank you, David.

Good morning and thanks for taking the questions. First one, just on your efficiency ratio, you guys beat the 60% this quarter and year to date, ex the legal, you’re at the 60%. I guess the big takeaway is the operating leverage clearly works in the model, but can you provide some color of maybe where you’re at in the investment and efficiency three-year timeline? Most of it is just to help with the expense trend line - you know, the efficiency ratio outlook, depending on how the revenue backdrop plays out.

I’ll start and Stephen might give some more granular detail, but I’d say that at a high level, Michael, and appreciate the question, there’s no question that our efficiency has benefited from an environment which has allowed us an opportunity in some of our businesses to capture more revenues, and some of that, as Stephen highlighted, is really due to market share gains and we think that will be more sticky. Some of it is due to the environment. There is no question as we looked at our three-year trajectory and thinking about our desire to run the firm more efficiently that this environment and the crisis slowed down some of the actions we might have taken during this year. We’ve now begun to deal with some things from an efficiency perspective that we might have dealt with earlier in the year, and we then have two more years to go through and execute that plan. We continue to be very committed to that plan. We continue to be very comfortable with that plan. We actually think there might be things that we’ve seen or learned that may create more opportunities for us to advance from that plan, but at this point our intention is to give you a more detailed granular update when we review our plan in January at the next earnings call. Stephen, is there anything you’d want to add to that?

You know, Mike, I would like to add to David’s comment that moving forward, we will keep focusing on strategic value locations as areas where we can expand and develop various businesses, especially the newer ones. Automation remains a priority for us across the entire firm, including automating processes in risk management and control functions, as well as automating platforms that attract client attention. It’s challenging to assess efficiency based on just one quarter; it’s vital to consider the entire year. However, this is a medium-term journey, and some of the items David mentioned will likely yield greater operating leverage. Additionally, we have discussed in previous calls the need to view operating expenses as a whole. As we continue to develop businesses like transaction banking and the consumer segment, they will require less human involvement and rely more on automation, which will help us reduce the compensation intensity typically linked to those businesses. There are several options available to us over the medium term.

All right, that’s helpful. Just a follow-up on Glenn’s asset management question, one of the things we’ve seen in some of the private companies is they’ve been slower to rebound, given the economic backdrop, so any insight you can provide on the private portfolio companies, either those facing more COVID-related pressure or those that aren’t, and if that will have an impact beyond the pace of monetization?

Sure, so as we looked across the portfolio and we did it in the first quarter, did it in the second and again did it in the third, we look at those that are most acutely impacted by COVID. Their circumstance in some sense hasn’t changed, and they remain untouched from the downward mark pressure and valuation that we saw in the first and second quarter. There are others that have turned the corner as being affected by COVID, and that is as much a function of where the market is moving, where consumers are moving and the like. Then there are others that historically have been untouched by this, and so I would say we continue to look at it through the frame of COVID impact and equally we look obviously at the underlying performance of the business, and not exclusively as against public market comparables and the like. By the way, this is of course for that part of the private portfolio not otherwise marked, given other events that are going on, so that frame remains the same in terms of how we look at that portfolio itself.

Hi, good morning. This is Manan Gosalia, standing in for Betsy Graseck. I wanted to ask about your capital levels. I know you mentioned aiming for a CET1 ratio between 13% and 13.5% over time, but could you share your expectations for capital in the near term, at least until the 2021 stress test? Do you plan to maintain the same buffer above your required minimum as you did this quarter? I understand you noted potential strong market activity in the fourth quarter due to the election and market rebound. Is there an opportunity to be somewhat more agile and possibly increase your exposure and market risk-weighted assets in the fourth quarter?

Sure. I think we’ve brought our CET1 ratio to 14.5% really to sort of fix ourselves in a competitive position in anticipation, as I said, of the potential for volatility and higher trading over the course of the fourth quarter. We’ve said before and I’ll say again that we run roughly with a 50 to 100 basis point buffer. Where within that range we stand, obviously at the higher end now, is equally a function of volatility from a risk management point of view - that is, we’re in a market that is more likely to express higher, not lower. As and to the extent that that volatility subsides, we will see the buffer come down and will adjust, again consistent with where we are. On the longer-term trend, over the medium to longer-term, the reinforcement of 13% to 13.5% is more a reflection, I think as I’ve said in the comments, of a forward direction to create, and as David noted, lower stress loss impact in the overall composition of the business, meaning as we continue to pursue certain of our strategic initiatives which create more durable fee-based revenue, lower capital intensity, lower balance sheet intensity, we’ll be in a position where I think the requirement of us will come down and therefore over the medium term, we’ll move more in that direction.

Hey, good morning. I appreciate the commentary around M&A and maybe the spillover impact on acquisition advance, but if think about what’s been going on this year in terms of significant capital raising, both equity, DCM, how do we think about that going forward? It sounds like you’ve replenished some of the coffer in terms of the pipeline. How much demand is there to shore up balance sheets and for capital markets activity, or is it a yin and yang where M&A picks up and capital raising comes down, and we don’t really grow banking much? Just trying to think through that level of activity.

Jim, I think it's a challenging situation to analyze and predict with precision. It's clear that the current environment has accelerated some financing for companies and has also generated numerous financings that wouldn't have occurred otherwise. Financing levels have indeed been high this year. However, if we shift our perspective away from a quarterly focus and view these as significant franchises where we hold a leading market share and are well positioned, I believe that over any extended period of time—three, five, seven, or ten years—there will be substantial corporate financing activity, and we will maintain a leading role in that, which will become a highly profitable business that enhances our franchise and contributes to earnings and book value growth. In the short term, it’s difficult for me to make predictions. I would guess that if conditions normalize, which I anticipate, we won't see the same level of financing activity in 2021 as we did in 2020, when companies were trying to adapt and secure more resources due to uncertainty. Nevertheless, we have a strong franchise and a significant opportunity, and whatever the market presents, I believe we are well equipped to meet our clients' needs and take advantage of it.

Maybe as a follow-up on that, maybe you could update us on your efforts to expand market share. You’ve talked about going down market into the middle market. How has the progress been on that?

I appreciate that question, Jim. The progress is going quite well, and I think one of the things that I know is self-evident to everybody on the call, as market cap grows, there are more and more companies that grow into being worth $500 million, a billion, $2 billion that have never been on our radar screen, so that footprint has expanded meaningfully and there’s been hundreds of millions of dollars of revenue accretion based on the opportunity set that’s come from that, and I think that will continue. I feel good about the way that platform expansion is going, and I think there continues to be more opportunity for us over time to continue to add to that footprint.

Hi. I think my question is rooted in my business school class, when I read In Search of Excellence, and it said stick to your knitting. I’m not sure if you recall that old book, and maybe it’s just too ancient, but when I look at your business, the capital market side - I mean, you’re clearly gaining wallet share. It reminds of 2009 when you were successful in supporting your customers through the last recession. On the other hand, the expansion businesses - you know, buying into credit cards, one concern I hear is you’re just buying into a lower PE activity. You certainly seem committed on that strategy, but it seems like there’s still questions there. Specific questions on the side where there’s a lot more confidence, the legacy businesses of capital markets, your M&A backlog, how does that compare to the all-time high, and trading, by how much has the wallet share gain been to the environment because VIX is so high, versus new business, so that’s on the positive side? And on the less confident side, the growth, what do you bring when you buy a credit card that the seller wasn’t providing before? Thanks.

I think you’ve laid this out very well, Mike. We have a plan that we believe we’re executing. There’s still a lot of work ahead of us. If we execute, I expect the stock will reflect that, and we are committed to creating shareholder value. Our focus is on the medium to long term, and as a leadership team, we feel positive about our progress. However, there is more to accomplish, and we assume that if we maintain consistent delivery over the medium and long term, shareholders will benefit and the stock price will respond accordingly.

Okay, since there are no more questions in the queue, I’d like to take a moment to thank everyone for joining the call. On behalf of our senior management team, we look forward to speaking with many of you in the coming weeks and months. If additional questions arise in the meantime, please don’t hesitate to reach out to Heather; otherwise, please stay safe and we look forward to speaking with you on our fourth quarter call in January.