Goldman Sachs Group Inc (GS) — Q2 2021 Earnings Call Transcript

Thank you, Erica. Good morning. This is Carey Halio, Head of Investor Relations at Goldman Sachs. Welcome to our second 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. No information on forward-looking statements and non-GAAP measures appear on the earnings release and presentation. This audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. I am joined by our Chairman and Chief Executive Officer, David Solomon; and our Chief Financial Officer, Stephen Scherr. David will start with a high-level review of our second quarter performance and our client franchise. He will also provide an update on the operating environment and the macroeconomic backdrop. Stephen will then discuss our second quarter results in detail. David and Stephen will be happy to take your questions following their remarks. I will now pass the call over to David.

Thanks, Carey, and thank you everyone for joining us this morning. I will begin on Page 1 of the presentation with a review of our financial results. In the second quarter, we produced net revenues of $15.4 billion, our second highest result on record. The strength, breadth, and diversity of our business remained evident this quarter as we delivered net earnings of $5.5 billion and quarterly earnings per share of $15.02. Second quarter results contributed to our highest ever first half revenues of $33 billion and net earnings of over $12 billion, which drove year-to-date ROE of 27.3% and ROTE of 28.9%. Our performance underscores the strength of our client franchise and the constructive but more normalized market environment relative to a year ago. Our results also reflect ongoing progress on the firm’s strategic priorities across all four of our businesses as laid out at our 2020 Investor Day. In Investment Banking, we continue to benefit from our leading M&A franchise. Given this position, we observed certain secular changes driving strategic activity as our key clients emerge from the pandemic, the drive for scale, the push to achieve operating efficiency, and the shift to a digital economy across a broader industry set. We’ve maintained a number one ranking completed M&A for 19 of the last 20 years and have been the leader in equity underwriting for nine of the last 10 years. We have broadened our Transaction Banking platform. In June, we launched in the UK and we will now focus on expanding into Japan and other geographies. Although we are early in the rollout, initial client feedback has been quite positive. We delivered solid results in Global Markets where recent market share gains contributed to our performance. We continued to deploy our balance sheet to support client activity and we are further expanding our means of engagement with our clients across both traditional and digital platforms. A good example is our marquee platform where we are collaborating with MSCI to deliver improved portfolio analytics for our institutional clients via APIs. In Asset Management, our assets under supervision hit another record of $1.6 trillion as we serve clients by delivering best-in-class investment opportunities across a growing spectrum of traditional and alternative asset classes. We also continue to transition the business to more third-party funds, where we have raised $74 billion in gross commitments across a range of alternative investment strategies since our 2020 Investor Day. Additionally, during the quarter, we received preliminary approval for a joint venture with ICBC, China’s largest bank. The JV will combine our expertise in asset management with ICBC’s extensive access to retail and institutional clients. The partnership is a testament to our longstanding relationship with ICBC and represents a significant opportunity for us to grow internationally. In Consumer and Wealth Management, we are seeing solid inflows in PWM from new and existing clients and ongoing synergies with our Ayco and PFM businesses. We are also advancing on our vision of creating the leading digital consumer banking platform, where customer satisfaction with our products and services continues to be very high. This quarter, we launched Apple Card Family, which allows co-owners on the same account to build credit together as equals. In addition, as we grow markets, invest in and prepare for the rollout of checking and other services, we are building a more comprehensive consumer banking offering. All in, the progress on our strategic priorities, combined with our continued execution, reaffirms my confidence in the strength of our franchise and increasing durability of our revenues. Reflecting this confidence, our Board of Directors declared a 60% increase in our quarterly dividend to $2 a share. This follows an increase of over 50% in 2019. Taken together, we have increased the dividend by 150% since I took my seat as CEO. While future increases won’t necessarily be of this magnitude, we continue to prioritize a robust dividend as a part of our capital management philosophy. With that, let me now turn to the operating environment on Page 2. It’s clear that we are in the middle of a significant economic rebound. This is particularly true in countries like the U.S. and China, driven by the lifting of health and safety restrictions amid comprehensive vaccination programs. The broader economic improvement has also been underpinned by unprecedented support by central banks and, in the United States, the prospect of further fiscal stimulus in the form of infrastructure spending. A quarter ago, I mentioned my concerns about the prospect of the U.S. economy overheating. But recent commentary from the Federal Reserve indicates that the central bank is focused on this risk, which supports our economist view that inflationary pressures might be transitory and any resulting risks could be adequately managed. From here, I remain concerned about the prospect of a pandemic resurgence. The delta variant, should it spread further, could spearhead policy actions that slow economic growth. We are already seeing this play out in places like Hong Kong and Australia and potentially in parts of Europe. While vaccine uptake is progressing, it is not consistent across communities and nations, including parts of the United States. Widespread vaccine distribution and high vaccination rates are critical to open and thriving economies. I want to urge policymakers, government officials, and business leaders across jurisdictions to do all they can to facilitate these efforts. At Goldman Sachs, we are running programs to facilitate faster vaccinations for our people and their families in the United States, Hong Kong, and India among other locations, building on the support we are providing communities in which we operate as we all navigate the challenges of this pandemic. More broadly, as risk managers, we closely monitor developments and remain attentive to a variety of potential risks away from the challenges associated with COVID. Right now, the geopolitical landscape, most notably China and cybersecurity, are top of mind. As always, we remain committed to helping our clients navigate these and other risks amid an ever-changing market backdrop. As I look ahead, I remain optimistic about the opportunities set for Goldman Sachs. Our Investment Banking backlog is at a record level as strategic discussions with our corporate client base remain high, reflective of elevated CEO confidence and the prospect of continued economic recovery. While consumer confidence may prove more volatile, as supplemental benefits expire in the U.S., corporate clients remain steadfast in their efforts to emerge stronger from the pandemic. In our Markets business, ongoing client engagement and increased market share have strengthened our competitive positioning, notwithstanding more normalized flows and spreads relative to a year ago. And across our investing businesses, the current rate environment and search for yield are driving demand for both institutional and individual investors for our world-class scaled investment platform. Before I turn it over to Stephen, I’d like to close with a few final thoughts on the people of Goldman Sachs. We are an incredibly dedicated and resilient team and I am so proud of how we’ve worked tirelessly to serve our clients through the challenges of the last 18 months. Again and again, I’ve heard from our clients that they say Goldman Sachs stays ahead of the curve and that the engagement from our people has been stronger than ever. Speaking of that, as many of you know, we formally welcomed our colleagues in New York, Dallas, Salt Lake City, Hong Kong, and other locations back to the office this summer. With roughly 50% of our people in these offices back on a regular basis, I can tell you that seeing them in our buildings again has been completely invigorating. We recognize that various geographies are navigating different stages of the pandemic and we’ll continue to provide our colleagues with the support they need. Going forward, we look to reopen more locations consistent with health and safety guidelines of each city in which we operate. I’ve heard from so many of our people over the last few weeks that they are glad to be back in the office and our clients appreciate that we are showing up. We’ve always given our people the flexibility they need to manage their professional and personal lives and we will continue to do so. That said, I believe bringing us back together, forging the close bonds to support a culture of collaboration has renewed the sense of teamwork and apprenticeship that allows our people and our business to thrive. I am particularly excited to see nearly 5,800 interns and new hires who are joining us this summer, many in person working side-by-side with long-tenured professionals of Goldman Sachs. I’ll close by saying I am very pleased with how our people continue to deliver for our clients and our shareholders. I am especially confident in the strength of our client franchise amid an improving economic backdrop. Importantly, we are making progress in executing our strategy, and I believe we are on a path to sustainable mid-teens returns.

Thank you, David, and good morning. I will start with our business performance by segment beginning on Page 4. Investment Banking produced its second highest quarterly net revenues of $3.6 billion. Financial Advisory revenues of $1.3 billion reflected an elevated number of deal closings in the quarter and increasing market position of our business as we have expanded our client footprint. We maintained our number one league table position for the year-to-date, participating in $975 billion of announced transactions with a volume market share of 33%. Activity continues to be strong across geographies, particularly in the Americas, with strength across all industry groups, reflecting the breadth of our franchise. Underwriting performance remained very strong with its second highest quarterly revenues following a record performance in the first quarter. Equity underwriting performance, in particular, continued to be strong, generating $1.2 billion in revenues amid elevated IPO activity and representing our third consecutive quarter with revenues of over $1 billion. We ranked number one globally in equity underwriting for the year-to-date with volumes in the first half climbing to $85 billion across 400 deals. That represents volume market share of 10%, up 40 basis points versus full year 2020. Notably, we led over 160 IPOs for the year-to-date, more than all of last year. In Debt Underwriting, net revenues were $950 million with performance supported by strong high-yield volumes and, importantly, robust acquisition financing activity, including LBOs, as well as strong M&A and financial sponsor activity. This performance reflects the integrated nature of our Financing and Advisory businesses, as well as our dominant share in financial sponsor activity. Additionally, ESG remained a focus of the market, particularly in Europe, with strong issuance volumes across sustainability-linked bonds and loans. We expect this trend to continue in future quarters. Notwithstanding the realization of record revenue in the first half of the year, as David noted, our investment banking backlog ended the quarter at a fresh record high with sequential growth supported by sustained M&A activity, as well as replenishment from underwriting transactions. Corporate Lending results of $159 million reflect revenues from Transaction Banking and Middle Market and Relationship Lending, net of approximately $130 million of losses on hedges in place with respect to the relationship loan book. Transaction Banking is performing well. The business is approaching 300 clients, generating roughly $40 billion in deposits with an increasing percentage becoming operational. Moving to Global Markets on Page 5, segment net revenues were $4.9 billion in the quarter, driven by solid client activity and a generally supportive market-making environment.

Thanks for the update, Stephen. I think the overview of our business performance illustrates the strength and diversity of our franchise. As we continue to engage actively with clients, we remain focused on leveraging our capabilities to meet their needs while delivering strong returns for our shareholders. Our commitment to supporting our clients amidst evolving market dynamics is unwavering, and we are confident in our strategic priorities moving forward.

In the financial markets, we saw continued strong performance across equities and FICC—fixed income, currencies, and commodities. Our global markets franchise remains robust, benefiting from client engagement and market making. As we adapt to the changing environment, our focus on technology and innovation positions us well to capture additional market share. With that, I will turn to our results in Asset Management.

As we look to Asset Management, it's clear we are seeing positive trends in our revenues driven by both management fees and the performance of our investments. It's been gratifying to see record levels of assets under management as we continue to execute our strategy effectively. Our approach to diversifying our investment offerings and enhancing client engagement has propelled growth.

In the second quarter, we generated record revenues of $5.1 billion. Management and other fees totaled $727 million, which rose year-on-year, despite approximately $160 million of fee waivers on our money market funds. These waivers carry over from prior quarters and are consistent with industry practice in this rate environment. Incentive fees for the quarter totalled $78 million. Equity investments produced record net gains of $3.7 billion, amid a supportive market backdrop, particularly in growth equity, which drove roughly one-third of these revenues. The growth equity business has a 15-year track record of generating strong investment returns over the cycle and is focused exclusively on investments in growth-stage, technology-driven companies spanning multiple industries.

I want to highlight that our diversified portfolio and investment strategy are vital in navigating market fluctuations while delivering sustainable growth. The combination of our traditional and alternative offerings allows us to capitalize on emerging opportunities while mitigating risks, ensuring that we remain a leader in the asset management space. Our efforts are reflected in our results, and I believe they position us favorably for the future.

Overall, we remain optimistic about the growth trajectory of our asset management capabilities and the significant opportunities that lie ahead. As we execute on our strategic priorities, we anticipate continued expansion of our asset base and revenues, which will further enhance our competitive position in the industry.

Hi, thanks very much. A quick follow-up. You noted the record prime brokerage and curious if you could drill down a little bit on how much is environment versus engagement of clients versus new clients and market share gains? And while we are on the topic, I’d love to know if you have any thoughts following the Archegos incident. What has or do you expect to change in the industry as a result? Thanks.

Thanks a lot, Glenn. So on prime balances, they have grown. They’ve grown consistent with the broader strategy that we set up. As to distinguish that growth between the environment and clients, I would say it’s both. I would say the environment, obviously, by virtue of balance, is accreting in this market. We’ve obviously seen opportunities to take on new clients and, frankly speaking, to be more profound with our existing ones. But I would tell you that in the context of all of that, and I mentioned this in the script, there is a clear screen that looks at where we are pricing, how we are structuring terms, both around new entrants and equally around the back book of our prime balances. So, we are being rather judicious in the context of what we bring to assure that this stays as accretive as we think it can become from a returns point of view, but it is both environment and clients, and our ambition is to take that share up, but to do it in a rather prudent way. On the part of your question relating to Archegos, look, this has obviously garnered an investigative purview from a number of geographies and across regulators. It's hard to predict exactly where that yields or what that yields. I suspect that in the broad category of transparency and disclosure, both of which we would be supportive of, there will be moves by regulators to achieve that. But very hard to say how that all plays out. As we shared in our first quarter earnings call, we aim to be a constructive participant in the kind of regulatory and industry change that will come about. Sure. Progress on both fronts has been considerable. I would say, let’s start with Apple Card. The press around creating the family plan was, frankly speaking, to achieve a greater and more positive user experience. So that people across a family were treated equally in the context of the underwriting, broadly speaking. I think that move will accelerate share. But I think more importantly, and its objective was to create just a better overall user experience. On Apple Card, generally, I would tell you that while we pulled back in terms of the rate of growth during the course of COVID, we’ve seen the credit profile of Apple Card customers improve positively, perhaps even more positively than we thought. We’ve now opened up the aperture and are now accelerating that rate of growth consistent with the tone of the consumer market that we are seeing. I think there are more opportunities to be had with Apple using the card as a medium for engagement with the client set. So you’ll start to see forward growth, and I suspect balances will be a fast follower from the increase in originations and underwriting, and Apple Card’s family plan will only serve to help that.

In transaction banking, that business continues to grow. We are upwards of now several hundred clients, $40 billion of deposits. And perhaps most importantly, when you look at that deposit base, we are starting to see an acceleration of operational deposits approaching 15%. And that’s obviously the linchpin to creating a deposit base that is more usable and more valuable to the firm. I will tell you based on our opening expectations of that business, we have had to put less rate on deposits to attract customers. It’s turning out that the user interface and the engagement with the corporate client set just in terms of what we are offering by way of experience and technology is proving to be the winning ticket.

That said, I believe bringing us back together, forging the close bonds to support a culture of collaboration has renewed the sense of teamwork and apprenticeship that allows our people and our business to thrive. I am particularly excited to see nearly 5,800 interns and new hires who are joining us this summer, many in person working side-by-side with long-tenured professionals of Goldman Sachs. I’ll close by saying I am very pleased with how our people continue to deliver for our clients and our shareholders. I am especially confident in the strength of our client franchise amid an improving economic backdrop. Importantly, we are making progress in executing our strategy, and I believe we are on a path to sustainable mid-teens returns. With that, I’ll turn it over to Stephen.

In the second quarter, we generated record revenues of $5.1 billion. Management and other fees totaled $727 million, which rose year-on-year, despite approximately $160 million of fee waivers on our money market funds. These waivers carry over from prior quarters and are consistent with industry practice in this rate environment. Incentive fees for the quarter totalled $78 million. Equity investments produced record net gains of $3.7 billion, amid a supportive market backdrop, particularly in growth equity, which drove roughly one-third of these revenues. The growth equity business has a 15-year track record of generating strong investment returns over the cycle and is focused exclusively on investments in growth-stage, technology-driven companies spanning multiple industries.

Thanks to each of you for your focus and support. It has been a strong quarter for Goldman Sachs, and I look forward to sharing more positive updates in the future as we continue to drive our business forward.

Good morning, David and Stephen. Maybe just start off with the equity investments portfolio and thanks very much for the roll forward of Slide 9. I guess I have a two-parter on that slide. It’s a high-class problem, but you sold nearly $6 billion in positions and you made basically no progress in reducing the equity investment portfolio. So, curious what else you can do to bring that portfolio down? And then, maybe more broadly, is it time to rethink the sort of disposition strategy? Your stock is at all-time highs. The market is rewarding your stock for strong revenue growth and ROE expansion, and they don’t really care about the capital position. So, I mean, should you just not cut the buybacks, focus on revenue growth, rather than potentially making uneconomic investment dispositions?

Thanks, Christian. We appreciate the question. And on the first part of the question, we absolutely have made progress on our goal with respect to capital efficiency and the on-balance sheet investing. I’ll let Stephen highlight some of the details in a moment. But we continue to move aggressively to manage those positions. I think it’s a very constructive environment for us to do so and I think we’ll continue to do that. You’ll continue to see us do that with intensity as we see good opportunities to monetize those positions. We continue to be committed to both diversifying our revenue streams and also continuing to drive toward more durable and recurring revenues, and the fee-based emphasis of the fundraising that we are doing in the asset management business is one aspect of that. On the broader question about opportunity, I think one of the reasons why we decreased our buyback in the quarter is that we see opportunities to continue to devote capital to serving our clients and growing our business. If we can add accretive returns in our business by deploying capital in that manner, we will continue to do it, but we want to remain and I think we’ve always been a very nimble capital allocator. And so, when we see those opportunities, we will make investments and we’ll continue to grow the business. If for some reason the environment changes and we don’t, we will return that capital appropriately to shareholders.

Yes. So, I guess, let’s just start with the facts. Obviously, on the new page that we showed you, $5.5 billion did come off-balance sheet producing $4 billion of capital relief. And as I mentioned, there is another $3 billion that’s in sight to take $1 billion of capital down. Now that just looks narrowly at the private equity portfolio. There are consolidated investment entities. There are debt positions, all of which are on-balance sheet, all of which are subject to further reduction, all of which will reduce down capital. Now why does that matter, and why do we want to stick to that strategy, Christian, as opposed to kind of abandon it? Well, first of all, obviously, we are looking to elevate the capital returns of the firm. The one way to do that is to influence the denominator. The way to do that is to reduce down the capital density of our businesses more broadly. At the same time, this is going to dramatically change over time the durable revenue forecast for the firm, which is that moving from on-balance sheet to fund format and the fact that we’ve raised since Investor Day, $75 billion of new funds in those funds, okay? We’ll increase assets under supervision and equally we’ll increase fee revenue that’s being generated by those investments in that fund format. And so, in a way the page to watch on the forward will be Page 11 of our Investor Day presentation, because what’s going to play out and we promise more disclosure which we will deliver, but firm-wide assets under supervision will go up. Firm-wide management and other fees will go up. Those will prove to be more durable and predictable and I think hold the promise of greater valuation on the back of a lower capital dense set of businesses.

At a high level and I appreciate the question, Steven, I don’t think our views on transformational M&A have evolved. Call after call, quarter after quarter I’ve said and I’ll say again that the bar would always be extremely high for us to do something very, very significant. But I’ve also said that our drive to diversify our revenues and create more durable revenues comes, as both Stephen and I have highlighted in our remarks, from continuing to invest in and grow our Asset Management business, continuing to invest in and grow the opportunity in our Wealth Management business and for broadening our digital Consumer Banking platform. There may be opportunities from time to time that can accelerate the direction of travel in those. We look at things constantly. If we see things that could accelerate the direction of travel in those businesses and accelerate our goals in those businesses, we’ll certainly consider them always with a high bar. It wouldn’t surprise you that prices at the moment are high, and that certainly has an impact on how we think about these things. But we are making a lot of progress organically, and we continue to be focused on that organic growth.

Okay. I appreciate that. Maybe just to follow up on two of the new business builds. You mentioned the Family Card with Apple. I am curious on what customer segment you are going after with that? And maybe a bigger question on, do you have any numbers for us in terms of accounts, balances, or new partners who want to talk about? And maybe that same comment question for transaction banking clients, deposits, just tracking progress, I appreciate it. Thanks.

Sure. So, I appreciate your inquiry. Progress on both fronts of the Apple Card and Transaction Banking has been considerable. I would say, let’s start with Apple Card. The press around creating the family plan was, frankly speaking, to achieve a greater and more positive user experience. So that people across a family were treated equally in the context of the underwriting, broadly speaking. I think that move will accelerate share. But I think more importantly, and its objective was to create just a better overall user experience. On Apple Card, generally, I would tell you that while we pulled back in terms of the rate of growth during the course of COVID, we’ve seen the credit profile of Apple Card customers improve positively, perhaps even more positively than we thought. We’ve now opened up the aperture, and are now accelerating that rate of growth consistent with the tone of the consumer market that we are seeing. I think there are more opportunities to be had with Apple using the card as a medium for engagement with the client set. As for Transaction Banking, that business continues to grow. We're upwards of now several hundred clients, $40 billion of deposits. And perhaps most importantly, when you look at that deposit base, we are starting to see an acceleration of operational deposits approaching 15%. That’s obviously the linchpin to creating a deposit base that is more usable and more valuable to the firm.

I’ll talk a little about strengthening and expanding our Transaction Banking platform. We are actively looking towards expanding this service through our bank entities established in the UK and transitioning into Japan as we continue to fine-tune and enhance our offerings.

Good morning, David and Stephen. I have a two-parter on that slide. It’s a high-class problem, but you sold nearly $6 billion in positions and you made basically no progress in reducing the equity investment portfolio. So, curious what else you can do to bring that portfolio down?

Thanks, Christian. We appreciate the question. On the new page that we showed you, $5.5 billion did come off-balance sheet producing $4 billion of capital relief. And as I mentioned, there is another $3 billion that’s in sight to take $1 billion of capital down.

Thanks for your questions, and I would like to say that our ability to navigate through capital requirements is intrinsic to our strategy. We have been actively aligning our balance sheet with our operational priorities while also optimizing our capital utilization.

Good morning.

Good morning, Matt. How can we assist you today?

Good morning, Matt.