Goldman Sachs Group Inc (GS) — Q3 2021 Earnings Call Transcript

Good morning. This is Carey Halio, 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 in the earnings release and presentation. This audio cast is copyrighted material of the Goldman Sachs Group and may not be duplicated, reproduced, or rebroadcast without our consent. I'm joined today by our Chairman and Chief Executive Officer, David Solomon, our Chief Financial Officer, Stephen Scherr, and our incoming CFO, Dennis Coleman. With that, let me pass the call to David.

Thank you, Carey, and good morning, everybody. I'm joining you today from California, where we have been hosting one of our best-known client events, the Builders + Innovators Summit. We bring together over 100 of the most intriguing entrepreneurs in the world to exchange ideas and hear from thought leaders about how to build successful and enduring companies. I've heard from a number of them that they are extremely excited to meet with our team and with other entrepreneurs here in California. In addition, over the last few months, I've also been able to travel around to spend time with our employees and clients in person, which has been invigorating. In my conversations with clients, and then the results we're reporting today, it's clear that our client franchise is on very solid footing. This quarter, we announced two acquisitions, a key pillar of the strategic vision that we laid out at our Investor Day in 2020, centered around diversifying our business mix towards more recurring revenues and durable earnings. There's no question that we have been successfully executing on our growth plans. And now, we are further investing in the growth of the firm to accelerate our strategic evolution. First, in August, we announced the acquisition of a leading European asset manager, NN Investment Partners. The addition of $320 billion in assets under supervision will help us achieve greater scale in our asset management platforms, enhance our distribution network on the continent, and bolster our ESG capabilities. On the topic of ESG, as world leaders prepare to convene in Glasgow later this month for COP26, I would like to underscore the firm's commitment to working across our businesses to deliver on the goals of the Paris Agreement. This includes partnering with our clients to help drive climate transition and inclusive growth. We're making progress towards our target of $750 billion in sustainable financing, investing, and advisory activity to help achieve these goals. My view is that the businesses and markets need policy that supports the deliberate transition to a more sustainable future. This includes developing a mechanism to put a price on the cost of carbon. This transition is complex and won't happen overnight. It will require both the public and private sectors to do their part. Given that fossil fuels will remain part of our energy mix for the near future, it is critical that we strike a balance between good public policy and recognizing the consequences of the supply constraints that we face. Our second acquisition was GreenSky, which we announced in September. This transaction furthers our efforts to build the consumer banking platform of the future, that provides our consumer business with an attractive and high credit quality customer acquisition channel via an impressive network of over 10,000 merchants and a secularly growing market, featuring a digital cloud-based infrastructure and product capabilities that are synergistic with our broader platform. With the addition of our bank funding model, we expect to generate 20%-plus returns at scale for recurring fee-based net interest income revenues. Importantly, these customers will be our customers. They will live in the market's ecosystem where we can holistically help them manage their financial lives. Turning to Page 1 of our presentation. We produced net revenues of $13.6 billion, driven by year-on-year increases in three of our four business segments. On the bottom line, we delivered net earnings of $5.4 billion and quarterly earnings per share of $14.93. Our year-to-date revenues of nearly $47 billion and net earnings of over $17.5 billion are higher than any full-year results in our history, and drove an ROE of nearly 26% and an ROT of over 27%. Our performance underscores the strength of our client franchise and a supportive market environment. In Investment Banking, we produced our second highest quarterly revenues. Our clients, who are extremely active, turned to Goldman Sachs for our leading M&A franchise, driving strategic activity and associated financing to elevated levels. We delivered solid results in global markets as we continue to focus on market share and engage with clients on a broader array of solutions. In Asset Management, assets under supervision hit another record of $1.7 trillion, which will be further enhanced by the NNIP acquisition. We continue to transition our alternatives business to more third-party funds, and we have gained momentum as we spend significant time with new and existing institutional clients, raising $90 billion against our goal of $150 billion in gross fundraising commitments since our 2020 Investor Day. In Consumer Wealth Management, we had a record quarter. In Wealth Management, we've seen strong long-term fee-based inflows in the first nine months of the year, and as big client wins in Ayco that give us the opportunity to serve employees at all levels of their organizations. In Consumer, we are now enabling 9 million customers to spend, borrow, and save on a multi-product platform. All in, our strong performance, tireless focus on our clients, and relentless execution of our strategy strengthened my confidence that we will continue to advance our strategic evolution and deliver higher, more durable returns for our shareholders. Let me now turn to Page 2. Broadly speaking, the current operating environment still has solid fundamentals, but there is increasing uncertainty around a number of factors. On one hand, fiscal and monetary policy remain accommodative, and equity markets are still near all-time highs. COVID-19 vaccination rates are rising around the world. I believe that we are likely past the worst of the pandemic's effects on the global economy. As technology behind the vaccines continues to improve, we will make further progress against the virus. That being said, there are a number of emerging areas of uncertainty we're paying close attention to. First, the trajectory of inflation, particularly wage inflation in the short-term. Second, there remains significant uncertainty around the Delta variant. Third, there is ongoing political debate in the U.S. over economic policy, including the potential for additional infrastructure deals, the longer-term extension of the federal debt ceiling, and tax increases. Fourth, the U.S.-China relationship remains complicated. Taken together, these items have the potential to be a headwind to growth, as further indicated by the downward revision in our economists' U.S. GDP expectations earlier this week. Regardless of the market backdrop, I consistently hear from clients how much they value the high-quality service we provide, especially our differentiated advice and execution capabilities. As I look ahead, I remain optimistic about the opportunity set for Goldman Sachs and our ability to grow our firm. Activity levels remain high, particularly in Investment Banking and we have solid momentum in our Asset Management client business. Before I close, I would like to thank Stephen for his nearly three decades of service to the firm. I've had the privilege to work with Stephen since the early 2000s, and I couldn't be more grateful for his counsel and friendship over the last 20 years. In January, as we announced previously, Stephen will be succeeded by Denis Coleman, a 25-year veteran of Goldman Sachs, who has held numerous leadership positions in Investment Banking, most recently as Co-Head of the Financing Group. He and Stephen have enjoyed a close working relationship for almost 20 years and are progressing toward a seamless transition in the CFO seat. With that, I will turn it over to Stephen.

Thank you, David. Good morning to all of you on the call. Before I turn to the results, let me say briefly that I have thoroughly enjoyed the opportunity to work closely with all of you, our shareholders, and the analyst community over the past three years as CFO. I am committed to facilitating a smooth handoff to Dennis, who, as Carey noted, has joined us on the call today. On our results, let me begin with our business performance by segment, starting on Page 4. I'm pleased to start with Investment Banking, which has continued to experience strong momentum and produced its second-highest quarterly net revenues of $3.7 billion. The consistency of performance in Investment Banking is a reflection of both elevated market activity and increased market share in a client that has long enjoyed a leading competitive position. Financial advisory revenues of $1.6 billion were an all-time high. We maintained our number one league table position for the year-to-date, participating in $1.4 trillion of announced transactions with a volume market share of 32%. M&A activity was elevated across geographies and industry groups, with particular strength in TMT and healthcare, and benefited from our strategic footprint expansion and our significant position with financial sponsors who remain exceptionally active in the market. Underwriting results were strong notwithstanding more normalized activity relative to the very robust levels in the first half. Equity underwriting generated $1.2 billion in revenues, representing our fourth consecutive quarter with revenues in excess of $1 billion. We ranked number 1 globally in equity underwriting for the year-to-date with volumes in excess of $110 billion across 570 deals, which represents a volume market share of 10%. In debt underwriting, net revenues were $726 million, with performance supported by solid high yield and investment-grade issuance, as well as acquisition financing activity. Given the current levels of M&A announcements and continued healthy activity among financial sponsors, we expect acquisition financing activity to remain high. Despite significant levels of completed transactions, our investment banking backlog nonetheless ended the quarter significantly higher than year-end levels. Corporate lending results of $152 million reflected revenues from transaction banking, middle-market lending, and the relationship loan book, including associated hedges. In transaction banking, we achieved our 5-year goal of $50 billion in deposits this quarter well ahead of the target date. As a key growth initiative for the firm with a very large addressable market, we continue to successfully access the breadth of our corporate client base in adding customers and driving higher engagement on the platform, which has exceeded expectations. We remain confident in the longer-term revenue target for this business of $1 billion. Moving to global markets on Page 5. Segment net revenues were $5.6 billion in the quarter, 23% higher year-on-year, driven by healthy client activity, notably in equities and a generally supportive market-making environment characterized by heightened volatility in certain areas. Results were also supported by recent market share gains across FICC and equities. Global markets again produced returns in excess of the target ROE expressed at our Investor Day, reflecting the strength of our franchise and ongoing attention to cost. Turning to Page 6, our FICC business generated $2.5 billion of net revenues for the third quarter. The decline in FICC intermediation versus a year ago was the result of lower revenues in rates, credit, and mortgages, offset by materially better performance in commodities and higher results in currencies. Activity increased into the end of the quarter with September proving to be a very strong month, our commodities business continued to perform well amidst the heightened level of volatility in the business, including in oil, natural gas, and power. Fixed financing revenues of $513 million were the best in over a decade. These were up meaningfully, driven by mortgage lending consistent with our strategy. Total equities revenues of $3.1 billion were very strong, helped by higher results in equities intermediation amid better performance in both derivatives and cash, and record equities financing, as we saw record average balances in prime and opportunities to extend liquidity to clients. Moving to Asset management on page 7. In the third quarter, we generated revenues of $2.3 billion. Management and other fees totaled $724 million, which were impacted by approximately $155 million of fee waivers on our money market funds. We again extended these waivers for clients consistent with industry practice in this low-rate environment. Equity investments produced net revenues of $935 million amid $1.6 billion of gains on our $16 billion private investment portfolio, plus our consolidated investment entities, partially offset by $820 million in losses on our $4 billion public portfolio. Losses in the public portfolio were dominated by a few positions, which by contrast, were material contributors to gains in the segment last quarter. Additionally, we had operating revenues of roughly $200 million related to our CIE portfolio. Staying with asset management, page 8 again provides disclosure on the composition of our equity and debt positions by vintage region, and where relevant accounting treatment. On page 9, we show a longer time series of disclosure regarding the progress made in harvesting our on-balance sheet investments. Since our 2020 Investor Day, we have actively harvested positions of $16 billion which have been partially offset by markups on the portfolio of $9 billion and additions of $5 billion, which include early fund facilitation and other commitments. The implied capital associated with total dispositions across both private and public equity positions since our 2020 Investor Day is approximately $8 billion. We continue to have line of sight on $2.8 billion of incremental private asset sales corresponding to $2 billion of capital reduction. We remain focused on the execution of this strategy and meeting our capital target for the segment. To this end, we sold over $1 billion of CIE portfolio during the quarter and also disposed of $2 billion of private positions. Moving to page 10, Consumer and Wealth Management produced record revenues of $2 billion in the third quarter. In Wealth Management, very strong long-term fee-based inflows for the year-to-date helped drive record management and other fees of $1.2 billion, which was up 10% versus the second quarter and 28% year-on-year. Incentive fees of $121 million largely reflected the recognition of overrides in certain of our investment funds. Private banking and lending revenues of $292 million rose 12% with loans to private wealth clients up $2 billion sequentially. The demand for lending products remains high amid the low-rate environment. I would add that we view private bank lending as an integral part of our wealth offering with room for further growth based on the needs of our clients and our current penetration rates, as well as the strong credit standing of this client base. Consumer banking revenues were $382 million in the quarter, reflecting higher credit card loans and deposit balances year-over-year. We expect loan growth to accelerate in 2022, given the pending acquisitions of GreenSky and the General Motors credit card portfolio and continued expansion in our existing product set. Looking across these two segments, page 11 shows our firm-wide assets under supervision and management and other fees. We've been building these businesses steadily, and total AUS now stands at a record $2.4 trillion, putting us in the top five of both active managers and alternative asset managers globally. This growth has driven higher firm-wide management and other fees, which rose 16% year-on-year to a record $1.9 billion. On page 12, we address net interest income and our lending portfolio across all segments. Total firm-wide NII was $1.6 billion for the third quarter, higher versus a year ago, reflecting lower funding expenses and an increase in interest-earning assets. Our total loan portfolio at quarter-end was $143 billion, up $12 billion sequentially, reflecting increases across the portfolio. Correspondingly, provisions for credit losses of $175 million reflected portfolio growth. On page 13, you see our total quarterly operating expenses of $6.6 billion. Our efficiency ratio for the year-to-date stands at 52.8%, reflecting our ability to exhibit operating leverage while maintaining a pay-for-performance culture and investing for growth. Our year-to-date non-compensation expenses were down 17%, but up 11% excluding litigation, while our compensation expenses were up 34% on a year-to-date basis. Turning to capital on Slide 14, our common equity Tier 1 ratio was 14.1% at the end of the third quarter under the standardized approach, down 30 basis points sequentially. Despite higher capital on solid earnings generation, the decline was driven largely by a $43 billion increase in RWAs, partially reflecting revisions to RWA calculations based on regulatory feedback in the quarter. In the quarter, we returned a total of $1.7 billion to shareholders, including common stock repurchases of $1 billion and $700 million in common stock dividends. Consistent with our capital management philosophy, we will prioritize deploying capital for our client franchise at attractive returns, and then return any excess to shareholders via dividends and share repurchases. In conclusion, we delivered another quarter of strong performance, reflecting the diversification and strength of our client franchise. Additionally, we announced two acquisitions that will enhance both our asset management and consumer businesses, and increase the firm's recurring revenue stream. Looking forward, the overall opportunity set remains attractive across the firm. As we continue to execute on our strategy, we are building towards a path to sustainable mid-teens returns. With that, we'll now open up the line for questions.

Hi, thank you. Stephen, I wonder if I could ask a quick follow-up question on your comments just now on capital. So you make a ton of money, the book is up 21% year-on-year, amazing. You did the GreenSky and NNIP deals, but RWA was up because activity is strong and SACCR is coming. So I wonder if you could just peel back the onion a little bit more and just talk about where you see your excess position now and if at the margin we should be expecting continued investment in, say, the digital consumer builds at the margin, more so than the buybacks side. Thanks.

Sure, Glenn. So let me start kind of with a reiteration of our standing capital policy. As you know, our priority is to deploy capital in the business on behalf of clients and to do that, especially when returns are as attractive as they have been. So in a quarter where we produce 22.5% ROE, it's that the reason and consistent with that, we deploy the capital in the business. I'd also point out that, in the dividend, our dividend is now at $2 a share, up from $1.25. So on an annual basis, we're returning an additional $1 billion or so to shareholders through the dividend. Where we exhaust opportunities that prove to be attractive, we will return capital back end that really represents what we do in terms of share repurchase. Now in terms of the opportunity set, you referred to the consumer business, it's unquestionably a priority. David had reflected time and again, the long-term view we have about how that business can grow and be accretive to the firm. But I would say that the deployment of capital knows not one segment nor one opportunity; it is a broad look across the firm. We think always about how we add in an agile way, deploy capital across the whole of the business. So I wouldn't necessarily say that it's targeted against anyone in particular. Obviously, we're operating at a higher SCB, a higher minimum requirement pursuant to the Fed, therefore, surplus is less. We always look forward to what will be in effect a petition on capital that we know. SACCR is certainly one of them. In that regard, while we've not made a formal decision on implementation, and we'll let our regulators know when we do. We're looking forward to that. Our view is that when we put SACCR in place, it will increase our RWAs by about $15 billion or tax our ratio by about 30 basis points. It is at that level in part because, as we look back when SACCR was finalized by Basel in 2014 and adopted by the Fed in 2018 and 2019, we began to proactively mitigate the effect. So the implementation now reflects mitigation progress we've made in anticipation of it, as opposed to starting a workstream. Obviously, the work was assembling data and understanding where appropriate netting pursuing through the rules could play out. But I think that's a reflection of a proactive engagement, so as to minimize the impact to capital and ratio now, relative to what it would have been.

That was comprehensive. I appreciate it. Take notes then. One last follow-up because year-to-date revenues are up 42% and so strong, you made a ton of money. Comp dollars accrued are up 34%. I wonder if we could talk about that a little bit in terms of comp leverage. I know it's a bottom-up and I know a lot of people at Goldman Sachs are killing it this year. But I think 1MDB impacted things last year. So just thinking full-year to full-year comp ratio, anything on the puts and takes on what to expect?

So maybe I start with the numbers and then I'll turn it to David, who I think can reflect on kind of comp philosophy generally. But where we are right now, comp to net revenue, net of provision for credit loss, is at 31% through nine months. That was at 34% when we ended the second quarter. We always reserve for compensation, consistent with what's required of us, which is what do we think we need to pay the firm consistent with performance, as at that date. Obviously, there's a quarter to go. So we're at a 31% ratio, revenue net of provision for credit loss. You can see through nine months in the comp and benefits line, that number is up 34%. Again, reflecting the performance of the business and a pay-for-performance philosophy more broadly. That 34% is obviously to be measured against revenues that are up 42% year-to-date and revenues net of provisions up 56%. So you can see the comp leverage that exists even when we are provisioning for what we believe to be a healthy and robust comp process. Overall, if you look at total operating expenses because we look at it that way, including our non-comp expense, there continues to be the exhibition of leverage, operating leverage in the business. Again, revenue is up 42%, but total operating expenses ex-litigation are up 24%. This just gives you a sense of the leverage in operating expenses broadly and in comp specifically. But maybe David wants to comment just on the philosophy.

Glenn, I appreciate the question. I know one of the things you're getting at. There is no question, there is comp pressure, there's wage inflation everywhere at all aspects of every business right now, we're extremely focused on it. We are a pay-for-performance culture, and there is no question that people are performing. But we're very, very comfortable that we're managing this in a way where we can show real operating leverage to our shareholders given our performance, and at the same time, pay our people exceptionally for exceptional performance. And we're on top of that. We feel good about it.

Thank you, both. Appreciate it.

Good morning, David, Stephen, and welcome, Denis. Firstly, just to echo David’s sentiment about Stephen. Congratulations, and this will definitely be very big shoes to fill for sure. So my first question here is on the digital consumer bank. That business continues to do very well. I think year-to-date, revenue growth is an impressive 30%, but that's still lagging some of the pure-play neobanks out there. Some of that might just be a function of product holes, I think a checking payment functions and investment functions are a little bit light. So curious here how you think about the product roadmap from here, from Marcus. The potential to use M&A to fill some of those gaps. And then longer-term, how should we think about sort of sustainable revenue growth for that business?

Sure. I'll start and Stephen may have additional comments. Christian, we're focused on this for the long term. We've established a solid platform starting from scratch. In just five years, we've created a significant depository institution with over $100 billion in digital deposits, without any branches and a minimal marketing budget, resulting in low customer acquisition costs. The infrastructure that supports these deposits is very efficient compared to other models. We currently serve 9 million customers. Our credit card platform is unique, and we are onboarding various partnerships while also developing a proprietary card. We've publicly discussed adding digital checking to our portfolio in 2022, and that is progressing well. GreenSky helps us expand our point-of-sale capabilities. Their cloud-based technology integrates smoothly with our operations. We are confident in our ability to continue growing and building a substantial business with a long-term perspective. I won’t comment on specific revenue growth percentages, in contrast to many fintechs focused solely on revenue models. We aim to build a sustainable business that generates steady recurring earnings for Goldman Sachs over time. We believe that by serving clients effectively with good technology, our growth will continue. Stephen, do you have anything else to add?

Well, the only thing I'd add, Christian, is if you just look at the year-over-year comparison, right? You can't forget that we went through a more challenging period in COVID, where we by design looked to limit the amount of underwriting we were doing. We're now coming back to sort of turn that back on, having seen the portfolio performed very well. Year-over-year, revenues in consumer are up 23% in the deposit line. They're up 54% in credit cards. That's just a reflection of the renewed commitment that David is reflecting to growing out that business and seeing it perform. If you look at loans and savings and Apple Card, soon to be joined by General Motors, investing module and checking, this is net what's coming into focus is a big, broad platform that can serve customers in all of their needs, as opposed to where we began with kind of a bespoke product set. I think we're at a key moment now with the acquisition of GreenSky to sort of take that forward.

Great. Thank you. My second question maybe is on, back to trading a bit of a high-class problem here but the results are just another quarter of market share gains in the trading businesses. But the share gains have been so dramatic over the last few years that one has to wonder how sticky it could be going forward. Just curious how you think about the sustainability of share gains in the trading business as we roll into 2022 and 2023.

Well, Christian, I appreciate your focus on the share gains. I think it's a really important part and highlight of what we've been executing on in the context of the strategy that we laid out when we went back to Investor Day. I think there are a couple of things we've tried to do very differently over the last few years to strengthen the position of this business. I think the accruing results will be quite sticky. I don't want to say that the share gains are going to continue at this pace because they won't, we know that. But we've positioned the business much better for, I think, two principal reasons. Number one, the business has been much more focused on having a client-centric one Goldman Sachs culture to really figure out how to serve the needs of our clients in a very holistic way. The business has been less transactional, more long-term focused on the client relationship and the level of client service, while bringing to bear the market-making, provisioning, and financing capabilities of the firm that we have. I'm hearing repeatedly from clients that they see a real shift in the way we're operating the business, and it's accruing the market share gains, and it's benefiting us in that context. Number two, we were never an organization that focused on financing our clients as a business segment that we could meaningfully grow and target. Since the Investor Day, we targeted our ability to grow our financing capability across both equities and SEC, and we succeeded on that, and that's a place where we've taken market share. That's more durable share, obviously. We continue to think there are opportunities to continue to pursue on the financing side. That's different. I would also highlight that we've been making significant investments in technology and we have the scale and have developed platforms that enhance the competitive position we have with clients. One of the things that's happening broadly is the leading players here, given the tech necessity, have an advantage over secondary or tertiary players. So we're benefiting from that also. Now, there's no question this is a very conducive environment for performance in that business, and we're not sitting here saying this level of performance will continue. But I think that the way we're running the business, the focus we've made, certainly takes us a step function up from where we were in 2019. I'd also say as part of our Investor Day, we were focused on efficiencies in operating that business. Even if we went back to a different level or at a higher hurdle return rate and the business at lower levels, we feel very good about the way the business is positioned.

Hi, good morning.

Hey, good morning.

Morning.

I wanted to start off with a question. It's a multifaceted one on just the sponsors and the alternative space. Sponsors have been a significant and clearly growing contributor to increased M&A activity these last 12 months, you guys have certainly benefited from that. With the unique perspective into the business, just given you're building out your own third-party alternatives platform. You cited some really impressive fundraising numbers. I was hoping you could just speak to how much longer this frenzy pace of both fundraising and deal activity could persist, and whether there are any factors we should be watching, whether it's tax reform or higher rates that could potentially derail some of the momentum?

Sure. I'll provide a high-level overview, Steve. You're correct that we're currently experiencing high activity levels. On the fundraising front, we focused a few years ago on systematically growing our third-party capital and building institutional relationships to enhance our alternatives platform because there is significant growth in capital allocation towards alternatives. Globally, whether among governments, sovereign wealth funds, or various institutions, many are increasing their allocations to alternatives. Moreover, there's a clear trend of expanding retail participation from wealthy individuals in this space, with more access being offered. We have traditionally had a distribution network catering to ultra-wealthy individuals, but this access is broadening significantly. I believe we are looking at several years of ongoing secular growth regarding capital allocation to these global alternatives platforms, and we are well-positioned for that, which is benefiting our fundraising efforts. Regarding deal activity, there is substantial capital available. Notably, sponsor activity in M&A constituted a higher percentage of activity this quarter compared to the past few years. Historically, when sponsor activity rises, it tends to continue for a while, but eventually tapers off. We are closely monitoring the speed of our lending activities in relation to that sponsor activity, with careful attention to risk management. Given the current accommodating monetary and fiscal policy and the economic recovery following the pandemic, this trend may continue for some time. However, we will be vigilant, as this pace is unlikely to be sustained indefinitely, and we anticipate potential challenges along the way.

Thanks, David, for all that color. Maybe just for my follow-up, a question for Steven, just on equity investments and the impact to capital. One of the primary drivers of future SCB reduction, which you've talked about, is the harvesting of those equity investments. We know they've got very punitive treatment in CCAR. This is a high-class problem; shrinking the investments at least on a net basis has proven rather difficult and remains stubbornly above that $20 billion level. How much smaller does the book need to get in order to meaningfully reduce your SCB? Is that 13% to 13.5% CET1 target still the appropriate long-term bogey, just given some of the stubbornly high equity investments that have persisted for the better part of a couple of years now?

Sure. Let me address the latter part of your question first. We firmly believe that operating within a range of 13% to 13.5% is appropriate for our firm. However, our progress towards this target is being hindered by the Federal Reserve's requirements in relation to the CCAR and SCB frameworks. In response, we are proactively taking measures into our own hands rather than waiting for regulatory approvals to ease the requirements. This means we are shifting from a focus on our balance sheet to a fund structure. If you refer to page 9 in our presentation, you will see the impact of $16 billion in asset dispositions and how this has benefited our available equity. Over the past nine months, our balance sheet has reduced by $8.9 billion, which translates to $4.6 billion in available equity. Since our Investor Day, we’ve seen a balance sheet reduction of $16.2 billion and released $8.3 billion in available equity. We estimate that there is potential for an additional $2.8 billion reduction in our balance sheet, which would free up around $2 billion in available equity. I provide these figures to illustrate the scale of the activity underway, which will persist. Initially, there was concern that we might face a significant decline in revenue—essentially a gap—due to the accelerated pace of balance sheet reduction. However, this has not occurred. As David mentioned, we have raised $90 billion in funds, with approximately $50 billion of it that is fee-paying. We are managing this transition effectively. This context illustrates the overall capital reduction as we pursue our objectives.

Good morning, guys.

Hey, Jeff.

Good morning.

So balance sheet growth has stepped up since the pandemic, and it's something we kind of been waiting for since the great financial crisis. Can you talk a bit about how much of that growth has really been driven by client demand for balance sheet, which would be a good thing versus just being a function of kind of QE in the flood of liquidity in the market?

Well, I would say that much of the balance sheet growth that has gone on has been attributed to client activity. If you just look segment by segment, you look at growth in our financing activity in investment banking that supports our M&A franchise. You look at financing that's going on in the context of both FICC and equities that were up year-on-year and that David was reflecting in the answer to his question around sustainability on the forward in our trading business. A good deal of this is balance sheet in support of clients. I would point out though that in the context of growing balance sheet, it doesn't grow in isolation. Meaning we have various risk metrics that are in place; capital has obviously grown, liquidity maintained at the firm, obviously grows in the form of our GCLA. All of these, I think, are meant to be read in tandem in the context of serving clients. But doing that in a way where balance sheet growth is held in the context of various risks, be it capital and liquidity profile of the firm itself. We're not a bank, notwithstanding the fact that we have strategically grown our deposit base that are experiencing the outsized growth in deposits that you're seeing or that you have seen at the bigger commercial banks. We aren't seeing that kind of inflation, frankly, in part because this is a new platform for us and a strategic pivot in terms of very usable deposits as a substitute for wholesale funding.

Okay. And as we think about the recurring question for a number of quarters now, of capital markets and how sustainable are these really strong activity levels, understanding that you can't predict and things could shut off tomorrow. How do you think about things like investment banking and global markets when you look at the budgeting process into next year and maybe the year beyond? How do you approach that? What's your outlook from that perspective?

I think our outlook, there are a confluence of things, Jeff, that are going on that are obviously quite accommodative for this. You're right; at any point in time, that mix could change and we wouldn't see the same robust amount of client activity. But we have fundamental growth in markets; we have fundamental growth in economic activity around the world. Over periods of time, that will grow long-term growth in these business platforms. I certainly would say we are running at very, very robust capital markets activity in the investment banking franchise at the moment. But I'd also say whenever things slowed down or rebalance a little, we're going to find that these businesses are baseline fundamentally larger than they were five years ago because of the growth in market capital world and the growth in economic activity in the world. We've always said that there’s a real correlation to economic activity to our activity. There’s a real correlation in market cap growth to our activity. Obviously, these things will ebb and flow. But we have lots of flexibility in the context and the way we manage the businesses. These businesses, I think, will continue to be strong performers even in different environment; they just might not perform at this level all the time.

Hi, good morning.

Good morning.

Good morning, Betsy.

So we talked a little bit earlier about market share and market share opportunities. I just wanted to take a slightly different angle on that and ask the question about where you think you're punching below your weight, if we could think about that being an opportunity from a regional perspective. So especially in Europe or Latin America, maybe Asia, you could speak to where you think you have opportunities in those regions. Thanks.

I mean, I point to a couple of things at a high level, Betsy. There's no question. One of the reasons why NN was really attractive to us is that in our asset management business, we've been punching below our weight across Europe, both in terms of the assets that we were supervising but also on our distribution capabilities. I still think there's more opportunity there. I do think around some of the public portion of our GSAM business across the world, there's still opportunities for us to punch above our weight, even though at this point, we're one of the top five active asset managers. We continue to think about that as an opportunity. I think there are opportunities for us around the Wealth Management business, particularly in Europe, and we've been focused on that. I think there are wealth management opportunities for us in the U.S. as we move from simply managing money with ultra-high net worth clientele that has been our traditional PWN business to a more mass affluent structure in using digital technology and extending the use of Ayco. China is another place where there's opportunity for us from a wealth management perspective, and you've seen we've announced our joint venture with ICBC, which we think is an interesting opportunity in that part of the world. Those are a handful of things from a regionalized basis, I would highlight.

Hi.

Hey, Mike.

Morning.

I was wondering if you could just kind of mark-to-mark us on your Sachs successes or initiatives. As you mentioned, year-to-date growth in revenues is two or three times that of expenses, so you're getting a higher marginal margin. Now some of that's due to the bull market. You mentioned comp leverage, but then, how much of that is due to technology? So I guess, one way to phrase this question is by area. So you have your new growth initiatives. You mentioned digital deposits of $100 billion, transaction banking deposit of $50 billion. I think that's pouring the cloud. Then you have your legacy trading activities where I guess there's been a lot of electronification. Then there is the rest of the Company, where I'm not really sure what the tech backbone is. So the question is, how much has the tech backbone contributed to that higher marginal margin for each of the growth areas, trading and the rest of the firm?

Well, I'll start, Mike, and Stephen, I'm sure will have some things to add here too. At a high level, we're spending significantly on technology to expand the platforms that we operate on, to better connect to our clients, and to enable us to operate more efficiently. We're performing very well at the moment. Our commitment to continuing to uplift our broad background and to put more of our businesses into the Cloud for a variety of reasons, which I will highlight in just a second, I think, is something that we've been very focused on strategically and it continues, but we're in the middle of the execution path. Historically, developers at the firm have used their own physical data centers to build technology. Cloud adoption really enables innovation by allowing talent that we have all across the organization to focus their time where it really matters and to directly create services and applications that can service our clients’ needs. Rather than doing what I call is undifferentiated heavy lifting tech builds that manage more traditional tech infrastructure. The cloud really provides low-friction access to technologies such as big data, machine learning, and analytics, which enables us to continuously deliver products to meet the growing demand that our clients have as they want to connect with us. It's allowing us to accelerate some of the initiatives we have, and you highlighted some of them, like transaction banking and some of the things we're doing on the market platform. There's no question that there are real efficiencies for us that are coming out of that. We know that the cloud is not for everything, and so there are some services, I give you an example like high-frequency trading, that are better-served on-premise. We clearly operate in a hybrid environment, and we also choose our partners in a multi-cloud or what we call a Poly Cloud strategy so that we can take the best-of-breed offerings that each of these different technology platforms have and allow that to better leverage what we can do for our clients. Overall, we're in this journey that's very, very intentional. It's aligned with our strategic objectives of delivering better services to our clients and operating the firm more efficiently. I think we're getting real benefit from it in the execution of our strategy. But I think there's more upside in that as we continue to build financial clouds, so to speak, for some of our principal businesses. Stephen, would you add anything to that or do you want to quantify some things a little more?

Yeah, the only thing I'd add was a bit of quantification. Mike, if you heard me say before, our non-comp expenses, so excluding litigation to just looking at the core non-comp expense year-to-date is up 11%. If you look at the gross expense that represents, about a third of that increase is related to technology. We're about a third of the increase of non-compensation expense in the firm through the first nine months relates to technology. This is spent all across the firm. It's both in particular initiatives like consumer TXP McKee but equally, it's been broadly on the broader uplift of platforms in and around the firm. Cloud-based engineering is one that David brought to your attention. In all of these spends, we sweat the ROI of this investment. As an example, part of the uplift will enable us to create greater opportunity for automation, which will play out as a return across the whole of the firm. I just offer that to you to give you some dimension from a true expense line as to what David was otherwise describing.

And just a follow-up, maybe digging deeper on our transaction banking. I have to be a little skeptical, but you did get your five-year target, as you said. If you think about the cloud, cloud-enabled, cloud-native, or I think in that case foreign in the cloud, can you just define really what that means? Is that the nirvana state of being in the cloud, the way you have transaction banking? To what degree has that contributed to you getting your $50 billion? By the way, does that $50 billion include any deposits from Goldman Sachs itself?

So I don't believe that there are GS deposits in it. It's $50 billion of gross deposits. As we've said, that's now become about 25% operational, so valuable to us. But just to come back to your question about the Cloud. The TXP business was built entirely in the Cloud. I don't know that I would necessarily conclude that that is why it's been successful. I would conclude, however, that it is how it's been built on a very cost-efficient basis and built with a level of security that I think satisfies us and our client base. The reason is self-evident, which is that it's built in the cloud, as David noted, it's not built with multiple instances of the transaction banking platform across redundant datacenters. It benefits without necessarily costing us to improve security upgrades to technology and the like.

The one thing that I want to add very, very clearly: the reason our transaction banking platform is succeeding and accelerating is that the quality of the offering for our clients is differentiated and better meeting their needs than the existing offerings. Part of the reason, as Steven highlighted, we could do that so quickly was because it’s easier to build on the Cloud and transition. Fundamentally, this is an example of us seeing an opportunity to build a digital platform that took friction out of an activity that was deeply embedded with our corporate clients. As a user of that activity, we saw that experience and we saw that there were ways that that experience could be improved. We've built a platform that delivers a better experience, and that's why it's succeeding. That's why it's meeting targets and continuing to grow. We are very confident about how we'll continue to execute. Stephen laid out a few billion dollars of revenue. We're confident in that target. This business has margins in it and will be a good contributor. We're very optimistic, so we're confident about how we continue to execute.

Good morning. Thanks for taking my questions. Just first, just congrats, best of luck to you, Stephen.

Thank you.

And Dennis congrats to you also on the new role, looking forward to working together. Maybe we could start with the GreenSky acquisition. So the Firm, a lot of investors see how the stock has performed since the IPO, pointing to spotty history in underwriting and the Firm began exploring strategic alternatives in August of 2019. So could you maybe add your perspective on why this was the right franchise to connect your growing consumer banking business? What do you think the market might not be appreciating or understanding about this Company that led you to be interested in acquiring it?

Sure. I'll start here on that, and I appreciate the question, Brennan. But first, it's a very different Company as an independent public Company than it is as a platform inside Goldman Sachs. One of the big weaknesses of the Company as an independent public Company is it didn't have a funding model and had to fund differently. Inside Goldman Sachs, we have attractive funding that becomes a technology platform that allows us to connect to a very attractive base of customers that we can pull into the market's ecosystem. I think the merchant network that they developed, well over 10,000 merchants, and they developed over 15 years is extremely valuable. The work we did to try to have a point-of-sale merchant network and look at that, we think it would have taken us close to ten years to develop a similar network. The ability to acquire that network, bringing very high-quality customers, these are customers with high FICO scores, very attractive to Goldman Sachs, allowed us to do something that fits seamlessly into our platform and allowed us to expand the point-of-sale activities that we were doing. We feel very, very good about it, and we think that this acquisition will consistently deliver 20% plus returns on the activity that it generates.

Great, thanks for that David. Maybe following up on that, could you provide some context around the strategic priorities from here? You've done two recent acquisitions, smaller both on size, but certainly a bit of activity. When you think about the different businesses in which you want to grow you've done a lot of these smaller bolt-on, some in the wealth side, with United Capital and Folio several years ago, at NN and GreenSky more recently. Going from here, is there any particular business that you think is quite compelling, given either some combination of ripe inorganic opportunities that the market might be under-appreciating, or your platform can be different within Goldman than it is as a standalone, the way it was with GreenSky? How should investors think about priorities and direction from here, and how they stack?

Sure, Brennan. I want to center our discussion around what we shared during our Investor Day. We outlined a strategy focused on continued investment in our core businesses to grow market share and enhance our positioning, and I believe we've made progress in that regard. There are still opportunities for further growth. We identified several key areas where we see potential to expand our competitive advantage while increasing our mix of durable fee-based revenues. These areas include transaction banking, asset management, wealth management, and our digital consumer bank. Moving forward, I believe there are still opportunities to grow in each of these areas. We can pursue organic growth, but if opportunities arise for acquisitions that could enhance our competitive position and growth in any of these segments, we will seriously consider them. As I mentioned earlier, the criteria for significant actions are very stringent. There may be future opportunities that could accelerate our progress in these areas. Our focus remains on these four segments because they enhance the durability of our revenues and support a more consistent earnings stream. This will be our guiding framework going forward, and I cannot point to anything more specific at this time.

Great. Thanks. Good morning. I have a question regarding Asset Management and the opportunity for fundraising in third-party alternatives. I'm interested in how you plan to scale this on both the customer and product sides. When we examine some of the stand-alone alternative managers, they've effectively expanded their product offerings and strengthened relationships with limited partners by linking multiple products, which creates a network effect. In your perspective, how is Goldman Sachs positioned with limited partners? Is there greater potential to bring in more limited partners or to enhance connections with existing Goldman Sachs products? Concerning alternatives, are there specific areas where you see potential for increased investment that could help you engage more effectively with your current limited partners on additional products?

I appreciate the question, Devin. This is a key focus for us strategically. I want to refer back to our comments during Investor Day that shaped our attention on this matter. We have extensive experience in these businesses and offer a broad global product lineup that has been developed over many years. Our presence spans private equity, growth equity, credit, real estate, and infrastructure on a global scale. While some independent firms have diverse offerings, very few have the same range of products worldwide as we do. What makes our alternatives business unique is that our limited partner relationships primarily stemmed from our private wealth network. We've raised significant capital through this network, including from our firm's partners, but we've not been major institutional funders in this area. However, given our relationships with various institutions from different activities, we recognized that adopting a unified Goldman Sachs strategy to foster relationships with these institutional partners could enhance our collaborations. A significant part of our growth potential lies in expanding the number of limited partners in our ecosystem. If you look at strategic solutions, which we raised last year, there were a number of probably a dozen new significant institutional LPs that the first time they were coming onto our platform was in that strategic solutions fund. I think it's a big opportunity for us to continue to expand that, and it's something we're very focused on. The opportunity for us is less about product addition, although we are at in products. We just raised the horizon fund, which is an ESG-centered fund that will allow us to allocate capital into certain climate technologies. We'll add other product capabilities that we think are interesting. But our focus is on meaningfully using the Goldman Sachs platform and the broad institutional relationships we have to really meaningfully expand our institutional LPs that are partnered with us. I think we have a lot of upside to run on that.

Thank you. Just one question, David. Adjust to us how you're thinking about just digital assets. You're seeing the entire ecosystem being built around digital asset custody tokenization. Just give us a perspective because it feels like all of that would be riding Goldman's wheelhouse to capitalize on as some of these things accelerate, so I would love to hear your perspective on one, how you see just that entire ecosystem developing and the role Goldman can play in that.

Sure. There’s no question that activities that we're involved in are digitizing quickly. I think there is a meaningful acceleration in the disruption that the digitalization of financial services is occurring. There are places that digitization is allowing us to disrupt and accelerate our position. The two we've talked about a bunch today on this call that are happening because of the digital infrastructure: our ability to do what we're doing in transaction banking is taking some of this digital disruption and using it in a different way. What we're doing in building a digital consumer bank is also relying on this. You know, the broader digital ecosystem, I think it’s an early stage as I think we're version 1.0. I believe you will continue to see a lot of disruption in traditional ways that financial services are delivered and consumed. I think big competitive platforms will continue to be a place where more financial services are remediated. There are lots of complications around the regulatory structure and how the regulatory structure will ultimately manage some of this as the technology allows for more disruption, but we are very early in the game, and I think it is a big opportunity for the firm, and the firm continues to be focused on it.

Good morning. I was hoping you could just elaborate on what drove the increase in RWAs from the regulatory guidance this quarter, please.

We experienced an increase of approximately $42 billion in RWAs, with about half of that due to changes in the methodology we are using for calculating RWAs. This adjustment resulted from ongoing discussions with regulators. This factor contributes to the third quarter ratio and will also influence future outcomes. Essentially, this change accounts for around 50% of the RWA increase. The remaining 50% is related to the overall business context and the associated risks and exposures.

Thank you. Hello, Steven. Hello, David.

Hey, Gerard.

Hey, Gerard.

Stephen, can you provide some insight on the transaction banking progress? You've reached $50 billion in deposits, which is ahead of schedule, and you remain confident in achieving $1 billion in revenues. When you presented those figures during Investor Day, were they expected to be reached around the same time? What is your timeline for reaching that billion-dollar target?

Sure. The targets were set at the same time, though bear in mind the environment then and now is quite different in the context of interest rates. We've seen fed funds come down from the time of Investor Day, I don't know, I want to say about 150 basis points, maybe a little more. The consequence of that is that the value of deposits that the economic value of deposits is not as rich now as we had imagined back at Investor Day. But equally in the context of an expectation of rising interest rates, we'll see a return to the value of those deposits, otherwise modeled out. Our view is that we'll be able to achieve that billion-dollar revenue target. I point out that of the $50 billion, more of them are operational. That's step one to achieving the value of that. That has been a big quarter-on-quarter increase from about 14% last quarter. More broadly in transaction banking, about two-thirds of the revenue from the time we modeled through now is correlated to deposit intake with the balance around FX and other fees. As we see interest rates come back, the value of those deposits will as well.

Since there are no more questions, I'd like to take a moment to thank everyone for joining the call on behalf of our Senior Management team, we hope to see many of you in the coming months. If additional questions arise in the meantime, please do not hesitate to reach out to Carey and the Investor Relations team. Otherwise, please stay safe, and we look forward to speaking with you on our fourth-quarter call in January. Thank you.