Goldman Sachs Group Inc (GS) — Q2 2023 Earnings Call Transcript

Thank you. Good morning. This is Carey Halio, Head of Investor Relations and Chief Strategy Officer 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. Note, this information on forward-looking statements and non-GAAP measures appears 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. I'm joined today by our Chairman and Chief Executive Officer, David Solomon; and our Chief Financial Officer, Denis Coleman. Let me pass the call to David.

Thank you, Carey, and good morning, everyone. Thank you all for joining us. This quarter, we produced net revenues of $10.9 billion and generated earnings per share of $3.08, an ROE of 4% and an ROTE of 4.4%. Our results were impacted by several items related to businesses we are executing on a strategic transition and positioning the firm for the future. In particular, shifting our asset wealth management business to a less capital-intensive model and the pivot to narrow our consumer ambition. All in, these items reduced our EPS for the second quarter by $3.95 and our ROE by 5.2 percentage points. Our results were also impacted by the challenging macro environment and, in particular, headwinds facing our specific mix of businesses. Activity levels in many areas of investment banking hover near decade-long lows and clients largely maintained a risk-off posture over the course of the quarter. CEOs around the world continue to be cautious as businesses grapple with persistent inflation, geopolitical tensions and slower growth. But we know corporate activity and capital formation are core to our financial system and there are a number of structural catalysts that should lead to increased levels of activity. And we're seeing it begin to pick up in a few spots already, particularly in equity capital markets and M&A dialogue. There's no question that recent economic data in the U.S. indicates the Fed's efforts to fight inflation are showing progress, and we are starting to see more optimism about the forward trajectory. However, as the year unfolds, we stand ready to help our clients navigate the evolving backdrop while maintaining a prudent risk posture and operating the firm more efficiently. Importantly, we laid out a clear set of strategic goals at our Investor Day in February, and we are in execution mode. We have two incredibly strong client franchises: a world-class global banking and markets business, and we continue to deliver solid returns even in an environment with reduced activity levels and a scaled asset and wealth management platform that continues to show very strong underlying trends aligned with our Investor Day goals with growth and more recurring revenues from management and other fees and private banking and lending. These businesses are supported by a number of things. First, a long track record of serving the world's leading businesses, institutions and individuals, building relationships as a trusted adviser is core to what Goldman Sachs does. Next, the client-centric mindset. Over the last five years, we have strengthened our efforts to bring to bear the best of the firm's capabilities to holistically serve clients with our One Goldman Sachs operating ethos. Client feedback continues to be highly encouraging and we see opportunities to make further gains. We also have a global, broad and deep platform with capabilities that span across products, geographies and solutions—a key differentiator of value to our clients around the world. We have exceptional people. They are differentiated and work hard to make a difference for our clients. Lastly, this is all underpinned by a culture of collaboration and excellence. We are also pleased that our strategy to reduce the capital intensity of our business and multiyear progress deploying our capital. We continue to execute on the $30 billion share repurchase program we announced in February and we recently announced a 10% increase to our quarterly dividend. We have made it a priority to grow our dividend to a competitive rate. Since the beginning of 2019, we have more than tripled our dividend from $0.80 to $2.75 per share per quarter. Given our ongoing strategic efforts to lower the firm's capital density and reduce earnings volatility, we are well positioned to grow further. As I said, we are laser-focused on executing our strategy. This moment in the economic cycle creates meaningful headwinds for Goldman Sachs and our business mix. At the same time, we are making tough decisions that are driving the strategic evolution of the firm. Given both these factors, it should come as no surprise that we're entering a period of lower results. I remain fully confident that we will deliver through-the-cycle targets of mid-teens returns while creating significant value for shareholders. I'll now turn it over to Denis to cover our financial results for the quarter in more detail.

Thank you, David. Good morning. Let's start with our results on Page 1 of the presentation. In the second quarter, we generated net revenues of $10.9 billion and net earnings of $1.2 billion, resulting in earnings per share of $3.08. As David mentioned, we have provided additional detail this quarter on three items that impacted our results. These items are a gain in connection with our sale process for the market's unsecured loan portfolio, as well as the business' operating results. Losses from our historical principal investments within Asset and Wealth Management and results related to GreenSky, including a goodwill impairment in consumer platforms. In aggregate, for the second quarter, these three items impacted net earnings by $1.4 billion and reduced our EPS by $3.95 and our ROE by 5.2 percentage points. Turning to performance by segment, starting on Page 4: Global Banking and Markets produced revenues of $7.2 billion in the second quarter. Advisory revenues of $645 million were down versus a strong prior year period amid significantly lower industry completions. Equity underwriting revenues rose year-over-year to $338 million as we saw some signs of reopening in the capital markets, although volumes continue to remain well below medium- and long-term averages. Debt underwriting revenues were slightly down versus the second quarter of 2022 as activity remains muted. Nonetheless, our client franchise remains very strong and we are well positioned to support the needs of our clients. We ranked number one in the league tables across announced and completed M&A as well as equity underwriting and high-yield debt on a year-to-date basis. Additionally, our backlog rose quarter-on-quarter, primarily in advisory. Fixed net revenues were $2.7 billion in the quarter as clients remained in a risk-off posture relative to a more active prior year quarter, particularly in commodities, rates, and currencies. Fixed financing revenues were $622 million. Equities net revenues were $3 billion in the quarter, roughly flat year-on-year. Equities financing revenues were a record $1.4 billion as we benefited from our ongoing strategic focus and increased balances. This was largely offset by a decline in intermediation revenues, primarily in derivatives. Our strategic priority to grow financing across both equities continues to yield results as these activities increase the durability of our revenue base, and we continue to see attractive deployment opportunities to support further growth. Moving to Asset & Wealth Management on Page 5: revenues of $3 billion were down 4% year-over-year, primarily driven by weaker results in equity and debt investments. Management and other fees increased 5% year-over-year to a record $2.4 billion, largely driven by higher assets under supervision. Private Banking and lending revenues were also a record at $874 million. We continue to see positive momentum in this business as we benefit from higher deposit balances and net interest income. Results were supported by a gain of approximately $100 million related to the sale of substantially all of the remaining Marcus loans portfolio. Equity investments generated losses of $403 million. More specifically, we had roughly $305 million of net losses in our private portfolio, primarily due to markdowns on investments in office-related commercial real estate, and approximately $100 million of net losses in our public portfolio, largely driven by a loss related to a historical principal investment that we sold during the quarter. Importantly, we have now reduced the public portfolio to approximately $1 billion, down from more than $4.5 billion in 2021. Debt investments revenues were $197 million, with the year-over-year decline driven by weaker performance in real estate investments. This quarter, we also experienced approximately $485 million of impairments on our real estate-related CIE portfolio, which are reflected in operating expenses. In aggregate, the results from Marcus loans and the losses from our historical principal investments negatively impacted our margins for the segment by approximately 15 percentage points for the first half of the year. Now moving to Page 6: total firm assets under supervision ended the quarter at a record $2.7 trillion, driven by $30 billion of market appreciation as well as $8 billion of long-term net inflows, representing our 22nd consecutive quarter of long-term fee-based inflows. Turning now to Page 7 on alternatives: alternative assets under supervision totaled $267 billion at the end of the second quarter, driving $521 million in management and other fees for the quarter. Gross third-party fundraising was $11 billion for the quarter and $25 billion for the first half of the year. Total third-party fundraising since our 2020 Investor Day is now over $200 billion and remains very well positioned to achieve our 2024 target of $225 billion. On-balance sheet alternative investments totaled approximately $53 billion, of which $24 billion is related to our historical principal investment portfolio. In the second quarter, we reduced this portfolio by $3.6 billion, which included sales of several CRE-related investments, bringing year-to-date reductions to approximately $6 billion and putting us well on pace to achieve our 2024 year-end target of a historical principal investment portfolio below $15 billion. Next, Platform Solutions on Page 8: revenues were $659 million, driven by growth in loan balances and consumer platforms. As noted earlier, we took a $504 million impairment charge on the goodwill associated with consumer platforms this quarter in connection with our exploration of a potential sale of the GreenSky business. We will continue to evaluate its intangibles for impairment, and should we decide to sell the business, we will also make a determination regarding moving GreenSky to held for sale, similar to the action we took last quarter with respect to our markets unsecured loan portfolio. We will share further updates as appropriate. Additionally, you'll recall that at our Investor Day earlier this year, we said we expected to reduce the efficiency ratio in Platform Solutions below 100% by the end of this year, and we are making progress. Absent the impact of the goodwill impairment in consumer platforms, the efficiency ratio for the segment year-to-date would have been better than our stated goal. On Page 9, firm-wide net interest income was $1.7 billion in the second quarter. Our total loan portfolio at quarter-end was $178 billion, unchanged versus the prior quarter. For the second quarter, our provision for credit losses was $615 million. Provisions in the quarter were primarily due to continued growth and higher net charge-offs in our lending portfolio within consumer platforms. Additionally, within our wholesale portfolio, impairments and a reserve build were partially offset by releases due to lower balances. Moving on to Page 10: we added a new slide this quarter, providing additional detail on our CRE exposure. Starting with the left side of the page, CRE loans represent a relatively small percentage of our overall lending book, roughly 15%. We are well diversified by property type with only 1% in the office category. Moving to the right side of the page, you can see additional detail on our CRE-related on-balance sheet alternative investments. We conducted a comprehensive asset-by-asset review of this portfolio this quarter and have incorporated the feedback from our sell-down process. Office-related exposure represents approximately 2% of the aggregate portfolio and equity securities loans and debt securities make up approximately 15% of the CIE investments in other category net of financings. Overall, the CRE investments are diversified across geographies and positions, with no single position representing more than 1% of the total on-balance sheet alternative investments. Furthermore, 50% of these investments are historical principal investments that we intend to exit over the medium term. We continue to remain highly focused on the overall risk management of this portfolio. Turning to expenses on Page 11: total quarterly operating expenses were $8.5 billion. Our year-to-date compensation ratio net of provisions is 34%, which includes approximately $260 million of year-to-date severance costs. At Investor Day in February, we articulated this year and we have now largely reached this target with line of sight to surpass it. Quarterly non-compensation expenses were $4.9 billion. The increase in our non-compensation expense was entirely driven by the CIE and goodwill impairments I discussed previously. Absent these items, non-compensation expenses are down for the second consecutive quarter, even in the face of inflationary headwinds. Our effective tax rate for the first half of '23 was an increase in taxes on non-U.S. earnings. For the full year, we expect a tax rate of roughly 22%. Next, capital on Slide 12. Our common equity Tier 1 ratio was 14.9% at the end of the second quarter under the standardized approach, which is 190 basis points above our new 13% requirement that will become applicable in October. As David mentioned, we are pleased with the results of the recent stress test and remain confident that our strategy to reduce the capital density of our business will continue to help improve our SCB over time. The 80 basis point reduction in our SCB will allow us to continue to remain nimble in dynamically deploying capital to support our client franchise. In the quarter, we returned $1.6 billion to shareholders, including common stock repurchases of $750 million and common stock dividends of $864 million. Our Board has also approved a 10% increase in our dividend, to $2.75 per share beginning in the third quarter. This increase will enable us to pay our shareholders a sustainable growing dividend and maintain a competitive yield, complemented by our previously announced $30 billion share repurchase program, where we intend to step up the level of buybacks going forward. In conclusion, our second quarter results reflect a challenging backdrop as well as our ongoing execution of several strategic actions. These initiatives will help transition our business and improve our overall return profile. We remain confident in our ability to deliver for shareholders while continuing to support our clients and remain optimistic about the future opportunities set for Goldman Sachs. With that, we'll now open up the line for questions.

So I want to talk about how we build towards that medium-term ROE target. So obviously, this quarter was depressed by the write-downs. Let's start with a 9-ish starting point. We know capital markets activity will be better in normal times. So I know we're a lot closer than it looks right now. If you look at Page 7, where you spelled out the $3.6 billion of historical principal investments that declined in the quarter. Or if you want to do it year-to-date either way. My question related to that reducing capital intensity is in a good way, it didn't look like there was a big gain or loss related to those exits. A) Is that right? And B) how much capital that free up because I'm just trying to build towards that ultimate goal.

So Glenn, thank you for the question. In terms of our journey towards our through-the-cycle returns, there are a number of things that we need to do in terms of achieving the top line targets that we laid out at Investor Day as well as continuing to drive ongoing capital efficiency. The capital efficiency has been a project that we've been working on for a number of years. We've had particular increases in those reductions over both the first and second quarter. As you know, about historical principal investments were down $6 billion. If we ultimately reach our target, we expect the total asset reduction to be approximately $9 billion.

Yes. I just want to add two things, just looking at that because Denis focused on the asset reduction and the continued journey. The one thing you didn't touch on was your question around the reductions and whether there were meaningful marks around that. There are some where you might have reduced where it might be a public position. So we mark those public positions at market prices and if you sell that position at a discount, there could be a slight loss. There are others that are private positions where you keep a valuation adjustment or a discount to what you believe it's worth as you sell and you get a gain. But I wouldn't say there's anything material that I'd call out in the context of that process. But the important thing about the journey that I'd like to emphasize is we laid out clear in Investor Day that we were going to narrow the consumer ambitions and really focus on these two big businesses. Clearly, at this point in time, given the lack of investment banking activity, our investment banking business is performing at a lower level of return and a lower level of activity than we've seen in nearly a decade. We don't believe that’s constant. We believe that global markets and banking business can deliver mid-teens returns through the cycle and that obviously makes up more than two-thirds of the firm. In addition, Mark Nachmann laid out at our Investor Day a very clear path on asset management to grow the top line of asset management ex the legacy balance sheet by a high single-digit percentage, and we set a target to drive the margin which ex the legacy balance sheet up to 25%. At that point, that is a mid-teens return business. As we continue to narrow the drag which we're making progress on in the platforms and I believe we'll narrow that to zero and move past that, you've got these two businesses that are the firm that will be mid-teens through the cycle. So that's the way I'd think about it. But obviously, you need a better environment to see that activity.

I appreciate that. Looking at the big picture, many investment banks that have reported recently show varying levels of optimism about the return of capital markets activity. In typical Goldman fashion, you have been appropriately conservative over the past few quarters. Could you provide an update on any encouraging signs you may be seeing? You mentioned that your advisory pipeline is up; it would be helpful to contextualize that.

Sure. I'd say the following. It definitely feels better over the course of the last six to eight weeks than it felt earlier in the year. I've talked in the past on this call and other times when I've talked to many of you about the fact that when you have a big reset, it takes five or six quarters to get that reset. It's not surprising that we're kind of at six quarters now and you're starting to see more activity. So it definitely feels like there's been a pickup in equity capital markets activity. That definitely feels better. There's more M&A dialogue, I can't tell you exactly what the journey is, but when I go back and I look historically at other periods where the macro environment has created sharp drops in investment banking activity, they tend to last for a year or so and then they start to improve. So I think we're starting to see that here. It definitely feels better. I think the inflation data has been better. The client sentiment is better and now we'll have to watch and see that journey. But I know this activity level of investment banking is not going to be the normal on a forward basis.

I guess maybe just the first question, when we think about potential for obviously pick up in the back half, David, as you just mentioned. But give us a sense of rightsizing the business, given the slowdown that we've seen over the last year or so. Are we there headcount-wise, infrastructure-wise, where you want it to be on the expense base and as we anchor back to the efficiency target around 60%? Just give us a sense of how you think we get there and where Goldman stands in terms of just rightsizing the expense base.

Yes. So I think we've made — I'll make a couple of comments, and Denis will probably add on with some more granular detail. But I think we've made progress. We set out some targets at the beginning of the year. As you heard in Denis' prepared remarks, we have them generally accomplished, in line of sight for more. You've seen our non-comp expense, excluding these extraordinary items around impairments, has been down for the second quarter in a row. We've been very focused on that. Real work has been done there because there are inflationary pressures on several line items that are non-comp expenses. I think that with hindsight, I'm very glad that we were early in January in starting to work on the headcount sizing. We took a couple of actions so far this year and we feel good about where we are. I'd remind everybody. We've said this before that we are resuming our regular performance-based process that we do with compensation at the end of the year, which we had stopped during the pandemic, and started again next year when we go through compensation, we will do a performance review. But we have no other specific plans on the headcount right now. We'll watch the trajectory of revenues in the environment as we go forward. We'll always make adjustments if something changes. But as we just said, we think we're operating at extraordinarily low activities of investment banking. We're not going to erode that franchise. That is a key franchise of the firm. So this is a moment that we probably have to support that a little bit more as things recover. We obviously are focused on a bunch of efficiency uplift in processes and operations. We have a big project going on to make some investments that can create more automation and technology, and we feel good about that. So we think that over time, that's an early 2024 thing, but we think over time, that's something else that will benefit the trajectory.

Just to add for you, at the end of the second quarter, our headcount was 44,600, down about 2% on the quarter, about 8% year-to-date. I think the more comparable metric is probably the year-over-year metric, down 5%, because we'll have new joiners in the third quarter. But as David said, we're pleased about taking the action early in the year, positioning the firm towards our target of $600 million in run rate payroll efficiencies.

Got it. And just maybe a quick follow-up. If I heard you correctly, you mentioned a goal to maybe step up a pace of buybacks in the back half. Just if you could maybe put some numbers around that, what level of buybacks should we expect? And how big a deal is the Fed Basel NPR, from what we're hearing, it may take six to twelve months before we know what the final rules when they incorporate industry feedback look like? So how big of an unknown is that in terms of your capital deployment plans?

Sure. So you have pieces of the answer to my question, to the question for my answer. So what we would say is, obviously, we are very pleased with the CCAR results. We have 190 basis points of cushion. We intend to deploy some of that excess capital into the client franchise to continue to grow our activities there. We announced our increase in dividend. We have been very committed to sustainably growing our dividend, and we're going to increase our level of buybacks. We are mindful of Basel III revisions, but we also recognize that we will get a rule. There will be a comment period for the rule. There will be a period in which that's implemented, some suggestions in the beginning of 2026. As we think about managing capital, we think we should be optimizing for our client franchise and our shareholders. We obviously will make sure we're in a position to adopt any new guidance and to do so on time and early, but in the intervening period, we're going to manage our capital to grow the firm and deliver returns of capital to shareholders, and we thought we would indicate that intention is to step it up from where we are.

David, there has been considerable speculation regarding the pricing in your consumer business, including suggestions that you may consider selling additional receivables associated with partnerships with Apple and GM. While such speculation may not reflect the actual discussions taking place, it would be useful to hear about your strategic priorities for the consumer business and how your vision has changed in recent months, especially in light of the challenges the business is facing and its alignment with your core competencies.

Yes. So thanks for the question. I frame it this way. As I think you know, we made difficult but appropriate decisions over a year ago, working with our Board to narrow our consumer ambitions and kind of rolled out the direction of travel and have been executing on that. That included the wind down and the execution of the sale of the Marcus loan portfolio, which has now been completed, and obviously exploring options for GreenSky, which we've been transparent about in the process. We've also said very clearly that our credit card partnerships are long-term partnerships. We don't have unilateral rights with them. They definitely can operate better. We've been working hard to improve the operation of them, which will reduce the drag, and we're making good progress on that. We're working with Apple and also with GM to do that. So there's a significant focus on reducing that drag. The drag of those credit card partnerships has gotten smaller and will continue to be reduced as we move forward into 2024. We continue to have a very strong deposit platform. We launched an Apple savings platform which also was a successful launch to grow our deposit base. We'll continue to grow deposits, and that's the course that we're on at the moment.

It's great color. Maybe just for my follow-up on equity financing specifically. The contribution in the first half actually implies an incremental $1 billion in fees year-on-year. You've definitely been highlighting the commitment to grow the financing piece. I just wanted to better understand, one, the durability of the gains that you saw in the first half, and as we look out over the next few years, how significant of a contribution to the trading business do you expect from the financing component both across equities as well as fixed income?

I'm going to start with a high-level just strategic view of what I think we've done and we're focused on doing and then Denis will give you a little bit more detail. One of the things — this has been a strategic priority for us because I certainly remember going back over the last decade that there were times where we did not have the largest equity business, and we were not in a position with our clients and the equity franchise that we're in now. There were some reasons based on strategic decisions that we made at the time. We've been very focused over the last decade in improving that position and have made good progress in growing the financing franchise and also expanding the base of clients that we work with. So I look at the equities performance this quarter and feel very good about it; very good about what the team has accomplished and very good about the feedback we get from clients. Now broadly, that financing revenue is more durable than intermediation revenue, but it obviously is affected by risk on, risk off, and overall market-level activities. So there can be variability in it, but there's a base stability there that's much more meaningful than intermediation revenues. Denis can expand a little bit more on how we think about that from a risk and capital perspective.

Sure. That is the strategic direction of travel. We are allocating a lot of time and resources—human capital, financial capital—to grow those activities. Equities financing revenues are nearly 50% of overall equities revenue this quarter, and that's something that has been growing. The combined fixed income and equities financing as a percentage of pick and equities continues to grow. So we remain very focused on prioritizing activities in that space with clients. We're also observing that there's a virtuous reinforcement of our commitments to grow market share and to cover clients more holistically over a multi-year period. It's paying dividends across dividend and intermediation, and recognizing David's comments with respect to market valuation levels, which drive changes in balances and changes in behavior, there's also activities that we've been taking to really systematically identify components of the client base across the financing activities and ensure that we're capturing more share in underpenetrated portions of the client base. So we remain committed to growing that activity. It’s relatively more durable than intermediation, but like other line items, it can fluctuate on the forward.

Just one follow-up to that last question and then a different one. But just on the last question, so you mentioned durability when you were talking about financing; that was part of what I wanted to understand. Do you feel like this quarter of financing revenue is a good jump-off point for us to grow from? If there's any puts and takes on how you would think—how would you want us to think about that level of durability, that would be helpful.

Sure. I'll comment both on fixed income and equities. In fixed income, we had slightly softer performance over period-on-period. That was driven by a component of fixed financing that is more episodic, which is commodities-based financing; those activity levels were a lot higher. So I think you see less contribution from commodities-based financing activity that was in prior periods. I think the forward for other components of our fixed financing, like collateralized lending and repo, remains an opportunity for us to deploy and continue to grow those types of activities. I'm always cautious about predicting growth off record performance. We’re pleased with the equities financing performance in the second quarter and we intend to grow that from here, but we'll have to continue to work hard to deliver the type of period-over-period growth. However, we do think there is still unaddressed market share, and we continue to grow our balances to grow those revenues.

You highlighted capital, obviously, have excess, significant excess. So there's that flex between buybacks versus deploy. This is an opportunity to deploy. I guess the follow-up I had to that was in your comments earlier on the Basel III end game. I think you mentioned that you, look, you're in a position to be opportunistic, whether or not you want to meet the requirements early. Again, I kind of ask the question with the context of you've got this opportunity in financing. So how should I think through meeting it early versus leaning into financing versus other options you might have?

Yes, Betsy. I appreciate that. I think there's a lot that's unknown about the direction. We're talking about years out. Dennis' message on early was in the context of the phase-in period, making sure we were getting there on time. We are focused on deploying—we generate a lot of capital because the firm generally through the cycle generates good earnings. We are going to return a bunch of that to shareholders, and there are opportunities, as we're talking about, to deploy that in service of clients. Given the work we've done strategically, we now have much greater flexibility which gives us the option to look sharply at some of the deployment opportunities than maybe six to twelve months ago when we felt we needed to be more cautious. At the same point, we have more capacity, as Denis said, to step up buybacks. You should view that we're very, very focused on delivering capital to serve clients and to shareholders, and we'll be very thoughtful about the adjustment phase in of whatever comes when we understand it. But I'd just say there's a lot of uncertainty; it's a ways out; there’s going to be comment periods. So, nothing going to be premature about what we do.

I think you mentioned the adjustments related to equity and debt investments, as well as headcount. Where do we currently stand on the headcount adjustments? The main question for David is whether this is the worst we can expect. Are you confident that all aspects, including any severance related to Marcus, GreenSky, and CIE, have been accounted for in a conservative manner? Will we continue to see 9% ROEs, or does this indicate a quicker path to reaching a midterm ROE of 15%?

Okay. Mike, it’s Dennis. I'll start and then I'll turn it over to David. We called out our severance expense year-to-date was $260 million. The vast majority of that was in the first quarter in connection with much larger levels of headcount reductions then. The reason we are making an effort to call it out, you will also notice our comp ratio net of business at 34%. We're just making an effort to provide transparency in terms of what components of our compensation expense accruals are designed for severance. We think that's important because with the balance, we're going to focus on our pay-for-performance ethos as well as balancing returns for shareholders but making sure we have the capacity this year to protect our talent, protect the franchise, and ensure we're positioned to capture the upside. The severance disclosures are just designed to help understand the financial impact of the actions we've taken. David will give you more color, but we've largely done what we set out to do. We're on target for the payroll efficiencies, and that will help you understand the severance picture relative to the overall accrued level of compensation and expense.

Mike, to your bigger question, this was a meaningful quarter of putting some things that we strategically decided to do behind us. With respect to the balance sheet, I think one of the important things to call out is that this is an environment at the moment that's been hard on that legacy balance sheet. We are reducing the legacy balance sheet, but we could just as well next quarter if the environment improves, see positive revenues from that legacy balance sheet too. If the environment got worse, we still have a balance sheet to reduce. This was obviously a tough quarter, but we also had one-off items that we put out. We'll continue to give you transparency on the legacy balance sheet, and we'll continue to move forward. I think the environment feels better, and if it turns out to be better, you'll see better performance. I feel very good about the strategic decisions we are making, the execution we are working on, and the progress we're making in asset and wealth management, and we as a leadership team see a clear path to improvement in a better operating environment.

And can you remind us—so you're taking this pain with the charges and you're looking to get to mid-teens ROE in the medium term. How do you define medium term? What should we be looking at along the way? Because to the extent that this accelerates this transition, it'd be nice to see some metrics externally for that progress?

Well, we're going to make progress, Mike, over the next couple of years. In the next two to three years, we're going to make meaningful progress. But I'd just highlight, when you go back to our core business, banking and markets, we are a leader. Given the mix of that business, it is performing well in what is not a perfect environment for that business. That business we really believe will deliver mid-teens through the cycle. The investment banking returns right now are at a very, very significant low, but we do have a 14% ROE to date in Global Banking and Markets. An improved environment should help us. The asset management journey is going to take—and we were very clear about this in February—it's going to take two to three more years for us to continue to make progress on the journey with respect to the continued reduction of the balance sheet and the revenue growth and the margin uplift. We're working on it. We see a clear line of sight, and we're going to make progress.

You spoke earlier to green shoots that you're seeing in the banking side given how important sponsors are to your banking franchise. I'm curious to drill down specifically on what you're seeing with that cohort and whether or not we need to see the levered loan market recover before they can come back in full force?

Yes. So thanks for that question, Brennan. It's a good question, and it's an important thing. I'm glad you're asking us to highlight it because I think about it this way, and it's very, very important. When you look at our M&A business, a significant contributor to our M&A business is M&A responses, and that has come to a halt. It's come to a halt. There are two aspects of it: the buy side and the sell side. The buy side obviously also gives us financing and other capital markets activity. The sell side sometimes gives staple and financing opportunities too, but that stuff has kind of come to a halt. Here's one thing I know about financial sponsors: they own a bunch of assets; they're all for sale, and they all will be sold. This environment has slowed down the pace of sales, but in a better environment, that will accelerate, and I think we're going to see that accelerate as we look forward from here. This has been a particularly slow environment for that. Secondly, they have enormous dry powder, and they can't make money unless they deploy. So as soon as you get to a place where the values reset and financing costs are understood, you start to see people deploy. We're starting to see some of that. You saw this quarter, obviously, a very, very big transaction around FIS. So I think that, as we move forward, we are going to see an improvement.

Great, I appreciate it. For my second, you started the process of selling GreenSky. We saw the goodwill impairment. What's been the reception to that asset, and has that impacted your expectation for how quickly you could finalize that sale?

Brennan, in terms of the process, we're obviously in the middle of it. We have feedback. I think extra color, just to share with you in terms of how to think about potential on the forward. It's a business we bought for $1.7 billion. We integrated into Goldman Sachs. We're seeing it perform well; it's a good business. We made the decision to explore alternatives because it's not the right fit necessarily for Goldman Sachs. We've written down the goodwill in the Consumer platform segment—there's no more goodwill to be written down. That business at this point has remaining unamortized intangibles of approximately $625 million that we consider for impairment on a quarterly basis and will do so in the future. Should we move forward with the transaction with respect to GreenSky, it could happen in a number of different ways. We could sell the platform, or we could sell the platform and the historical lending book that we have on balance sheet. Should we choose to sell the loan book, we will designate that as held for sale, much like the action we took last quarter with respect to our markets unsecured loan portfolio. You'll see the P&L impact accordingly as we mark the loans and release the associated reserve, so those are the types of things that could occur going forward given the strategic activity, but I don't think there's anything else to say about the GreenSky process given where we are.

In markets, we hit on financing. I just want to look at intermediation here. Obviously, results were off quite a bit from a great quarter last year. But based on the results, it looks like you did better than the implication on the conference circuit late in the quarter. So just the implication there would be that June got a lot better for intermediation. I just want to make sure that read is correct. Did June feel like a more normal month relative to the first couple? And has that continued? Just trying to think about the quarter and the cadence there.

Yes. So thanks, Devin. Just pointing back. One of the big differences when you look at the year-over-year comparison is we're coming out of the period where the war started in Russia, and there was enormous activity in the commodity space. We were very well positioned to serve clients in that space; if you go back and you look at the second quarter of 2022, we way outperformed in that quarter because of that commodities activity and obviously didn't have that here. I think to the second part of your comment, yes, June was better. June was definitely better. There was an improvement in tone and a little bit of improvement in risk on in what was early in the quarter. There's no question; there's a risk-on sentiment in the month of July than it was earlier in the second quarter. You just think about it, we're coming out of March, we were coming out of the banking crisis, and you think about when we were on this call in early April; we're in a very different place in terms of investor sentiment overall. So there has been an improvement throughout the quarter, and I think it's noted appropriately.

Okay, that's great. And then just on transaction banking and the momentum there, it'd be great to just get an update on some of the kind of the drivers. Really, the question is, it's such a huge market as you guys identified when you got the business. It's still a very small driver for Goldman. So just trying to think about the growth there? Are there opportunities for more step function growth if you add a certain capability? How should we think about the opportunity to really position this to become a much bigger business for Goldman?

So I appreciate that question. You are right; I think we've got an interesting platform. It's been very constructive in bringing deposits to Goldman Sachs. One of the things we said over the last couple of quarters is we're working now on getting the clients that are on the platform to really get more of their payments activity into the flow so this delivers real revenue and real value over time. That's taking some time and it will take some time. I think it's a dispersed business where there are lots of providers for most people. These are our clients, so we have the right to compete for and be engaged with them. They like our technology, but making changes in payment flows takes time. I think the team is very focused on the long-term investment in building those relationships. A particular opportunity for us is around our financial sponsor companies. Given our financial sponsors franchise, we have a very, very good opportunity set over time, but this is going to take time to execute. I think we have a business that's performing fine, but it's not making a meaningful contribution. Over time, we will work hard to figure out how this can make a more meaningful contribution to the firm with our client base.

I wanted to ask about private banking and lending, even excluding the $100 million gain this quarter. That continues to be an area of growth. Can you talk about the prospects as we think about going forward and the inputs to kind of continue the lower growth you’ve seen?

Sure. It's highlighted as one of those areas within the overall Asset & Wealth Management business, which we think has the combined benefit of growth opportunities as well as more stable and recurring revenues. There are a couple of components inside that line item. We've obviously seen strong growth in the deposit platform, which has been contributing nicely. That was the area in which we had our Marcus loans activities, which will obviously not be contributing moving forward. But the other piece of it, which is a strategic priority for us, is the overall activities with respect to wealth lending activities. We have, as I think David highlighted earlier, a premium ultra-high net worth business that has been growing nicely. We feel like we're relatively under-penetrated with respect to some of the lending activities with those clients and across the wealth space. We have some new leadership across the division in the past number of quarters and a very, very clear mandate that we should be out there aggressively leaning into those relationships and making sure that we can solidify them as comprehensively as possible. We expect that will be a contributor to that line item moving forward.

I think it's important to note that, to David’s point, that we are seeing client activity and there is movement across our private banking and lending activities. We have seen that significantly improve in the first half of the year as client demands for services continue to increase.

Yes. We just want to thank you for joining. Obviously, if you have any further questions, please feel free to reach out to me or Johan and the rest of the team. Otherwise, we look forward to speaking with you soon. Thank you, everybody.