Goldman Sachs Group Inc (GS) — Q4 2023 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Thank you for joining us. 2023 was a dynamic year. The US economy proved to be more resilient than expected, despite a number of headwinds to growth, including a significant tightening of financial conditions, regional bank failures, and an escalation of geopolitical tensions. Against this backdrop, this was the year of execution for Goldman Sachs. In addition to narrowing our strategic focus, we further strengthened our core businesses. As we enter 2024, the potential for rate cuts in the first half of this year has renewed optimism for a soft landing. We are already seeing signs of potential resurgence in strategic activity, which is reflected in our backlog. I am starting today's presentation with a strategic update, and Denis will provide comments on the financial results. Beginning on page one, we aspire to be the world's most exceptional financial institution, united by our shared values: client service, partnership, integrity, and excellence. Over the last 155 years, we have created one of the most aspirational brands in financial services. Goldman Sachs is a preeminent global investment bank and a leader across asset and wealth management. We've continued to simplify our strategy, and today is an opportunity to take stock of our progress, as well as highlight avenues for further growth. Strategic objectives on this page underscore our relentless commitment to serve our clients with excellence and to further strengthen our client franchise. As we show on page two, we have two world-class and interconnected franchises that are well-positioned to achieve these strategic objectives. First, Global Banking & Markets, which includes our top-ranked investment bank with an unparalleled merger franchise and a leading capital markets business. It also includes our number one equities franchise and top three FICC franchise. We are uniquely positioned to serve our clients across geographies and products. Second, our unified Asset & Wealth Management business, where we are leading global active asset manager with a top five alternative business and a premier ultra-high net worth wealth management franchise. This is a scaled business with over $2.8 trillion in assets under supervision and where we see significant opportunity for further growth. Across these two businesses, our extraordinary talent and unmatched execution are bolstered by our One Goldman Sachs operating ethos. On page three, we lay out our progress across several key priorities that we discussed at our most recent Investor Day in February 2023. In Global Banking & Markets, we've maintained and strengthened our leadership positions across investment banking. In FICC and equities, we have improved our standing with the top 150 clients. We generated record total financing revenues across these businesses in 2023 and have demonstrated impressive growth over the last four years. In Asset & Wealth Management, we've driven solid investment performance and consistent growth in a more durable revenue base of management, other fees, and private banking and lending revenues. This past year, we reduced our historical principal investments by $13 billion, and also surpassed our five-year alternatives fundraising target one year ahead of schedule. I will talk more about each of these businesses in a moment. Before I do, I would like to speak about how we've narrowed our strategic focus. We made several important decisions and swiftly executed on them. We exited the Marcus lending business and sold substantially all of our Marcus loan portfolio. We sold our Personal Financial Management business. We announced the sale of GreenSky, which remains on track to close this quarter. We also sold the majority of our GreenSky loan portfolio, which settled in the fourth quarter. We've also reached an agreement with General Motors regarding a process to transition their credit card program to another issuer. We remain committed to supporting the products and servicing customers through the various transition agreements and our consumer activities. I firmly believe companies should innovate and seek out new opportunities for growth, but it is also important to be nimble and make tough decisions when needed. Our consumer ambitions have produced over $150 billion of deposits, which we expect to grow further from here. These deposits have materially improved the firm's funding profile. Now we are focusing our growth in other areas where we have a proven right to win. We recognize that scale matters as it allows the firm to operate more efficiently and manage incremental regulatory and other costs, making unit economics more favorable. We need to be measured and focused in our execution. Our narrowed strategy is now focused on our two core businesses where we have a proven right to win with our leadership position, scale, and exceptional talent. On page four, in Global Banking & Markets, our leading and diversified franchise has produced average revenues of $32 billion over the last four years across a number of different market environments, demonstrating the diversity and relative durability of this business in aggregate. Over the last several years, we have made a concerted effort to grow our wallet share and financing revenues, which have clearly raised the revenue floor for these businesses. We have also generated attractive returns with an average ROE fully allocated of over 16% over the last four years. Turning to page five, a key part of enhancing this durability has been executing on our strategic priorities. Our efforts to materially strengthen the client franchise are evidenced by wallet share gains of roughly 350 basis points since 2019. We've maintained our league table rankings of number one in announced and completed M&A, number one in equity and equity-related underwriting, and number two in high yield debt. In FICC and equities, we're in the top three with 117 of our top 150 clients. These competitive positions reflect our One Goldman Sachs approach and our clients' confidence in us. Additionally, we have significantly increased more durable financing revenue. FICC and equity financing together have grown at a 15% CAGR since 2019 to a new record of nearly $8 billion. Turning to Asset & Wealth Management on page six. We've continued to make progress on bolstering more durable revenue streams. Management and other fees, as well as private banking and lending revenue together, have grown at a CAGR of 12% since 2019. We've also made swift progress in reducing our historical principal investments and are already approaching our pre-tax margin target on an adjusted basis. Turning to page seven. Our solid investment performance across both traditional and alternative channels has driven inflows. Over 75% of our traditional funds performed in the top half of Morningstar funds, while on alternatives, over 90% of our funds were in the top half of Cambridge funds, both over the last five years. The fourth quarter represents our 24th consecutive quarter of long-term fee-based net inflows across our platform. I want to reiterate that we have reached a milestone by raising over $250 billion in alternatives since 2019, surpassing our $225 billion target a year early. This fundraising success has been the result of our continued innovation and developing new strategies, as well as our ongoing focus on investment products where we have deep expertise and longstanding track records. Fundraising has been broad-based across geographies and asset classes, with approximately 40% coming from our ultra-high net worth relationships. I'm very proud of this achievement. When we were preparing for our first Investor Day four years ago, I remember how ambitious our initial target of $150 billion seemed. We’ve surpassed not only that target, but also our increased target of $225 billion one year ahead of schedule. This demonstrates the power of our platform and the exceptional depth of talent we have in this business. Putting all this together on page eight, you can see how much we've improved the durability of revenues across the firm. On this slide, baseline revenues are shown in gray, representing the sum of the trailing 10-year lows for each of the businesses that are considered more cyclical, namely advisory, underwriting, and intermediation. We believe this is a very conservative measurement because it's unlikely that every one of these businesses would ever hit a low point simultaneously. In fact, in all the years since we became a public company, that has never happened. In dark blue, you can see the more durable revenues from financing, management, and other fees, as well as private banking and lending, which in aggregate have grown at a 13% CAGR since 2019. Taken together, these two components make up over 70% of revenues in 2023. On top of that, we consistently generate upside across different market environments because of our diversified franchise. The increase in the consistent baseline and more durable revenue streams, coupled with the diversification of our scaled franchise and our ability to capture upside, demonstrate the revenue-generating power of our firm. Narrowing our strategic focus, our leadership team spent a significant amount of time in 2023 realigning the firm's priorities with our strategic vision, our values, and our strengths, which we highlighted on page nine. You've heard us talk about many of these elements before, starting with our strategic objectives. First, to harness One Goldman Sachs to serve our clients with excellence. Second, to run world-class, differentiated, and durable businesses. Third, to invest and operate at scale. As you can see on the page, our execution focus areas for 2024 are aligned with these strategic objectives. Taking one example, investing in our people and culture. The exceptional quality of our people, supported by our unique culture of collaboration and excellence, is critical in solving our clients' most consequential problems, and it's imperative that we continue to invest in them. All in, these objectives and execution focus areas will result in our desired outcomes: to continue to be a trusted advisor to our clients, to be an employer of choice for our people, and to generate mid-teens returns through the cycle and strong total shareholder return. With everything we achieved in 2023, coupled with our clear and simplified strategy, we have a much stronger platform for 2024. I feel very confident about the future of Goldman Sachs, our ability to continue to serve our clients with excellence, and that we will continue to deliver for shareholders. I will now turn it over to Denis to cover our financial results.

Thank you, David. Good morning. Let me start on page 10 of the presentation. In 2023, we generated net revenues of $46.3 billion, net earnings of $8.5 billion, and earnings per share of $22.87. As David highlighted, we made significant progress this year in narrowing our strategic focus. We provide details on the financial impact related to these decisions, as well as the impact of the FDIC special assessment fees on the slide. In aggregate, these items reduced full-year net earnings by $2.8 billion, earnings per share by $8.04, and our ROE by 2.6 percentage points. Turning to performance by business, starting on page 12. Global Banking & Markets generated revenues of $30 billion for the year, down 8% as higher equities revenues were more than offset by a decline in FICC revenues and investment banking fees versus last year. In the fourth quarter, investment banking fees of $1.7 billion fell 12% year-over-year, driven by a decline in advisory revenues compared to a very strong quarter in 2022. For 2023, we maintained our number one league table position in announced and completed M&A as well as in equity and equity-related underwriting and ranked second in high yield debt underwriting. Our backlog rose quarter-on-quarter, driven by a significant increase in advisory. As David mentioned, we are encouraged by the robust level of dialogues with our corporate client base. And though we're only two weeks into the new year, there have been solid levels of capital markets activity in both the US and Europe. FICC net revenues were $2 billion in the quarter, down 24% from strong performance last year amid lower activity in rates and other macro products. In FICC financing, revenues rose to a record $739 million. Equities net revenues were $2.6 billion in the quarter, up 26% year-on-year. The year-over-year increase in intermediation revenues was driven by better results in derivatives. Financing revenues of $1.1 billion rose year-over-year with continued strength on higher average balances. Across FICC and equities, financing revenues rose 10% in 2023, consistent with our priority to grow client financing. Moving to Asset & Wealth Management on page 14. For 2023, revenues of $13.9 billion rose 4% year-over-year, as an increase in more durable revenues, including record management and other fees and record private banking and lending revenues, offset a decline in equity investments revenues and incentive fees. Fourth quarter management and other fees of $2.4 billion were up 9% year-over-year. Full-year management and other fees were $9.5 billion, putting us on track to hit our $10 billion target in 2024, notwithstanding the sale of our PFM business. Equity investments produced net revenues of $838 million, higher year-over-year, driven by modest gains in our public portfolio versus losses in the fourth quarter of last year. Results in this line item also included a gain of $349 million from the sale of PFM. Moving on to page 15. Total firm-wide assets under supervision ended the quarter at a record $2.8 trillion, driven by market appreciation as well as strong net inflows across fixed income and alternative assets, representing our 24th consecutive quarter of long-term fee-based net inflows. Turning to page 16 on alternatives. Alternative assets under supervision totaled $295 billion at the end of the fourth quarter, driving $571 million in management and other fees for the quarter and $2.1 billion for the year, surpassing our $2 billion target for 2024. Gross third-party fundraising was $32 billion for the quarter and $72 billion for the year. As David mentioned, third-party fundraising since our 2020 Investor Day now stands at over $250 billion. On-balance sheet alternative investments totaled approximately $46 billion, of which roughly $16 billion is related to our historical principal investment portfolio. In the fourth quarter, we reduced this portfolio by over $4 billion, including sales of $3 billion of CIEs across over 40 positions, bringing reductions for the year to $13 billion. We continue to focus on exiting this portfolio over the medium term, though we don't expect portfolio reductions in 2024 to be at the same pace as in 2023. I'll now turn to platform solutions on page 17. Full year revenues were $2.4 billion, up 58% versus 2022. Quarterly net revenues of $577 million were up 12% year-over-year on higher consumer platform results amid growth in average credit card balances. As David mentioned, we reached an agreement with General Motors regarding a process to transition their credit card program to another issuer, the impact of which was to move the loans to held for sale and release the associated loan loss reserves of approximately $160 million. We have no additional updates regarding our credit card partnerships at this time. On page 18, firm-wide net interest income of $1.3 billion in the fourth quarter was down 13% relative to the third quarter, reflecting an increase in funding costs supporting trading activities. Our total loan portfolio at quarter-end was $183 billion, modestly higher versus the third quarter, reflecting an increase in other collateralized lending, which includes the pools of Signature Bank's capital call facilities we won at auction in October. Our provision for credit losses was $577 million. In relation to our consumer portfolio, provisions were driven by net charge-offs and seasonal balance growth, partially offset by the GM reserve release I mentioned. For our wholesale portfolio, provisions were driven by impairments that were generally in line with the last two quarters, with roughly half related to CRE. Let's turn to expenses on page 20. Total operating expenses for the year were $34.5 billion. Excluding severance-related costs of $310 million, compensation expense was flat year-over-year amid solid core performance, and as the market for talent remains competitive. As of the fourth quarter, we achieved our goal of $600 million in run rate payroll efficiencies, which allowed us to continue investing in our talent. Quarterly non-compensation expenses were $4.9 billion and included CIE impairments of $262 million. The year-over-year increase in non-comp expenses was driven by the FDIC special assessment fee of $529 million. Our effective tax rate for 2023 was 20.7%. For 2024, we expect a tax rate of 22% to 23%. Turning to capital on slide 21. Our common equity tier 1 ratio was 14.5% at the end of the fourth quarter under the standardized approach, 150 basis points above our current capital requirement of 13%. In the fourth quarter, we returned $1.9 billion to shareholders, including common stock repurchases of $1 billion at an average price of $311 and common stock dividends of $922 million. While we expect to remain nimble regarding capital return, given the ongoing uncertainty around the Basel III proposed rule, our capital management philosophy is unchanged. We prioritize supporting client deployment opportunities, sustainably growing our dividend, and returning excess to shareholders in the form of buybacks, particularly when valuation levels are attractive. In conclusion, we made solid progress on narrowing our strategic focus in 2023 with our execution driving a much stronger platform for 2024. Our best-in-class core businesses are well-positioned to execute on our strategic objectives. We will continue to harness One Goldman Sachs to serve our clients with excellence, run world-class differentiated and durable businesses, and invest to operate our businesses at scale. Additionally, the execution focus areas we've identified for 2024 will help us drive the outcomes of delivering for clients, our people, and our shareholders. With that, we'll now open up the line for questions.

Hi. Thank you very much. I wanted to get an update. You've been cautiously optimistic about potential improvements in investment banking. You noticed some momentum in the fourth quarter. I'm curious about the increase in your pipeline quarter-on-quarter. Can you explain the differences you're observing between the corporate side and the sponsor side, and share your current perspective? Thanks.

Sure. Sure, Glenn. I mean, just at a base level, I'm pretty optimistic, given the way we've got the firm positioned. There's no question that capital markets and M&A activity levels have been depressed. As I've said before, I don't think that continues year-on-year. We really started to see, in the second half of this year, real improvement. As Denis highlighted, the M&A backlog saw a robust replenishment and improvement in the fourth quarter. I'll just highlight, and I know this is obvious, but I think it's worth stating: we put up $1 billion of M&A revenue. If the backlog is growing, that means we've got to replace the $1 billion that we put up, plus then have growth. That's a very, very strong replenishment. The level of strategic dialogue has definitely increased, and we're seeing it across our platform. I'm encouraged by capital markets activity. I'm not going to say it's running back to 10-year averages right away, but it has materially improved. I do think you're going to see some more meaningful IPOs in 2024. Across debt and equity issuance, we are seeing more activity and more engagement. At the end of the day, people had done a lot of funding that takes them out for a period of time, but they've got to start thinking about their capital structures and accept the reality of the market. We're seeing that come through. So when I look broadly, it feels better. There's a lot going on in the world. So I think one of our jobs is to be risk managers and worry 98% of the time about the 2% of things that can go wrong. We'll continue to take a cautious view regarding the overall operation of the firm, but I do think the firm is incredibly well-leveraged to this pickup, and it feels better is the way I'd frame it.

All right. Cool. Maybe just to follow up on that. Reducing the on-balance sheet investments, as you mentioned, is an important part of the ROE improvement for Asset & Wealth and for Goldman overall. With that said, the markets are higher, the pipeline's better. How come the balance sheet reduction of on-balance sheet investments might be slower this year when the intent, I think, is to get rid of all of it at the right price?

Yeah, first of all, I think we made a lot of progress last year. If you look at what we accomplished, it was pretty meaningful, especially given the environment. One of the things that happened is we pulled some stuff forward that we didn't expect to monetize in 2023 into 2023. Our focus is to get that to zero as quickly as possible. If you're operating inside this firm and you're operating in that business, you feel enormous focus on reducing that as quickly as possible. But we want to make sure that we manage expectations appropriately. We set a clear target over the next three years to get to zero. My guess is we've got a good shot if we execute to do that quicker than that.

Hey, good morning.

Good morning.

I wanted to discuss the FICC business. It appears that FICC revenues have returned to pre-COVID levels, similar to what we saw in the first quarter of 2019. Looking at slide 13, it seems that most products are underperforming. Can you give us some insight on whether the intermediation aspect of FICC is nearing its lowest point, and if we should expect some improvements in FICC going forward?

Sure. At a high level, what I'd say is that this quarter, intermediation activity was quiet, particularly in the back half of the quarter, late November and December; clients were quiet. If you look at the whole year, I don't think it's fair to say the whole year is back to 2019 levels. Activity levels were up and down during the year. We have a big diversified business. When our clients are active, we execute on it, and we continue to grow the financing revenues, which make it overall more durable. It was a quiet quarter, particularly the back half, in terms of intermediation. I don't expect it to continue at that pace. I think Denis' comments in the opening indicate we're seeing more activity in the first few weeks of the year. We'll watch it. That activity, particularly in that segment, can move up and down based on what's going on in the macro environment.

Got it. And maybe just sticking to FICC or maybe both FICC and Equity. On the financing side, if you don't mind reminding us of the opportunity to grow financing over the next year or over the medium term. Thank you.

Thanks, Ebrahim. So we've been clear over the last several years that we see opportunities to grow both FICC and equity financing. It's virtuous activity for us. It dovetails well with our focus on clients and our focus on market share. We have a lot of expertise in this space and we see a lot of demand from clients for us to deploy both into FICC and equities. We now have a leading equities franchise overall. Our equities financing business is in a leadership position and at scale. It has grown significantly, and we continue to see opportunities to increase the activities we do with our existing clients and bring new clients on the platform. So looking out into 2024 and 2025, we continue to be very focused. I think there are good opportunities across both FICC and equity financing in GBM.

Sorry about that. Thanks for taking my questions this morning. I'm curious about the impact that we should be thinking about around the potential exit from the Apple relationship. I know it's an ongoing thing, but maybe is there anything that you could provide to help us think about how that impact could flow through?

Denis said in his comments, we've got no other updates on the credit card partnerships other than what he stated. We continue to work with Apple on a partnership to serve our customers and to continue to reduce the drag from the partnership, and we continue to make good progress. The drag in 2024 will be materially less.

Okay. Appreciate that. When you think about the deposit platform, Marcus, that's been a pretty bright spot on the consumer front and definitely seems to have worked well. What has been your views, or how has the beta on that deposit base played out versus your expectations? Do you have any plans to adjust your thoughts around, you know, earlier you talked about wanting to be in the top decile of payouts for that product. Is that still the goal, or has that adjusted as the platform has matured?

Sure, Brennan, and thank you for that question. Our Marcus deposit platform has been a real strategic advantage to us in terms of overall firm-wide funding. We did set out a strategy to set our pricing at the higher end of the pricing envelope to maintain, sustain, and grow our balances across that platform. We haven't adjusted our strategy at this point. We saw good growth across our various strategic deposit funding channels last year, not just Marcus. Overall, deposits are up over $40 billion on the year. I would just say, as we move into 2024, we continue to focus on driving growth across the strategic channels and be thoughtful about our overall funding mix.

Hey, David. You started off the call saying that 2023 was the year of execution and that was the year when you had an ROE of 8%. If we throw in some of the charges, it's 10%, and that's not really executing at your 15% or so desired return. Can you give us a kind of waterfall chart in words on how you get from that core 10% ROE to 15%, and if you could define medium-term?

Sure. I appreciate the question, Mike, and obviously, we're very focused on it. It wasn't an ideal environment for our core business. In fact, I don't think it was even a good environment. When investment banking is operating at low levels, that impacts overall. It's important to look at our core business of banking and markets, which is a very significant portion of the firm. On a fully allocated basis in these environments, which were not ideal, given the investment banking activity, it had a 12% ROE. We believe through the cycle that that business is a mid-teens business. I don't think we're going to stay at the level of activities that we've been at. We have that business positioned very well. You'll get some upside returns there in a better environment. On Asset & Wealth Management, we continue to reduce the balance sheet. The balance sheet has been a drag on returns. However, we can drive Asset & Wealth Management with a smaller balance sheet to mid-teens returns or better with a 25% margin. We're on that journey and making progress. Looking at those two businesses, that's the vast majority of the firm, and they can operate in mid-teens. We've significantly reduced the other drags. We have most of it behind us this year. That doesn't mean there won't be anything, but the drag from platforms in 2024 will be materially reduced from what it's been. I think we're making good progress on the overall positioning of the firm over the next three to five years.

And then just to follow up, the other drag you mentioned would be a lot less than 2024 from Platform Solutions. Can you dimension that a little bit? Also, as it relates to principal investments, do the higher stock markets help the disposition or not so much?

They absolutely do. When markets improve, they help the disposition. There's no question. Over the last two years, we've had real headwinds in terms of revenue against the balance sheet. We could have more of that, but on a much smaller balance sheet in 2024. With a better market, you might have some benefit to revenue performance, but we're focused on reducing that broadly. You see you have more transparency now in the platforms as we continue to close on GreenSky and move GM to held for sale. You have more clarity in that regard. We believe the drag will be significantly reduced in 2024. When we're comfortable providing more specific color on that, we will.

Thanks so much. Morning, David and Denis. I wanted to ask about the interplay between a recovery in investment banking versus trading intermediation. I know there's probably a lot of assumptions that need to go in here. But if you think about the environment with macro conditions settling down, which would likely support investment banking, I'm assuming some areas of trading could also slow down, and then maybe other areas could pick up. Just love to hear a little bit about the puts and takes, what you've seen historically there, if easier. Can you grow investment banking revenues and trading ex-financing at the same time? Thanks.

At a high level, Devin, I appreciate the question. I think we can continue to grow our financing activity given the scale and size of the market, and the way market activity is growing. We will normalize investment banking activity. Over time, assuming growth in the world and in the market capital world, we'll continue, as we have for the last 25 or 30 years, to grow our investment banking activity. When there are disruptions in the world, we find that FICC can be a little bit countercyclical in some ways. But that doesn't mean a normalization of investment banking activity leads to a slowdown in intermediation or market activity. There's a lot going on in the world. The trajectory of rates, inflation, there's a point of view, but it's not certain. I think people are going to be active as they adjust to the environment. Debates about how the Fed continues on its quantitative tightening will contribute to the overall activity. I think this environment in 2024 will be better for our mix of businesses than it was in 2023.

Understood. I appreciate that, David. Quick follow-up for Denis. Commercial real estate has clearly been a big headwind in 2023. Appreciate all the disclosure. Your office on-balance sheet is only $1 billion now. As you think about the environment relative to current marks, how do you feel about the pain being behind the Company and just characterize the environment where there could still be material marks? Also, what are your expectations for marks as you exit the historical CRE on-balance sheet principal investments?

Thank you, Devin. As you know, we have new disclosures in the last couple of quarters on CRE, specifically regarding the nature of the loans in that sector. As well as the on-balance sheet position. You can see from those disclosures that we've made substantial progress reducing positions over the course of 2023. We disclosed on prior calls that our office exposures from an impairment and marks perspective, are roughly at 50%. Based on our visibility and recent activity over 2023, we think that portfolio, and the broader portfolio, is in the right place. As we move into 2024, there should be opportunities for further dispositions, and we'll remain very focused on the mix of that disposition activity. We're also mindful of supporting clients during these transitions while reducing our risk.

Hi. Good morning, and thanks for taking my question. You highlighted in your prepared remarks that Goldman surpassed your fundraising target in alternatives. As we look forward, can you provide more color on your strategy to grow, particularly in private credit? How big do you expect to get in private credit, how it complements your DCM and wealth franchises, and any risks we should be aware of?

Sure. I appreciate the question, Ryan. It's obviously something we are very focused on. We feel good about the fundraising progress we've made. Looking forward in 2024, you could expect us to raise another $40 billion to $50 billion of alternatives. We're very focused on private credit. We have over $110 billion of private credit. The opportunity to continue growing in private credit, especially given our franchise's position and origination connections with our broad banking business, gives us a unique platform and competitive advantage. We will continue to keep this focus. Our goal was meant to set the opportunity set three-and-a-half years ago, but you'll see us continue to raise money on a yearly basis. We have some big funds planned for 2024 and will continue to build the partnerships with our client base. Both myself, John Waldron, and the broad team across our Asset Management division are spending significant time with big capital allocators globally to invest in those relationships. Well, today marks the end of the comment period, and it's the end of the beginning of the process. We are moving into the next phase and continue to engage with regulators, given our significant concern with the proposed rules. You'll see comment letters from us and our peers, along with letters from end-users, including pension funds, insurance companies, corporates who are particularly concerned about how this rule may affect their access to capital and the ability to mitigate risks in their business. The magnitude of these proposed changes would be felt well beyond the banking industry and could disadvantage the US competitively. My view is that this rule was not proposed appropriately and should be withdrawn and reproposed. I don't think it's helpful to speculate on the impact of the rule as proposed. The Fed is listening carefully, taking in feedback. However, I don't think anyone believes the base case is this will move forward as proposed. We have a long track record of being nimble with capital. We’ll adjust businesses or pricing in certain activities to adapt. Until we see what the rule looks like, it's premature to speculate. We are flexible with capital and focus on achieving our objectives.

Thanks, good morning. As you think about your efficiency targets, what's a reasonable level of growth for non-comp expenses? Excluding, obviously, all the one-timers this year? And what are your investment priorities for 2024?

Thanks, Dan. The efficiency ratio is something we are laser-focused on. We are orienting the firm to drive toward our 60% target. You mentioned the impact of selected items; without those, the efficiency ratio would have been around 65%. We have many initiatives across the firm to target our non-compensation expense. We had a structured process implemented to mark our business plan against our execution throughout the year. Obviously, we are dealing with inflation across these expenses, and we need to manage our spending closely. As we look into 2024, excluding selected items, we don't expect that type of activity to repeat. We remain focused on maintaining our overall non-comp expense spend. Compensation expense is a performance-based variable component of our overall expenses. We will evaluate how activities unfold in 2024 to determine our aggregate expense base and efficiency ratio.

Great, thank you. There was a reference to alternatives inflows from the wealth channel. Can you confirm if that has been consistent over that time period? Do you view that level of contribution as sustainable? What are the economics to Goldman Sachs for that funding versus external alternatives?

At a high level, that comment looks over the past four years that we have grown our Asset Management and Asset & Wealth Management business, highlighting the mix during this period of investment. Traditionally, most of our fundraising for these activities came from our private wealth channel and was higher than 40%. As we continue to invest in broad institutional partnerships, that percentage of wealth funding will probably decrease, but I won't speculate exactly where it will go. The economics associated with alternatives are extremely attractive across all channels. However, there are fundamental differences between the economics of institutional partnerships and those allocating smaller amounts. We're continuing to scale the business and have real margin targets in the business. I'm confident in our opportunities and our ability to solidify investment through our asset management platform.

Good morning. There's, obviously, all the uncertainty on the capital rules as discussed earlier. But in the near-term, how do you think about capital allocation? You're continuing to lean into financing, which is capital-intensive depending on how banking, and if banking comes back, that can consume capital. Can you touch on interest in bolt-on deals, as well as buybacks, which were strong in '23?

I'll start with general comments, and Denis may add some comments. We've always stated that when there's activity to support our clients, that's our priority on where we allocate capital. We've increased the capital allocated to client franchises over the last five years. Since that's one reason our broad Global Banking & Markets franchise has performed well in varying environments, we're very focused on ensuring we have the resources to support our client base. We will continue to deploy capital where we see opportunities. Similarly, we will return it to shareholders as we generate capital. We're currently taking a more conservative posture given Basel III endgame uncertainty. Yet, we have a long track record of being nimble with deployment and return of capital. We will emphasize our commitment to growing the dividend and returning excess to shareholders. There is an operating leverage story, which is why the margin in our Asset & Wealth Management business will continue to improve. When we ran an on-balance sheet business, the number of people needed to manage those positions creates a scaled business differently from traditional fund management. We're early in that journey, but as we raised our first growth equity fund, we need a smaller team to manage that fund than we would with an on-balance sheet position. So there's real operating leverage here, contributing to margin improvement over time. Yes, while it's not massive, it accounts for some operating leverage. I don't want to overstate it, but it will contribute positively moving forward.

Good morning, David. Good morning, Denis.

Good morning.

Good morning, Gerard.

In your prepared remarks, David, you mentioned slide five or six about the success in growing relationships with top 100 FICC and equity clients, identifying financing as a key contributor. Can you elaborate on the success factors? Is it capital injection into that business, hiring additional people, and has competition changed? Has your competition faced greater challenges?

Sure, Gerard. At a high level, I’d start with the fact that this business is a scale business, and we’re one of the few firms that operate these businesses at scale. A handful of things we've done well is: First, our One GS Ethos. Historically, we operated these businesses more in silos, with clients experiencing the firm differently across the board. We spent time getting client feedback on how to improve their experience. They wanted to deal with the firm as one partner. The results from our One GS approach significantly improve our client experience and consequently our wallet share. Secondly, we've become a much larger financer of their activities, and financing leads to rewards in other ecosystems. Thirdly, we take a long-term view in our transactions with clients, serving them even when it’s not economically attractive. Consistent engagement leads to better long-term opportunities. Those three elements, combined with our scale, have helped significantly. John, Denis, and I spend considerable time engaging with these clients to gather feedback to refine how we serve them.

Very good. You talked about seeing a pipeline and activity across the globe. In which areas are you seeing the best potential? Is it the Americas, Europe, or Asia?

The Americas is the largest activity region due to the resilience of the US economy. We've observed a material pickup there that exceeds other locations. However, we see increasing activity across Europe, particularly in strategic dialogue. Comparatively, Asia, particularly China, remains slower in both M&A and capital market activities.

Thanks. Good morning, David. Good morning, Denis. I wanted to ask a couple of questions about comp leverage and operating margins. Denis, you noted the adjusted efficiency ratio set at 65% versus the reported figure in the mid-70s. Can you help reconcile some of the different items to get down to that 65% figure, and is that the appropriate jumping-off point for 2024?

Steven, I think the 65% is a good starting point for 2024. As the business evolves, we need to be mindful of the activity mix. Certain activities attract varying degrees of transaction-based expenses. We will focus on driving operating leverage while remaining true to our pay-for-performance principles. Ultimately, the compensation relative to 2024's results will depend on the activities and ensuring talent retention is emphasized.

I was wondering about the Lead Independent Director, who I guess is no longer on your Board, Bayo, who had a firm acquisition. Now you're looking for a new lead director. Is that someone from the Board, or from outside Goldman Sachs, and what type of person is the Board considering?

I appreciate the question, Mike. As you noted, the acquisition of Bayo's business occurred last week, but he remains the Lead Director until the deal closes later in the year. We have governance processes in place, and the Board will address the transition properly. Aside from that, I'm not going to comment on specifics regarding the governance process.