Goldman Sachs Group Inc (GS) — Q3 2024 Earnings Call Transcript

Thank you, operator, good morning, everyone. Thank you all for joining us. In the third quarter, we produced net revenues of $12.7 billion and generated earnings per share of $8.40, an ROE of 10.4%, and an ROTE of 11.1%. Overall, I am pleased with our performance especially in a quarter where our results were impacted by selected items including the narrowing of our consumer footprint which reduced our ROE by 80 basis points. Our performance demonstrates the strength of our world-class and interconnected franchises where we were effectively serving clients in a complex backdrop. In Global Banking and Markets, we remained a premier M&A advisor and a leading global risk intermediary. Across investment banking, corporate sponsors remained actively engaged and we see significant pent-up demand from our clients. Our backlog rose again this quarter driven by advisory and we expect our leading investment banking franchises to benefit from the continued resurgence in activity. In FIC, we delivered record financing revenues and facilitated our clients' risk intermediation needs, particularly as activity levels picked up towards the end of the quarter. In equities, we reported a very strong performance across both intermediation and financing. Overall, our global broad e-platform remained exceptionally well positioned to support our clients' evolving needs across products and asset classes. In Asset and Wealth Management, our position as a leading global active asset manager and the top five alternatives player afford us significant opportunities in secular growth areas. Our assets under supervision reached another record this quarter, surpassing $3 trillion and representing our 27th consecutive quarter of long-term net inflows. We demonstrated further growth in more durable management, other fees, and private banking and lending revenues, which together were a record $3.4 billion this quarter and up 9% versus last year. We remain confident in our ability to grow these more durable revenues at a high single-digit pace over the coming years, and alternatives fundraising remains strong. We raised over $50 billion year-to-date and now expect 2024 fundraising to exceed $60 billion as we see ongoing demand across asset classes, including private credit, private equity, secondaries, and infrastructure. In wealth management, we grew our total client assets to $1.6 trillion, and our ultra-high net worth franchise is well positioned to continue to grow globally as we expand our advisor footprint and our leading offerings and our lending offerings to clients. Our pre-tax margin in AWM is up meaningfully from last year and in line with our mid-20s target. We remain focused on further improving the margins and returns in this business while also investing to drive growth across wealth management alternatives and solutions. As I look at the operating backdrop, the U.S. economy continues to be resilient. Inflation has been coming down, the recent unemployment data is supportive, and while we have seen some softness in consumer behavior, the tone of my recent conversations with clients has been quite constructive. The beginning of the rate cut cycle has renewed optimism for a soft landing, which should spur increased economic activity. More broadly, clients remain highly focused on the trajectory of rates in jurisdictions around the world, the policy implications of global elections, particularly in the U.S., and the high levels of geopolitical instability. Against this backdrop, we are leading global franchises in supporting our clients as they navigate risks and position themselves for a range of outcomes. Before I turn it over to Denis, I want to spend a moment on capital and Basel III revision. Although we have closely followed the recent remarks from regulatory officials about the upcoming reproposal, we continue to have concerns about the overall regulatory process. There remains a lack of transparency and appreciation for the interconnectedness of capital requirements across the proposed fundamental review of the trading book, CCAR, and the G-SIB buffer. We recognize this is an ongoing process that will take time, but as we've said before, we need to get this right. The final rule will have a significant impact on the growth and competitiveness of the U.S. economy. Requiring too much capital will increase the cost of credit for businesses large and small and will impact growth across the country. We look forward to receiving more clarity from our regulators once the reproposal is published and participating in the new comment period. We remain very engaged both as an industry and as a firm. In closing, I feel very good about the trajectory of Goldman Sachs. We are leaning into our strengths. Our client franchise is stronger than ever, and we continue to harness our one Goldman Sachs approach. Our world-class talent, execution capabilities, and risk management expertise are core to who we are as a firm and allow us to provide differentiated service to our clients and outperform for shareholders through the cycle. Let me now turn it over to Denis to cover our financial results in more detail.

Thank you, David. Good morning. Let's start with our results on Page 1 of the presentation. In the third quarter, we generated net revenues of $12.7 billion, up 7% year-over-year, with earnings per share of $8.40, up 54% year-over-year. ROE was 10.4% and ROTE was 11.1%. As David mentioned, our results were impacted by select items, including agreements to transition the GM card platform and to sell our portfolio of seller financing norms. In aggregate, these items reduced EPS by $0.62 and our ROE by 80 basis points. Now turning to performance by segment starting on Page 4. Global Banking and Markets produced revenues of $8.6 billion in the third quarter. Advisory revenues of $875 million were up both sequentially and versus the prior year period. We remain number one in the league tables for announced and completed M&A for the year to date. Equity underwriting revenues rose 25% year over year to $385 million, as equity capital markets have continued to reopen, though volumes are still well below longer-term averages. Debt underwriting revenues rose 46% year over year to $605 million amid higher leverage finance and investment grade activity. We are seeing increased client demand for committed acquisition financing, which we expect to continue on the back of increasing M&A activity. Overall, our investment banking backlog rose quarter on quarter driven by advisory. FIC net revenues of $3 billion in the quarter were down from a strong performance last year amid a relatively quieter summer, though we saw a meaningful pickup in activity in September. A decline in intermediation revenues was partially offset by record FIC financing revenues of $949 million, which rose 30% year-over-year, primarily on better results within mortgages and structured lending. Equities net revenues were $3.5 billion in the quarter, up 18% versus the prior year. Equities intermediation revenues were $2.2 billion, up 29% year over year, primarily driven by strong performance across derivatives and cash products. Equities financing revenues of $1.3 billion rose versus the prior year amid higher average balances. Across FIC and equities, financing revenues were a record $6.6 billion for the year to date, a direct result of the successful execution on our strategic priority to improve the durability of our revenue base. Moving to Asset and Wealth Management on Page 5, revenues of $3.8 billion were up 16% year over year. Our more durable management, other fees, and private banking and lending revenues reached a new record this quarter of $3.4 billion. Management and other fees increased 3% sequentially to a record $2.6 billion for the quarter and $7.6 billion for the year to date, well on the way to achieving our $10 billion annual target for 2024. Private banking and lending revenues rose sequentially to $756 million. We are seeing positive momentum in this business, and we remain focused on increasing lending penetration and expanding our loan product offerings. Incentive fees for the quarter were $85 million. We continue to expect to reach our annual target of $1 billion over the medium term, supported by approximately $4 billion of unrecognized incentive fees as of the last quarter. Equity and debt investments revenues totaled $294 million, reflecting NII in our debt portfolio and markups in our public equity portfolio. For the year to date, we generated one and a half billion in combined equity and debt investments revenues. Now moving to Page 6, total assets under supervision ended the quarter at a record of $3.1 trillion, bolstered by $37 billion of liquidity products net inflows and $29 billion of long-term net inflows across asset classes. We continue to see traction in our solutions business where we are leveraging our SMA capabilities and outsource CIO platform to deliver customized multi-asset solutions. Turning to Page 7 on alternatives. Alternative AUM totaled $328 billion at the end of the third quarter, driving $527 million in management and other fees. Gross third-party fundraising was $16 billion in the third quarter and over $50 billion for the year to date. This brings cumulative third-party fundraising to more than $300 billion since our Investor Day in 2020. We further reduced our historical principal investment portfolio by $1.7 billion in the third quarter to $10.9 billion, bringing year-to-date reductions to $5.4 billion. On Page 9, firm-wide net interest income was $2.6 billion in the quarter, up versus the prior year period, reflecting an increase in interest earning assets. Our total loan portfolio at quarter end was $192 billion, up year-over-year, driven by an increase in other collateralized lending. For the third quarter, our provision for credit losses was $397 million, primarily driven by net charge-offs in our credit card portfolio and partially offset by $70 million of net recoveries on previously impaired wholesale loans. Turning to expenses on Page 10. Total quarterly operating expenses were $8.3 billion. Our year-to-date compensation ratio net of provisions is 33.5%. Quarterly non-compensation expenses were $4.2 billion, down 14% year-over-year. We remain focused on driving efficiencies across the firm, given ongoing inflationary pressures, competition for talent, and our desire to invest in our engineering and technology platforms. Our effective tax rate for the first nine months of 2024 was 22.6%. For the full year, we continued to expect a tax rate of approximately 22%. Next, capital on Slide 11. In the quarter, we returned $2 billion to common shareholders, including dividends of $978 million and stock repurchases of $1 billion. Our common equity Tier 1 ratio was 14.6% at the end of the third quarter under the standardized approach. During the quarter, the Federal Reserve reduced our SEB requirement by 20 basis points to 6.2%, following a successful appeal process, resulting in a standardized common equity Tier 1 ratio requirement of 13.7%, which became effective on October 1st. We remain very engaged with our regulators on creating a less volatile and more transparent process. Given our 90-basis point buffer, we continue to have flexibility on capital deployment and are very well positioned to serve our clients and return capital to shareholders. In conclusion, our overall performance reflected the strength of our client franchise and the improving operating environment. We are executing on our strategy where we are maintaining and strengthening our leadership positions across Global Banking and Markets and leaning into secular growth opportunities in Asset and Wealth Management. Across both businesses, we are making strong progress in growing our more durable revenue streams. Simply put, we are playing to our strengths as a firm, and we remain confident in our ability to drive returns for shareholders while continuing to support our clients. With that, we will now open up the line for questions.

So, trading question. The markets business has been great, markets have been supportive. But I guess my question is to your comments on the regulatory perception perhaps of trading in general, and August looked like a spike in volatility, but it looks like you did really well. This marks many quarters that you and others have done very well for years. Do you feel the business is managed better? Do you feel like your results mean anything towards the outcome on the regulatory side? I'm just curious what the, if the evidence matters.

I appreciate the question, Glenn, and I mean, it's a hard question to answer. I think we've been clear on some of the advocacy we're doing around the regulatory process, but I've also been clear on regulatory environments, ebb and flow and that people can be policy. And so, over time, you see shifts in all this. Our job, and I think we've done this effectively over a very long period of time, is to adapt and adjust and be nimble to the different regulatory environments. With respect to the business of markets which includes FIC intermediation and FIC financing and equities intermediation and equities financing, I think we have an extraordinary leading franchise that we've invested in over a long period of time. We have deep client relationships, clients who rely on us for a package of services and that's not going away. Certainly, in this environment, this is filled with uncertainty, their need to constantly engage, reposition, and reshape continues to make them very, very active on a broad global scale. I think that we've done a number of things to evolve the way we run the business over time that I think have made the business more durable. Certainly, our focus and our emphasis on financing and the way we've grown and managed the financing businesses puts a level of durability into the business that's different than when the businesses were predominantly intermediation businesses. But intermediation continues to be an important service, and when you really step back and look more year-to-year, these broad franchises across numerous silos tend to be more resilient and more consistent than one might see when you look quarter to quarter. So, we feel good about the way the franchise is positioned; we’ll continue to invest in it and grow it. I think one of the things that people forget is that these businesses are correlated to growth in the world. They're correlated to market cap growth in the world. As long as you believe, over the medium and long term, those trends will continue with our capital generation we have the ability to invest in those franchises and grow those franchises over time, and we continue to see attractive return opportunities to do that. How the regulators respond to that over time, I really think is a separate question. We’ll continue to be actively engaged as we’ve said to you, we are to ensure that we can manage that appropriately.

I appreciate that. This one will be a short follow-up. With HPI was weak, but that'll happen on any given quarter. I think if you look over a long period of time, you've earned good returns on your historical principal investments. But as that book shrinks, the $10.9 billion that's left, the $4 billion attributed to it, should I take a historical ROE on that capital to think about the lower revenue corresponding to the lower book going forward on HPI?

Glenn, it's Denis. I guess what I would suggest you take a look at, we have obviously a commitment to reducing the balance of the historical principal investments. As we continue to have success doing that, there will be less revenue associated with the positions that have now been moved off of the balance sheet. But you will still see revenue generation associated with some of the co-invest positions that we retain as a piece of driving our overall growth of our third-party fund management business. As to guidance on future projected returns on that portfolio, I don't think I have a good answer as to exactly what future returns will be relative to prior returns, but I would suggest to you that we have a very diversified portfolio of exposures and a longstanding track record of delivering good returns for our clients.

I just had a follow-up on trading and maybe David would appreciate your perspective around when we read about non-bank trading venues getting into fixed income markets, potentially disrupting the business for the incumbents. Comment on that you may, you could in terms of other parallels to the equity business that we should draw? And how much of a competitive threat are the non-bank/non-regulated entities, especially given your comments around the regulatory backdrop and kind of the Basel game, reproposal and the opaqueness around that? Thank you.

Certainly, Ebrahim, and thank you for your question. This topic garners significant attention, especially in the media. When considering the overall landscape, there are a few crucial points to note. The equity journey has been quite favorable overall. There is substantial competition across all these sectors. While competition has always been present, very few platforms can provide the leading capital allocators and asset managers globally with the extensive scale and integrated services they require. This aspect is crucial for these clients when we engage with them. Competition will always exist, and it will continue to grow. I want to emphasize that our equity business remains as large, scaled, and profitable as it has ever been, despite the immense competition over the last 25 years. The industry has seen digitization and transformations, and there are now only a couple of players attempting to penetrate certain credit markets. They may indeed compete and secure some business, but these are substantial markets. We deliver integrated scaled solutions for our clients and remain a major liquidity provider and financier for them, which is vital for their overall ecosystem. Though these businesses will always face competition, we are confident in our position as a leading player for our clients in these areas.

Understood. And just a follow-up on ROE and discussions with investors. You have made significant progress over the past year or two; performance has been strong, and the stock prices reflect that. As we consider the journey from a 12% to 13% ROE to possibly achieving 15% or more, one could argue that while the market conditions are not ideal, they are also not unfavorable. What needs to occur for Goldman to reach a point where we consistently see a 15% ROE? Thank you.

Well, I appreciate the question. And we've been very clear, we have a mid-teens target and that we believe we are on the journey of executing towards it. I think the first thing that has to happen is we need to continue to execute over a period of time to deliver on that. Again, I think it's a pretty simple building block of a story. First, we have a Global Banking and Markets business, and you can go look at the performance over the last five years of that business and the returns that that business has delivered. I would say that I still believe we have some tailwind dynamics around the investment banking activity, and I just highlight that while investment banking revenues have improved, and we've made progress, we are still not operating at 10-year averages in M&A and equity volumes. M&A volumes year-to-date are 13% below 10-year averages. That's better than the 25% below 10-year averages that they were for the first nine months of last year, and equity volumes are 27% below 10-year averages. Now that's better than the 34% to 35% that they were below 10-year averages for the first nine months last year. But there's no reason why we're not going to get back to 10-year averages as a tailwind, but you can look at the performance in banking and markets, and that's one building block in the foundation for mid-teens returns. The second is our continued progress, which requires more time and more execution on our part around Asset and Wealth Management. While we've improved the margins, we still have work to do on the margins and the returns, and we continue to be very focused. But we are confident over the course of the next few years that we can bring the returns of our Asset & Wealth Management franchise into the mid-teens. The next building block or the last building block is we continue to narrow our consumer footprint and the drag associated with the platform business; that will get to a point where it basically becomes negligible. It's getting closer to that. If you put those building blocks together, Global Banking and Markets, its actual performance with a little bit more of a tailwind, which obviously benefits from continued progress on Asset and Wealth Management, that is our business. We should be able to deliver those returns. We're focused on it. We have more work to do, but that is the path, and I think it's pretty clear.

Can you hear me? I have a question regarding the trading business and the competitive landscape. How do you view the broader competitive environment with other banks? Your market share seemed to peak in 2022, but it has been somewhat volatile since then. Are you noticing any signs of competitors returning and increasing competition from anywhere? I'm interested in your thoughts on this.

When you have leading market shares, our Global Banking & Markets franchise, you bounce around at different levels based on short-term activity, but what I'd say is if you step back and you look over the last five years, we took a step function up in our market share broadly across the plot. From quarter to quarter, you'll see variability. I still think those market shares are positioned in a leading position, and we're zealously focused on the top 150 clients, which obviously make a huge contribution to the markets business. We're obviously always focused on our overall banking footprint and the opportunities there. In a better M&A environment with more large cap M&A, you do see some movement in our market share. That's a market share tailwind for us. They've always been competitive businesses, Christian. Again, we think we're very well positioned with our clients and have deep trusting long-term relationships. Through our one Goldman Sachs operating ethos, we have a history of delivering for them through the cycle. There's always going to be competition, but we like the way our business is positioned. I don't see anything that fundamentally changes that.

Okay. On Private Banking, just another set of very strong results there, I think revenue growth up 10%. If I'm doing my math correctly, organic flows are in the high single-digit range, which would put you, I think, best in class. So just remind us again like what's driving strength there? And then maybe any key initiatives for growth over the next couple of years that should help sustain this growth.

Sure, I'll start. I don't know Denis might have something to add. But at a high level, this is a strategic decision that we have this big ultra-high net worth platform, and we were underinvested in lending to those clients. There are a lot of historical reasons for why that's the case, starting with the fact that 15 years ago, we weren't a bank. We really didn't look at the world that way. But lending into an ultra-high net worth franchise is a very good business and it's a very important part of the business. We understand that we've learned and we've seen it through investment banking, and we've seen it through market that when you holistically look at the integration of services that you provide to your client, including lending, you improve your market share position. When you look at our wealth franchise versus other wealth franchises, we've been underpenetrated in lending to those wealth clients, and we put in place resources, a leadership team on a focused effort to increase that activity to these clients. While we've moved the needle, we're still underweighted versus other competitors like JPMorgan, and I would expect that we have a relatively good growth trajectory to continue to invest in that capability for our clients. And Denis I don't know if there's anything you want to add on that?

The only thing I'd amplify, which I think we've mentioned before, we feel like we've run this play before. We worked on a strategy to holistically cover clients in banking by integrating lending as part of the holistic suite of services we provide them, improving our market share position with those clients. We implemented the same thing across the GBM public businesses of FICC and equities. We stand underpenetrated relative to peers today, and we believe that by taking the same holistic approach to the clients in the wealth business, we can improve our market shares and the nature of our relationship with those clients. As David said, we are allocating incremental resources, more specialist capabilities and giving our advisers the confidence to offer a competitive product to their clients to improve the overall relationship they have with their clients.

The first question relates to why do you stop platform solution sets of business line? And what's happening with the Apple Card? And do you plan to exit that and take charges for that? And kind of what's going on with that? Again, two-thirds of the firm's global banking market, one-third is wealth and asset management, and then you have this kind of extra business there.

Yes. Thanks, Mike. I mean, I know there's a lot of focus on that. I think we've been pretty clear in our messaging that we are continuing to narrow our consumer footprint. I don't have a lot more to say about where we are with Apple Card other than we're running it and improving it. And that's really all that I have to say. I think the direction of travel at this point is pretty clear.

Returning to the core business, you mentioned that M&A activity is still 13% below the 10-year averages. How relevant are these averages considering the activity from sponsors? There seems to be a range of estimates regarding the amount of dry powder available from sponsors, whether it's $1 trillion or $3 trillion, all of which are ready to pursue acquisitions. This seems to be an unprecedented level of capital. Could this potentially lead to an M&A super cycle as this money is deployed? If that’s the case, how would you adjust the 10-year average in light of this?

I mean, one, I think there are long-term secular trends around M&A and market cap, which, by the way, are also meaningfully below trend I think that's more driven by the current regulatory environment and the fact that there has not been a lot of large-cap M&A with the market cap expansion, especially around TAP, that might be permanent. It might not, but my guess is that will ebb and flow from time to time. But your sponsor point, Mike, is a very, very good point. The bottom line is the sponsors have been slower to turn on than I would have expected, but they will turn on. By the way, if all that dry powder is deployed, okay, M&A volumes versus the 10-year averages will go up. But if we were sitting here five years ago, the 10-year average was lower five years ago than it is today because the 10-year average is definitely correlated to market cap growth and economic growth. I do think we'll operate under 10-year averages. I think over time, by the end of the decade, the 10-year average will actually be higher than it's been with a historical lens. I will say at the point lower to deploy than we would have expected, but we see more activity. Some of that is indicative of the growth in our backlog that we've highlighted. I do think that sponsor activity will continue to accelerate over the next 6, 12, 24 months.

Can you hear me okay? Okay, super. Yes, I totally agree. We've been calling for a capital markets rebound. It's really nice to see it coming through. Two questions. One on the expanding loan offerings that you mentioned earlier. I know we touched on it briefly in the Q&A. Just a few questions ago. What I wanted to make sure I understood is when you think about the RWA impact of reducing the private investments that you're doing, you're reducing that portfolio and then increasing the expanded loan offerings into Asset & Wealth Management. Do you see that as RWA neutral; is the density of the loan offerings higher or lower than the investment, the private equity investments that you've got?

Sure, Betsy. Very good question. So generally speaking, the density of the HPI that we have left to sell down is high, and the density of Asset and Wealth loans is low. So, migrating RWA towards the lending businesses improves the durability, the predictability, and the recurring nature of it, it brings forth the holistic access to the clients, all their wealth management needs and it is more capital efficient for us. So that is an underpinning component of the strategy as well.

Okay, super. Right, because it's collateralized heavily, right? Okay. Then the other question I had was just on the GM cut. I wanted to make sure I understood this. As far as I get it, it's signed but not closed yet. So, can you give us a sense as to when you think it's going to close? And are there any trailers in your P&L when it does close, for example, anything we should be aware of with regard to either payments on the contract to GM? Or is there like a lot of cap that you have to be involved in? I'm just trying to make sure I understand how to model this as we go forward.

Sure, Betsy. So, in terms of timing, it's signed but not closed. There has to be a conversion to the new issuer and then ultimately at the closing of the platform transfer expectations; we're targeting Q3 of 2025. That's sort of timing from a modeling perspective. I’d point you to where we were in Q1 and Q2 of this year, something on the order of negative $50 million or $60 million per quarter, just to give you a sense for how that rolls forward from here until closing.

I wanted to follow up a little bit on the investment backlog commentary. I know you said that advisory drove a lot of the growth in the backlog. But we did see some sponsors recently go to the IPO market with some success. I'm curious about what you're seeing on the ECM and IPO side, particularly as we see early signs of sponsors re-engaging with that distribution channel.

So, thanks for the question, Brennan. There's no question equity activity picked up. But as I highlighted a few moments ago, volumes are still running 25% below 10-year averages. IPOs are running even more significantly below 10-year averages. I think the sponsors, again, some of it is sponsor monetization. Because sponsors have had their portfolios marked a little bit higher, they've been slow and are kind of waiting for growth to bring up some of the values. But I do see an acceleration of activity and I expect it to continue. There's no fundamental reason why equity volumes ultimately shouldn't run at 10-year averages, and those averages will grow over time with a growth in market cap and a growth in the deployment of sponsored capital. Sure. We have a very broad and interesting credit platform that is integrated in a one Goldman Sachs way, to some degree, on a differentiated way than many of the people we compete with. We obviously, as a credit originator in our investment banking business are one of the leading credit originators if not the leading position in leveraged loans and high-yield debt for quite some time and a leading position with sponsors and the origination of that. We originate and distribute. In our Asset & Management business, we are a leading player in private credit with $140 billion of private credit assets and growing and investing in that. I think one of the interesting things when you look at the discussion and the integration of this around the street, there is plenty of capital that is interesting in deploying into private credit. The valuable part of the ecosystem is origination channels. There are obviously some private credit players that have interesting origination channels and platforms. When you look across Goldman Sachs, our origination ecosystem across both our Global Banking & Networks business and our Asset & Wealth Management business is unique and differentiated; we will continue to lean into and grow our private credit platform.

I wanted to spend some time just looking at or unpacking some of the self-help levers, recognizing that the business is still burdened by capital consumption from some of the noncore assets, whether it's in consumer or equity investments. Denis, I believe in your prepared remarks, you alluded to an 80 bp drag on ROE from consumer. I was hoping you could maybe provide a more holistic picture, just frame the drag on returns from various noncore activities today. Are there any remaining self-help levers that could bolster returns which may still be on the come?

I believe the 80-basis point drag is the easiest way to understand the effect of the items we have identified for disposal. If we were to completely exit all consumer-related activities, we could see greater potential for capital relief. We can certainly reduce the majority of our HPI exposure, which currently has over $4 billion of attributed equity. This would help lower the P&L components. Over time, we will eliminate the capital associated with HPI, and ultimately move the capital from our consumer businesses, which will provide additional benefits to us in the long run.

That's great. And just for a follow-up on buybacks. Just stock is currently trading at 1.6x book, does suggest some expectation in the market for returns to get closer to mid-teens ROE target. Just wanted to hear your perspective on price sensitivity to buybacks at current valuation levels and in anticipation, at least of David's response, citing prioritization of organic growth; where do you see the most attractive opportunities to deploy capital organically today?

Our capital deployment philosophy unchanged. I think if you take some of our comments in the prepared remarks about the outlook that we have, some of the engagement we're seeing from clients, potential opportunities for the capital markets reopening to take the next step forward and see capital committed acquisition financing, that is an activity that's very core to Goldman Sachs. We have a historical leading market share position there given netting up our advisory franchise and our underwriting capabilities. That would be an attractive place for us to deploy incremental capital continuing to drive the recurring revenue streams across wealth and the financing business with public is an attractive place to deploy capital. That is our priority as we sit here today with our 90 basis point buffer heading into the fourth quarter. We also remain very committed, as we've said before, to sustainably growing our dividend. That's a core part of our philosophy. We do believe it's important to also continue to return capital to shareholders. We do have a higher valuation; we think about that. We are sensitive to that, but I don't believe our current valuation is such that we shouldn't be also returning capital to shareholders.

Question on just the alternative asset management fundraising. Looking at the fee rates, the largest bucket, corporate equity, is seeing a declining fee rate since the end of 2022. I know there were some legacy funds in there that are sensing, but it would be great to get an update on the outlook for the fee rates, just given all that fundraising that you've done in alts in recent years. When we should think about the inflection occurring as recently raised AUM moves into fee earnings? When we should think about the right steady state because it would seem like out there.

Sure. Thank you. Appreciate the question. Obviously, we put that disclosure out there so you can track it and follow it over time. It's obviously very much mix dependent in terms of the nature of the particular assets that are coming in. A strategic initiative that is very valuable to growth of our asset management franchise is important to a lot of our investment. Our clients are the services we provide through our OCIO offerings. But in certain of those portfolios, we do bring on board some alternative assets, and the effective fee associated with that is lower than the paid Goldman Sachs fund generated alternative fees. We have a multi-channel asset accumulation strategy that we're deploying to grow the overall scale and scope of that business. For us, having scale is an important contributor to driving margins, efficiencies and returns in the business; not each of the channels comes with the same exact effective fee. You may see some slight variation in that over time.

Okay. Just a follow-up on the trading business. Results have been incredibly resilient and the firm has gained market share. I'd love to get a flavor, if you can, just around how much of trading revenue today is driven by your electronic trading capabilities and how that's evolved over the past handful of years. I know there's been a lot of investment there, and you guys have some pretty differentiated offerings. I wanted to get a little bit of sense of that and how that plays into the story of market share from here just as you become more relevant with clients.

Sure. Thanks for the question. I mean, we look at equity and frankly, even FICC trading activities, the strategy facing clients is multi-channel again. We have voice. We have high-touch voice, and we have electronic. We're increasingly finding ways to integrate those activities to optimize ultimately the way that we can make markets and deliver solutions for clients. We have both, call it, run rate, more plain vanilla intermediation activities. Now we have the capacity to either take on board more interesting structure or complicated trades with or without deployment of risk capital in the process, and the approach is to have a distributed set of channels across the public side trading businesses.

Denis, I want to come back to a comment you made about reiterating the $1 billion goal for performance fees. I think you said $4 billion of unrecognized gains. You're obviously run rating well below that year-to-date. Can you talk about the time period you think to get to that $1 billion? Is there seasonality with certain liquid products that are typically more recognized in the fourth quarter? Or is this something that should be more pro-rata?

The $4 billion is versus the stock of outstanding funds that are in process of deploying, completing harvesting and migrating their way to the end of their investment cycle. Given a lot of the other commentary that we've been discussing about levels of activity, strategically and openness of capital markets, in particular, equity capital markets, sponsor monetization activity, etc., as it relates to our portfolio where we own some balance sheet investments, we have not had as much monetization in line with where the market has been generally. As activity improves, we will also see more monetization, and we expect that over the next several years, we will move towards those medium-term targets of a run rate, $1 billion worth of incentive fees. But I can't tell you exactly the rates that come in; that will be dependent on how ultimately these funds harvest and when we're in a position to ultimately pay carry to investors and recognize our own incentive fees. Sure. I think we have made a strategic decision that the investment in advisers needs to be a strategic and sustained investment program. Rather than having it a sort of ebb and flow across different market environments or based on what the firm's perceived capacity to invest may or may not have been at different years in the past. I think part of the strategy of investing in what is a really outstanding business at Goldman Sachs, where we're the premier ultra-high net worth firm, we are making a sustained commitment to invest in advisers over multiple years.

Can you guys share with us your Goldman is in a unique position, I think, to be able to share with investors the benefits of private credit. I think, David, you mentioned you have $140 billion in private credit assets. When you see your clients choosing a channel to access monies from you, whether it's private credit or just lending. Can you share with us the advantages that you see through private credit or the regular loan portfolio that your customers may benefit from?

I appreciate the question, Gerard. I think one of the things that's interesting about this is, this gets framed in very binary ways. Obviously, private credit is a broad term and it refers to a lot of things. It refers to a lot of investment-grade lending, a lot of which is on insurance company balance sheets. It can refer to direct lending in the below investment-grade business, which is a component of our syndication activity and origination activity, particularly with sponsors. It can be direct lending for small and medium-sized enterprises. There's a wide range of things. When I listen to your question, I pull away you asking in particular about leverage finance activity and how our clients choose channels in terms of where to get capital. I'd say they don't go in through the bias; they're actually looking for a capital structure that works for their particular solution. I think that one of the things that positions us well is we are a unique player that we have an ability to either syndicate and underwrite distribute; we have an ability to direct lend. We have an ability to show clients alternatives that can best meet their needs and their needs might be different in different transactional situations. We like our positioning there. I do say that I believe from a secular perspective, there will be continued growth in private credit, particularly in the leveraged finance space and so we're looking to capture that. It's more complicated. There are different channels, there's different origination efforts than sometimes the way this is all portrayed. But we feel like we're well positioned across the spectrum to be a significant participant in this space.

The only thing I'd add, Gerard, if you just think about it, I think David has laid this out really well. If you think about where Goldman Sachs is positioned against this opportunity set, we have capacity to lend to alternative clients, for example, who are deploying into the private credit space. We have the capacity to underwrite and distribute different types of investment-grade and non-investment-grade capital structures, and we have the capacity to offer investment opportunities to clients who want to get exposed to the asset class. While we compete with all those different parties that David enumerated, I'm hard-pressed to find many people that have the breadth of exposure to each aspect of this ecosystem relative to us. So we really like our position in terms of the secular trends there and how we can support clients in each and every aspect of the continuum.

I wanted to ask about the margin trajectory in Asset & Wealth Management. Year-to-date, you have a 24% pretax margin and have already reached the mid-20s medium-term target. I know you've mentioned that the margin could expand beyond the mid-20s. How should we view where it might ultimately settle in the near future? Clearly, you're growing your overall business and have $4 billion in unrecognized incentive fees. You also discussed the private banking and lending platform. Can you achieve a pretax margin above 30% like your competitors? Additionally, how should we consider the path forward and the timeline for that?

Sure. Thank you, Saul. We've just arrived at our mid-20s target. It's important that we consolidate our position there. We think there are plenty of opportunities to continue to drive that margin higher as we scale top line, as we improve the mix of alternatives across our platform, and we look to drive other operating efficiencies across the business segment. There are plenty of competitors that have margins as you cite, that are 30% or higher. Our commitment is to continue to improve the margins. We are also thinking increasingly about opportunities we have to scale and create value for the long term. We will try to find the balance between incremental margin improvement and making the right investment decisions that unlock long-term value in this segment. But for the time being, we think that both can be achieved. What I would say for the last period of quarters and years, we've been operating in an environment with a bunch of regulatory uncertainty. There's also been operating uncertainty as well. I think the economic trajectory, outlook and client franchise is coming more into focus, frankly, that presents opportunities. We run a buffer so that we have pent-up capacity to support incoming client opportunities. But we also run the buffer given other uncertainties in the world, which include regulatory. As to when we will have the next bit of clarity and be able to interpret exactly what that means for our capital position, I couldn't tell you right now. We have a long history of making adjustments to our activities when we get that regulatory feedback. From everything we know, there are generally timelines associated with those rules coming into effect. We feel like this is the right place to run our capital to support the client franchise and be prepared for other unexpected developments, including regulatory.