The Goldman Sachs Group, Inc. (GS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the virtual Wolfe FinTech Forum Fireside Chat with Goldman Sachs, hosted by Wolfe's senior analyst covering diversified banks and brokers, Steven Chubak. [Operator Instructions] And now I hand the call over to Steven.

Hello, everybody, and welcome back to the afternoon session of the Wolfe FinTech Forum. I'm very excited to introduce our next company, Goldman Sachs. And joining us virtually is their CFO, Stephen Scherr. So Stephen joined Goldman in 1993. He's worn many hats over his 27 years at the firm. CFO since 2018, previous roles include CEO of Goldman Sachs Bank, COO of the Investment Banking Division, Chief Strategy Officer, so just to name a few. And I go on listing the remainder, but I think we'd be here all afternoon. So, Stephen, thank you so much for joining us, taking the time to be here with us today.

Not at all, Steven. Thanks very much for having me.

So just wanted to kick things off by addressing the elephant in the room, so to speak, which is the macro backdrop. The escalation of coronavirus is clearly causing some business disruptions. Our conversion at Wolfe to a virtual conference is certainly indicative of that. I was hoping you could speak to how the firm is responding in terms of business continuity planning, just to ensure minimal disruption across your businesses.

Sure. So we have been, from an operational point of view, been planning what I would describe as kind of a separate team approach that is looking to maintain continuity as and to the extent anyone or a group of individuals somehow had succumbed to the virus. I would say that, to this point, fortunately, we know of no known case inside the firm, but we initially put in place travel limitations consistent with the CDC. We set up 14-day quarantine periods for people that were coming from those locations. And we have, over time, more limited travel in and among. But what we are doing right now is setting in motion separate teams such that we can carry on our business, including with the intensity of our sales and trading business. It is less challenging, obviously, in the context of investment banking or otherwise. And needless to say, we are working to maintain continuity around critical functions in and around treasury and risk compliance and the like. And so much like what I understand other banks to be doing, we've set up a series of contingencies to look at separate teams and separate physical sites within which people can work.

Okay. And so I wanted to switch over just to the credit side as it relates to the macro discussion. Credit risk is another topic that's getting more attention of late. Just in light of emerging concerns around -- across some select sectors like energy and hospitality, I'm just wondering, from a risk management standpoint, are there any particular sectors that you're more focused on? And are you seeing at least any early signs of stress from a credit or lending standpoint?

Sure. So I would say, look, as a general matter, we're assessing various sectors in the backdrop of the volatility that's been introduced into the market. And the fact that what we're seeing is sort of a reduction, broadly speaking, in liquidity and a bit more challenged in the context of funding. And so to that end, we have been, frankly, deploying our own balance sheet to serve as a prudent intermediary of flows where liquidity is not otherwise present in and among our client set more broadly. From a credit point of view, we have been quite vigilant in and around, I would say, 2 particular sectors, but not to the exclusion of others. One is looking at energy, and the other is looking broadly speaking at hospitality, both of which have been and will continue to be challenged in the context of the market more broadly. In the context of both energy and hospitality and looking at our overall portfolio, I don't view it as being at all outsized relative to what you see at other banks. In fact, it probably skews to the lower end in the aggregate. And then when you look deeper within each of the categories, I know of no particular situation where we find ourselves outsized to a particular name. And so we've been quite careful in that regard. And when I talk about energy, for example, I'm speaking, and we're looking, both specifically at oil and gas exposure directly, but equally looking collaterally at what our exposure would be, for example, to the airline space in the context of fuel and other hedging and funding activity, and in the context of hospitality, looking at airlines and hotels and crews. Now I would say that it's not readily apparent to me that any one of these are in kind of immediate stress. I think that a lot of this is looking forward from a prudent risk management perspective, both from the point of view of the company and equally as we assess risk as to how much cash and how long they can, in effect, carry forward with a drop-off in material demand, let alone supply disruption. And so I'd say, in answering your question, energy and hospitality are a particular focus. But I wouldn't limit the scope of our own credit surveillance to those, we're looking more broadly and across the patch as to any and all of our clients that could be challenged in the context of funding remaining tight and/or demand fall-off and/or supply chain interruption, any one or all of which could cause dislocation in and among the clients themselves.

Thanks for all that color, Stephen. And since you touched on funding, one of the things that we have been watching pretty closely, at least as it relates to the trading side, are early signs of liquidity and funding stress. I know it's maybe not in the context you were speaking about it, but it did come to mind. The Fed has provided some near-term liquidity support on the trading side. I was just hoping to get some feedback as to what you're seeing at your end, whether market making activity actually remains orderly in this market.

Yes. I would say that market making is, I mean, to call it orderly would probably be a bit of a mischaracterization. It is far from broken, but we've seen liquidity dry up in a lot of markets. Price action reflective of it. In certain markets and in certain geographies, you've seen people withdraw from the provision of liquidity in the context of risk and otherwise. And so at some level, we try to step in and flex our balance sheet so as to serve within the appropriate price and risk parameters to be good providers of liquidity where others might be stepping away. And so the market has not ceased, right, to sort of look at the extreme. So CP, for example, is elevated but operating orderly. And I would say, by the way, that in all of this, what we try to look for is the transmission into the real economy. That is, where do we see funding market ceasing or becoming more challenged such that they impact the ability of corporate clients to fund? So CP is a good window into that. It no doubt has been elevated, but I wouldn't call it broken or dislocated just yet. But in the context of what we've been watching -- we're watching that as a true signal as to whether or not there would be stress. But we're not, I'd say, yet seeing any unusual corporate stress other than what you see in the context of funding and in anticipation of broader longer-term or potentially longer-term dislocation in the economy occasioned by the virus and other circumstances.

Got it. And just the last macro variable, Stephen, I wanted to touch on is, the rate backdrop. We've all noticed a very steep decline at the long and short end. Clearly, it appears you're much more insulated to rate pressures relative to some of your large bank peers. But I was hoping you could provide some context on how the yield curve pressures may impact your businesses holistically and just walk through how you think about rate sensitivity on both the asset and liability side.

Sure. So look, I think for us, NII remains kind of less than 15% of overall firm revenue. Now in the forward strategic direction of the firm, that will become over time more material than that number. But at the moment, it really doesn't play into the results of the firm. I would say lower rates as a general matter tend in normal markets to sort of stand as a positive catalyst for client activity and for asset velocity, and that sort of skews positively for our business. So I'd say rates in terms of client activity is looked through that lens as opposed to its impact on us per se. So it's a bit of a second-order effect to our overall business. But I must say that to the extent that the market has otherwise been preoccupied with where rates sit, I would say the issue we're facing now is less rate sensitivity as it impacts our clients, because I think rates are at a historically low level in terms of absolute financing. It's a question of the availability of the market, ready availability of funding as being the issues we watch impacting the client. But in the direct response to the question you asked me as to how it affects Goldman Sachs, it is not a material factor in the overall performance of the firm inasmuch as it may be as things begin to change in terms of our business mix.

Got it. So switching gears, maybe away from the macro for a moment, Stephen. It might feel like a lifetime ago to some of us but I did, in fact, check the calendar. It was only 6 weeks ago when you hosted your first Investor Day. At the event, you did outline the medium-term ROE goal of more than 13%. I was hoping you could just remind us how much of the ROE improvement to 13% plus is in fact predicated on what we would classify as more self-help measures, such as funding and efficiency and maybe what sort of macro backdrop was contemplated as part of that target?

Sure. So it does seem like a long time ago. But as you point out, the velocity of change in the market has been quite rapid. If you go back to our Investor Day and the target, which I'll simply say here, we don't depart from in the context of what, 6 or 8 weeks may change as we think about this over kind of a medium-term or 3-year period. So the baseline for driving to a 13% or better ROE target was predicated roughly 200 basis points in what you described as kind of self-help. So think $125 million from expense initiatives and 75 basis points from funding optimization, and I wouldn't depart from those, particularly given that's over a 3-year period as opposed to kind of a spot resolution in the context of the last 6 weeks. And the balance of that, coming from business activity, and obviously, lower litigation and normalized tax rate. But on your question, funding optimization and expense efficiencies accounted for roughly 2/3 of the march, if you will, from where we finished 2019 to the target of 13%.

Okay. So maybe just digging deeper into some of those self-help levers. Just first on the funding side, you've clearly done an excellent job of gathering deposits through the Marcus channel. And what's your initial take on how the recent sustained drop in interest rates may impact your deposit gathering strategy? It sounds like there's still a clear funding advantage from growing the deposit base, but I just wanted to make sure to clarify that.

Sure. So I would say that, first, let me say that the behavior of our retail deposit base over the last several weeks is exactly as we had anticipated, meaning we have seen no unusual outflows. In fact, if anything, there's been a more meaningful pickup in CDs in the retail deposit channel than what we were otherwise experiencing. And I guess, that's not to be surprised -- surprising, in the context of rate movement and the like. We are ourselves looking to make appropriate adjustments consistent with where rates move and do it in a way that's not disruptive to the channel. And I think, as I've said before, our aim is not necessarily to be at the top of the rate card but somewhere in the top 4 or 5 -- 3, 4 or 5. And so we'll continue to play to that. I do think that this market, frankly speaking is more reaffirming of the strategy than it is to call it into question. Meaning, of course it's true that we see our wholesale funding costs, in theory, come down just given where baseline treasuries are and so forth. And therefore, the delta, the theoretical delta between deposits and wholesale funding may change, but this is really a longer-term strategy toward diversification of funding channel and this funding channel remains very open to us and quite robust even in dislocated markets like we've experienced over the last couple of weeks. And so I think we quite like the channel that's there. It's performing well. We'll look to achieve the right beta in the context of overall interest rate movement and sort of play it forward from there.

Okay. And the second piece of the ROE walk that we classify as self-help is the expense side. You did outline at Investor Day the $1.3 billion savings opportunity, the biggest contributor to that build over the medium term. Since it is a FinTech Forum, Stephen, I was hoping you could just speak to how you're leveraging technology to drive improved efficiency across your businesses, and how much of the technology budget that's being deployed today is towards grow the bank versus run the bank, so to speak?

Sure. So I think John Waldron mentioned that our 2019 budget, so last year's budget for engineering, was $4 billion and was probably kind of 53-47, run the bank versus grow the bank. And I think for 2020, we're suggesting to people that we could see that budget increase by about 10%. And I think you'll see more us honing more to a 50-50 split as between run and grow the bank, just kind of rough numbers, in terms of the direction as to how we're deploying our funding and capital as against engineering more broadly. I would say the way it's being deployed is sort of several-fold. One, it's obviously being deployed in the context of various platforms that are being built, whether it's Marcus on the consumer side or Marquee on the corporate side. And I think it is -- it's demonstrating to us, particularly, by the way, over the last several weeks, we've seen volumes through our e-channels, whether it's in FX or commodities, as playing well to the high side, meaning we're in a position to execute on electronic platforms with clients in moments of uncertainty and higher volatility at much higher levels but lower cost throughput in terms of the execution that's going on. And so I think we're living through kind of a real-time manifestation of deploying technology against platforms that serve us in the context of engaging with clients at higher volumes but lower cost. And so that's playing out. I would say, away from the kind of the front end of the business, I could point to a number of different places in areas like compliance, legal, operations where deploying artificial intelligence or the like is bearing fruit. Compliance being one of them. So in the context of compliance, we can surveil a lot more of the firm with fewer people and a bigger sort of digital set than we did before. And I think that's just playing to our ability to harvest cost out in terms of the number of people we need to deploy and the cost intensity of those kinds of exercises.

Thanks for all that color, Stephen. It's really interesting. And certainly, as we think about some of the recent changes and developments, another area where I'd be remiss if I didn't ask on this is the topic of bank capital. And you're already running with very strong capital ratios, in line with the 13% to 13.5% target you unveiled at Investor Day. Since then, the Fed released the CCAR instructions, it includes some tougher assumptions around private equity and leverage lending. I'm just wondering, given your exposure to these 2 areas and maybe some improved visibility in the new capital rules under the SCB, are you still comfortable underwriting that target?

No, I'm quite comfortable remaining committed to those targets. I would say that SCB and the rule set that came out are no doubt more severe on certain elements of our position set, including the ones that you highlighted, notably private equity and the like. But I think it's important to recognize that what we put out in terms of CET1 guidance of 13% to -- and 13.5% was a medium-term target, not necessarily a near-term target. And so we have for ourselves a very clear path about how to get to those targets and how to do it in the context of the various outcomes that might come of SCB and the new construct and the delivery from the Fed to us of what our SCB number will be. I will say as an aside that the SCB construct and the rule set and the way in which it's laid out, is in some sense, validating of the broader strategy that we laid out at the Investor Day, which is, we highlighted a series of businesses that should contribute to lower stress, peak to trough. And so, if in fact, we're meant to live, as I suspect, we will, within an SCB realm over the next several years, the notion that we can continue to work on the various businesses we highlighted, which would lower that stress, ultimately will lead us to sort of be a more lean or leanly capitalized entity. But I think, 13% to 13.5%, again, given some of the other inputs that we gave at Investor Day, including an eventual but perhaps not a near-term migration to a 3% GSIB, I think, is all consistent and one that we remain committed to in the medium term.

Certainly not a bad environment to have that additional buyback capacity. So glad that you're still committed to those targets. Just wanted to touch on the global markets business for a moment. We've seen a clear bifurcation, Stephen. And it's something you guys actually outlined very clearly at Investor Day. The industry wallet steadily decline -- has steadily actually expanded, sorry, on the financing side. The intermediation wallet, though, where historically, that's where your strength has lied, has been steadily contracting. I'm wondering, given those dynamics, if this trend persists, you guys outlined a 10% ROE target for the global markets business at Investor Day, is that something you can still prosecute on?

Yes. Look, I think like all the targets, our commitment to them is over the medium term. I would say that -- and so therefore, 6 weeks doesn't change that, notwithstanding the fact that these last several weeks since the Investor Day have proven to be quite tumultuous. I would say that the real strength of our global markets business shows itself in moments when we can deploy balance sheet on behalf of clients and stand in the middle of intermediating flows where others pull away. And the ability of our organization to do that, coming into it with kind of prudently managed inventory, I think is a very positive thing, and it only reassures me of the ability of that business to sort of march toward what we set as a goal for it over the medium term, which is there is unquestionably a place for liquidity providers in markets across broad asset classes and geographies and the deployment of balance sheet against it and the ability to do that with agility so as to serve our client base.

And another area, Stephen, that's garnered quite a bit of attention is trading competition. And with more FIC activities moving electronic, you certainly talked about the increase that you saw recently in terms of e-volumes. But just some of the strong growth across your competitor set, whether it's the exchanges or just other nonbank participants, how do you ensure -- as that continues to evolve, that you can protect your market share from some of those newer entrants?

Well, again, I don't want to draw too, kind of, long-term a conclusion on the back of the experience of the last several weeks. But I think in the face of certain nonbank participants, not being participants in the provision of liquidity in moments of stress, the notion that Goldman Sachs can step in and do that says a lot about both the strength of the organization to do it in stress periods. I think it captures the attention of clients who continue to rely on us in moments like this. And so I would just take that comment juxtaposed against kind of a broader, longer-term shift as we've seen, both in equities and to some extent in fixed income to, to share moving to a more finite, smaller group of banks, among which we are included. And I think that matters. Now look, over time, particularly around these e-platforms and the like, scale will matter, okay? And so our focus on developing that scale, bringing cost down in terms of straight-through processing and the like will be important, but I also can't ignore being consistent and consistently present and available as a liquidity provider to clients matters. Memories are long, and I think times like this will only serve to advance our franchise than to detract from it.

Got it. And just one more on the global market side. It's something you touched on a little bit, Stephen, it's the Marquee platform. It's an area of significant interest. You did [ obvious ] unveiled it to investors at the Investor Day, a highly functional digital interface. It's certainly something that seems to have very easy functionality, even I could actually play around with it a little bit. I'm just wondering how it's something that you would leverage in terms of thinking about the monetization opportunity for this asset, just given it's quite impressive. But just trying to understand what that's doing in terms of maybe improving market share or client retention.

Sure. So here's what I would say. I think that we need to create platforms that enable us to meet our customers and clients where they want to transact. And there's an increasing demand on the part of clients to do that digitally and on platforms. And I think that part of what we've tried to do with Marquee is work our way backwards. Meaning, what is it that our customers and clients are looking for and how can we design it. I'd also say that developing platforms that are embraced, easy to use, the UI is elegant, puts us in a place where there is greater stickiness as between us and our client. Meaning, enabling a client to come to use and then rely either on a set of tools and/or a data set is important. And I think the early signs of success around Marquee would corroborate that. So as of the end of the year, we had about 50,000 monthly active users on Marquee. We're handling over 1 million API requests each and every day. Occasioned by the Investor Day, we launched a new mobile app called GS Now, which now has about 3,000 monthly active users. And I think all of this is providing content. It's providing tools, and it's providing data to give people kind of either mobile or desktop experiences that give them live market insights and access to a global trading desk that suits them. And I think that's inevitably the path forward as to how we think this will work.

And, Stephen, you outlined a number of new growth initiatives at Investor Day. The one that I really wanted to dig into is actually the growth opportunity within the alternative space, just given how much attention that's getting from investors. The strategic merits of scaling this business are quite clear. You unveiled a pretty ambitious target of about $100 billion fundraising goal over the next 5 years. As we look to untack the opportunity, what gives you confidence that you can fundraise at similar levels from what we track at as some of your large competitors in the alternative side? And maybe how do some of the recent macro developments at least impact your ability to fundraise, if at all?

Yes. So I'll start by answering the question, kind of similar to what we spoke about earlier, which is, I don't view kind of a spot observation, if you will, on the current macro, even if it lasts several months as itself being an impediment to the target we set of $100 billion of fundraising over 5 years. So we're looking at it in kind of a longer time frame, right, than the narrow sort of print, if you will, of the moment. And we're working with investors on something in the neighborhood of about 10 funds across a number of different strategies and asset classes. And I think, as my colleague, Tim O'Neil, said during Investor Day, we're approaching this as an offering that will give our clients an opportunity across a range of geographies to look at asset classes that run from liquid, all the way to illiquid alternatives, and everything in between. In terms of equity growth, equity credit, real estate. And so our ambition is to create a broad menu, if you will, that can give our clients sort of considerable opportunities for investment, and all the while, take us from a less balance sheet-focused, more fee, predictable fee-generating sort of proposition. And so I must say, in the immediate aftermath of the Investor Day, there were some people who viewed $100 billion in 5 years as ambitious and others who didn't view it as ambitious enough. But in either case, I don't view the moment we're in, in the market, even if that moment becomes a bit longer as necessarily an impediment, right to that overall ambition and exercise.

Sadly, you can't please everyone, Stephen.

And all that I've learned.

But just wanted to dig into the wealth management opportunity. That's another area of significant interest. You've operated for a really long time, a leading franchise in the ultra-high net worth category. Only recently have you really made a push to service at least digitally, more emerging affluent or mass affluent clientele. And given some of the intense competition in this space, it's one that we cover quite closely. Just wondering, how do you attract a large proportion of those clients' investable assets? Maybe what's more differentiated about your value proposition in terms of your digital wealth offering?

Sure. So I would say, as you did, right, there are kind of 3 wealth strata or segments to think about. In ultra-high net worth, that's obviously our historical strength, with our private wealth management business. And so that continues as it has. And our ambition is to grow that geographically. At the other end is a more mass affluent approach, where we are developing, right, a strategy around how we approach mass affluent in the context of drawing up a blueprint that's influenced by developments that are going on now and that many of you have questioned, in the context of brokerage and the like. I think the middle segment, which is the one that you're referring to, and the one in which we acquired United Capital with an eye toward, is really the most interesting one in terms of growth in the near-term for us. So part of that is we've taken United Capital and Ayco, rebranded it Goldman Sachs Personal Financial Management. And I think the real channel to pursue there is an at work channel. That is through the corporate segment. So Ayco today covers about, call it, 435 corporations, roughly 60% of the Fortune 100. And I think that is a super interesting access point, right, to attract clients and customers. It had been the focus, if you will, of United Capital. It undoubtedly was the focus of Ayco, though Ayco was for a long while, focused more on the C-suite than the broader population set. And so the door is open for us there. There is access for us to do it. We can add another 30 new corporate relationships, leveraging relationships that exist around the whole organization and kind of expand the wealth offering, if you will, to hundreds of thousands of employees, again, using that at work channel as kind of an entry point to engage.

Stephen, I thought you opened the door to a question on M&A, given the comments relating to United Capital. Just given some of the recent merger activity in the financial space, I was hoping you could speak to how M&A fits into your overall strategy, particularly for scaling some of the newer business initiatives and whether there are any obvious or glaring capability gaps that exist, where it might make more sense to buy versus build.

Sure. So I think if I've opened the door, you know that I want to walk through it. So on M&A, I think consistent with what David, John and I have talked about, we're kind of very open to the proposition of acquisitions that fill gaps or accelerate elements of our growth plan. And so whether it's technology in the context of advancing one of our initiatives or acquiring companies because we can aggregate, for example, engineering talent or even to sort of accelerate as we did with United Capital, a push into a particular business. We are very open to do that. I would say that while we look, because I think it's our obligation to both offensively and defensively at larger material transactions, it's not in the offing. And I don't foresee us in the near term, making that kind of move or commitment. I think you'll find us to be much more acquisitive in the context of accelerating and facilitating the growth of business initiatives that are there, none of which would necessarily present themselves as being kind of material to the firm overall.

I think, certainly, people appreciate that discipline in terms of capital stewardship, which you guys have sustained for a long period of time. Stephen, I know that we're running out of time here. So I just wanted to ask 1 question. We've outlined, obviously, a lot of different targets and goals over the medium term. Just in terms of the feedback that you've gotten post Investor Day, it feels like higher transparency, more accountability that you're attaining at least as a management team, I'm just wondering what pushback surprised you post Investor Day, and maybe what resonated with you most just in terms of investor feedback?

Sure. Well, I would say, broadly speaking, the feedback we received was positive and pretty consistent with what you said. Our objective going in, and I think we opened this door, was to make the firm more investable than perhaps it was. Now that's not to say that people will necessarily run to invest immediately, but I think we opened the door to it being a more investable opportunity, generally speaking. What do I think the pushback was? I think the pushback was and is, as expected, which is, we need to see you as a management team execute, and I think that's fair. I think it's to be expected. And so I think the pushback is more in the context of show me than tell me. And I don't think any of us were surprised by that. We sort of expected it, and it's on us to take a strategy, which we think is sound and which we think investors have told us is more investable and just simply drive and work hard to generate higher, more sustainable returns for shareholders. And that's sort of what we're focused on.

Thank you so much, Stephen. I think we'll wrap things up there. Really appreciate you joining us virtually. Hopefully, you can join us again in the future. Next time in person, maybe in an environment where handshakes are no longer taboo. Next on the agenda, we have Global Payments, which is slated to kick off at 1:00 p.m. Thanks, everybody, for listening, and please try and stay safe. Wishing you all the best.