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

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Fixed Income Investor Conference Call. This call is being recorded today, Wednesday, May 13, 2020. Thank you. Ms. Miner, you may begin your conference.

Good morning. This is Heather Kennedy Miner, Head of Investor Relations at Goldman Sachs. Welcome to our Fixed Income Investor Conference Call. We have posted presentation materials on the Investor Relations portion of our website at www.gs.com. Please see our cautionary note on forward-looking statements, which can be found on Slide 23. This audio cast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Today on the call, our Chief Financial Officer, Stephen Scherr, will give a brief overview of the firm's response to the COVID-19 pandemic. Stephen will also review the firm's financial positioning, strategic priorities and risk management in the context of the current environment. Our Global Treasurer, Beth Hammack, will then provide an update on funding, liquidity, capital and our LIBOR transition efforts. Following the prepared remarks, Stephen and Beth will be happy to take your questions. Stephen?

Thanks, Heather, and thanks to everyone for joining us this morning. I sincerely hope all of you are staying safe and healthy during this unprecedented time. This pandemic continues to put extraordinary pressure on society and the economy as a whole. It remains difficult to predict the full impact that the pandemic and related shutdowns will have and the path to an economic recovery. This uncertainty is reflected in the varied economic outlooks offered by public and private sector economists. As it stands today, we have seen some positive developments as certain countries, beginning in Asia and now Europe, and several states have begun the journey to reopen businesses and local economies. But this will be a transition, and we expect the consequences of this crisis to be felt for an extended period. I am confident, particularly in light of the decisive actions taken around the world by both the public and private sector, that together, we will overcome the challenges created by COVID-19, and in turn, reverse some of the devastating economic consequences of the crisis. During this time, the people of Goldman Sachs have demonstrated extraordinary resilience and commitment to our clients. As we noted on our earnings call in April, we successfully executed our business continuity plan in early March with roughly 98% of our global employees working remotely. All the while, we've maintained very high levels of engagement with our clients and stakeholders across the globe and, importantly, have maintained the operational integrity of the firm. With respect to the communities in which we operate, we are harnessing our resources, experience and network to be of service. We are working with public and private sector clients to partner on new initiatives with a focus on community assistance and economic support for businesses. In the United States, we have nearly deployed all of our $500 million commitment to small businesses through community development financial institutions with whom we have partnered for more than a decade through our 10,000 small business program. We are not a 7(a) lender under the Small Business Administration and have, therefore, not been a direct participant in the Paycheck Protection Program. As the situation with COVID-19 evolves, we will continue to adapt our response while supporting our people, our clients, communities and the broader financial system. With that, let's turn to Slide 1 to discuss the financial position of the firm and the U.S. banking system in terms of capital, liquidity and risk. The industry came into this market dislocation in a strong financial position as the capital levels for large banks increased meaningfully over the past decade to more than $1 trillion. Since 2007, we have more than doubled the firm's equity base while our balance sheet has come down. This has resulted in more than a 50% reduction in our gross leverage. Our global core liquid assets averaged over $240 billion during the first quarter and represented more than 20% of our average total assets compared to 6% in 2007. Lastly, as part of our broader strategy, we have significantly improved our funding mix with deposits at a record $220 billion, now comprising over 30% of our funding sources versus less than 5% in 2007, resulting in a more diversified and stable funding profile. While these are challenging times, we feel better positioned from a capital and liquidity perspective relative to prior periods of stress and will continue to prudently deploy the firm's resources to serve the needs of our clients and support the overall economy. As we noted at our Investor Day, we will continue to be dynamic allocators of capital across our businesses with a focus on generating attractive risk-adjusted returns. Let me now turn to Slide 2 to discuss the strategic priorities we laid out at Investor Day. While January seems distant given current circumstances, we are as ever committed to the objectives we set out, particularly as it relates to funding, revenue and efficiency. We remain committed to strengthening our core businesses, expanding into new and adjacent businesses and operating with greater efficiency. In fact, the current operating environment only strengthens our resolve around the strategic direction we spoke about with an emphasis on improving the firm's resiliency and performance over time. To put that into context, let me highlight a few examples of the early benefits we've realized. Our standing commitment to investing in platforms and technology allowed us to seamlessly serve our clients remotely and support unprecedented trading volumes and high levels of client engagement throughout March. Our strong performance in global markets in the first quarter was a direct result of our ability to serve as an intermediary of risk and a source of liquidity to our clients, and to do so, on terms and on platforms conducive to such activity. This was further augmented by our ability to engage with clients and execute trades via our electronic trading platforms, such as Marquee, through which we saw high volumes in the first quarter. We saw significant deposit inflows to our consumer deposit platform and into commercial accounts tied to our transaction banking platform. These are 2 important areas of our growth strategy, which will enable us to further diversify our funding mix and improve our cost of funding. As we lowered our deposit rate last week, we will continue to improve the beta of our deposit platform so as to increase the cost advantage of the retail deposit product. We have also accelerated fundraising with respect to our alternatives business, with a first focus on a strategic solutions fund, allowing clients to take advantage of attractive investment opportunities. Going forward, the increase in third-party fundraising will help drive fee income and reduce the quantum and density of capital allocated to our on-balance sheet private equity investments. Ultimately, these strategic initiatives represent significant credit positives. First, we will increase the diversification of our business lines via more traditional bank activities, leading to a more stable revenue profile and more durable earnings over time with a larger fee component. Second, we will continue to strengthen our client franchise by offering value-added products and services such as transaction banking, thereby leveraging deep and long-standing corporate and institutional relationships in the context of our One Goldman Sachs initiative. Third, we will enhance our funding profile by increasing the relative proportion of more stable deposits compared to wholesale funding while moving more assets into bank entities that can be funded with such deposits. And fourth, we will continue to optimize capital utilization across the firm, including reducing the capital deployed in our asset management investing activities. Turning to Slide 3. Let's spend a moment on risk management, which underpins all parts of our long-term strategy and gives us confidence in our ability to successfully navigate the current operating environment. We have a strong risk management foundation that has been built through years of dedication and focus. This is supported by our substantial risk culture, robust processes and commitment to continuous improvement. Our risk management culture is differentiated by our disciplined risk reward approach and is reinforced by our deep bench of talent that manages all dimensions of risk, including market, credit, liquidity, operational and technology risk. The leadership of our risk organization has an average tenure of over 20 years at Goldman Sachs. Risk is an empowered and independent function at Goldman Sachs. It starts from the very top with Brian Lee, our Chief Risk Officer, who works closely with me, reports directly to David Solomon and to the Risk Committee of the Board. This permeates throughout the organization as we empower our people to be independent risk managers. From a process perspective, we employ comprehensive limit structures, stress testing and rigorous approvals. This is bolstered by our long-standing mark-to-market discipline, which provides helpful transparency to both our business leaders and risk managers. As the operating backdrop continues to evolve, we have remained dynamic and nimble, staying in front of evolving risks. The month of March was an example where we witnessed heightened levels of market and operational volumes and attending risks. Alongside the industry, we successfully navigated elevated levels of fails, widening basis risk and margin mismatch, bringing our risk and operations teams together to address these systemic developments, all the while managing our technology and firm-wide platforms from remote locations. Though the risk of broad and sudden market dislocation has long been part of our broader scenario planning, the way events unfolded around the COVID-19 outbreak was not in scope as the precipitating factor. That said, as conservative risk managers, we at Goldman Sachs spend an enormous amount of time, contingency planning for a wide range of outcomes from business as usual events to severe adverse scenarios. We were prepared and have operated without interruption. We leverage technology from New York to London to Bengaluru to Salt Lake City and Dallas as well as offices across the globe. Compliance made adjustments to facilitate adequate surveillance. Engineering guarded against the risk of increased cyber threat, and risk limits were imposed on individual traders and desks to ensure continuity and control. We set in motion practices to enable us to proactively manage our business and remain vigilant in underwriting the myriad of new risks brought about by the crisis. As we navigate the current macro environment, we are focused on the continued management of risk broadly. The 3 primary areas that we want to review with you are outlined on Slide 4: credit risk, asset price risk and interest rate risk. As it relates to credit risk, we maintain our long history of a conservative bias and continue to apply it to our origination and underwriting processes. In the current environment, we are balancing decisions around credit extension to support our clients and the broader economy, while at the same time, remaining vigilant and employing a thoughtful risk lens to each specific situation. The majority of our lending is secured and structured conservatively to limit our downside risk. We actively monitor our portfolios to ensure timely risk mitigation and that we are reserved appropriately for potential future losses. As many of you noted, last quarter, we bolstered our reserves in light of our ongoing internal risk reviews and the deterioration of the macroeconomic outlook. We will review that again in the second quarter consistent with our standing practice. I would also point out that as it relates to our consumer credit risk, as an example, we have modified our underwriting posture with an expectation of reducing our budget of incremental credit growth to consumers in this environment. Our portfolio of unsecured Marcus loans and Apple Card exposure will grow year-over-year but at more muted levels. The ability to quickly adapt these portfolios is reflective of our agile operating position and our ability to pivot relative to the operating environment. On the asset side, we are subject to asset price risk driven by our equity and debt investing activities within our Asset Management segment. Though assets within this segment represent less than 10% of our balance sheet, we remain ever focused on this portfolio. As it relates to our private equity investments, our portfolio is rigorously evaluated to ensure that it reflects the illiquidity and risk inherent in each investment. As a result, our portfolio is appropriately marked at any given point in time. Similarly, we extend loans and invest in debt securities across the capital stack where we employ active portfolio management. Lastly, on interest rate risk. Though we derive a smaller portion of our revenues from net interest income compared to our universal bank peers, we remain highly focused on managing our exposure as we anticipate the low rate environment will persist in the near term. We, therefore, actively manage and monitor rate risk by maintaining a comprehensive and holistic approach to asset-liability management. Let's dig deeper into each of these risks, starting with our loan book on Slide 5. At the end of the quarter, we had $128 billion of net funded loans outstanding across the firm. More than half of our book is comprised of corporate lending, which is driven by funded relationship loans, strategic lending activities, such as acquisition financing, and middle market loans. 23% relates to wealth management loans that are extended to private bank clients. 17% is related to our real estate lending activity, with the remainder comprised of consumer and other loans. As I noted earlier, further growth in consumer loans will be quite measured given the current environment. Given the institutional nature of our lending, 78% of our total loans are secured, which provides significant protection in the event of financial stress or market downturn. At quarter end, our allowance for loan losses totaled $2.9 billion or 2.5% of funded loans under accrual accounting. I would note that our allowance for the consumer portfolio represented 13.4% of total consumer loans. Furthermore, our credit performance remains in line with our expectations given the recent economic deterioration with our annualized net charge-off rate at 0.5%. Our lending commitments amount to $152 billion as of the first quarter, of which roughly 60% are to investment-grade borrowers, excluding warehouse financing and credit card lines. Let's take a closer look at our corporate lending book on Slide 6. Our $69 billion funded corporate loan portfolio is highly diversified across industries with no single industry garnering an outsized contribution to the book. Nearly 70% of our corporate loan exposure is secured, with the remainder predominantly to large investment-grade borrowers. In addition, of our $152 billion total lending commitment portfolio, $113 billion is related to corporate lending commitments, primarily to investment-grade corporate borrowers in connection to relationship lending activities and other investment banking activities, such as acquisition or bridge financing. Over the course of the first quarter, we saw $19 billion of drawdowns in relationship lending as we supported our clients' liquidity needs during a volatile market environment. While we saw a higher percentage of drawdowns from our noninvestment-grade clients, given the larger size of our investment-grade book, the $19 billion was roughly evenly split on a notional basis between investment grade and noninvestment grade. We've seen a slowdown in revolver draws over recent weeks and have also observed facility paydowns as market liquidity and access improved over the course of April into May. Let me now take a moment to touch on our corporate lending exposure to the oil and gas, gaming and lodging, and airline sectors, all of which have been in focus in light of the current environment. Our total funded exposure to these sectors is $7 billion in total or 10% of our corporate lending portfolio. A significant portion of these loans are secured by hard assets at attractive attachment points where we expect recovery rates to be manageable even in the current market environment. Turning now to Slide 7 to discuss our commercial real estate lending exposure. As noted earlier, as of quarter end, we had $17 billion of funded exposure to CRE, which was primarily concentrated in North America. This portfolio is also highly diversified by property type and includes $6 billion of exposure in the form of conservatively structured warehouse lending with typical LTVs of approximately 50% to property value. Our CRE loan portfolio continues to exhibit healthy velocity as last week, we issued a conduit in an amount exceeding $500 million. Switching gears to asset price risk. Let's turn to Slide 8 to review our Asset Management portfolio, which totaled approximately $70 billion as of the first quarter. I'll unpack our equity portfolio first. As of the first quarter, we had $2 billion in public equity, $19 billion in private equity and an additional $19 billion of consolidated investment entities, primarily related to real estate, of which $11 billion are predominantly financed by nonrecourse debt. Our equity portfolio is diversified across geography and vintage, representing investments across a broad range of sectors. I would note that we have been actively investing for over 3 decades and have teams of experienced investment professionals around the world who have strong track records navigating through a variety of market environments. That said, we are actively monitoring our portfolio and are availing ourselves of harvesting opportunities as appropriate, with the agreements to sell AirTrunk in Australia and our U.K. student housing business as examples during the first quarter. As I noted earlier and consistent with our overall strategy for alternatives, we remain focused on third-party capital raising and optimizing capital consumption of the portfolio over the long term. To that end, we are in the initial stages of fundraising for a strategic solutions fund and have line of sight into other asset classes. Turning to the debt portfolio on Slide 9. Our portfolio totaled $29 billion at the end of the first quarter primarily consisting of $13 billion of fair value debt securities and $16 billion of corporate, real estate and other loans, of which $4 billion are held at fair value. This portfolio includes a range of investing activities executed by our private credit group, which invests in large cap, syndicated senior loans and mezzanine debt securities and our multi-strategy investing team, which invests in distressed bonds and loans. These activities have generated solid contributions to firm-wide performance over many years. Of course, we continue to risk manage the credit portfolio prudently. Additionally, with respect to the loans, while the majority of the portfolio is noninvestment grade, it is nonetheless well-structured, and over 85% is secured. Our debt securities portfolio is accounted for at fair value and is comprised of real estate at 20% of the total portfolio with the remainder balanced across sectors. With that, I'll now turn it over to Beth.

Thanks, Stephen. I'll cover interest rate risk on Slide 10. Net interest income represents a smaller portion of our overall revenue base at 12% for 2019 as compared to 50% or higher for our U.S. commercial banking peers, which makes us relatively less exposed to rate risk. However, as you may recall, growing net interest income is part of our long-term strategy. As such, we are highly focused on how to best position the firm in an economic scenario where rates remain low for some time. As it stands today, our balance sheet is modestly asset-sensitive. The vast majority of our loans are floating rate or hedged to floating rates, and our trading assets are high turnover and primarily funded by liabilities that have been hedged at floating rates. If interest rates remain at current levels, we expect our NII to gradually expand over time as our consumer deposits continue to reprice. In addition, should the curve steepen through the recovery, we expect NII to increase in light of future growth driven by our lending and retail deposits activity. Moving to Slide 11 to discuss our balance sheet. As Stephen mentioned, we came into this period of market volatility with a strong financial position, which allowed us to commit our balance sheet to provide financing to corporate clients and facilitate client flows across our global markets franchise. As a result, our total assets increased 10% to nearly $1.1 trillion at quarter end. Disciplined allocation of our financial resources is core to what we do in corporate treasury, and we will continue to dynamically manage our balance sheet, particularly in the current environment. Ultimately, the size and composition of our balance sheet will depend on our strategic priorities, client activity levels, macroeconomic environment and market conditions. As Stephen highlighted, we will continue to prudently manage credit and liquidity risk. Turning to the liability slide. We fund our assets conservatively with a focus on term and diversification. In line with our long-term strategy to diversify our funding mix, we now see a larger contribution from deposits. At the end of the first quarter, deposits comprised almost 1/3 of our funding sources. I'll review our funding strategy in more detail on Slide 12. As many of you may be familiar, our historical reliance on wholesale funding leaves us with a higher cost of funds compared to some of our peers. We see considerable value to be unlocked here, and our strategy, as outlined at our Investor Day in January, is based on 3 key components. First, we continue to diversify our funding mix by increasing the proportion of deposits versus wholesale debt. Over time, this will improve our cost of funding and drive significant savings throughout the organization. Second, we are enhancing our asset liability management to better match our liabilities to the maturity profile of our assets, which will reflect a more lending and fee-based revenue mix over time. This creates an opportunity to modestly shorten the weighted average maturity of our wholesale debt from the current duration of approximately 8 years. Finally, we see long-term potential to recalibrate the size and mix of our liquidity pool as our business mix evolves. At the end of the day, we will be conservative and vigilant in the current operating environment but remain committed to our strategy. Over the long term, these changes will further enhance the resiliency and efficiency of Goldman Sachs. I'll now discuss our funding channels in more detail, starting with deposits on Slide 13. We are extremely proud of the remarkable success we've seen in growing our deposit base. In the first quarter, our total deposits increased to $220 billion on the back of strong flows through our Marcus and transaction banking channels. Deposits comprised 46% of our total unsecured funding base at the end of the first quarter. We continue to target at least 50% deposits over the medium term, which we project will improve the firm's funding profile and overall cost of funds. Given the pace of recent growth, a key consideration for us is the expected stickiness of these deposits in both a fully stabilized market and a continuing stressed environment. In each of these scenarios, we consider a range of factors to assess deposit stickiness, including FDIC insurance coverage, historical sensitivity to rates, size of balance and client type. Through this recent period, we saw meaningful inflows from new accounts and significantly smaller outflows from existing accounts than our models anticipated. We expect the current backdrop will continue to be fluid, and we are actively monitoring the portfolio as the market and economic conditions evolve. Turning to group unsecured funding on Slide 14. We issued nearly $5.5 billion of benchmark debt prior to the COVID-19 crisis as we typically take advantage of investors' high cash balances at the beginning of the year. Though we had a robust capital and liquidity position entering the crisis, we felt that it was prudent to further enhance our liquidity and raised an additional $8.2 billion of benchmark debt to help support client activity. While pricing for these transactions was higher than recent issuances, we felt comfortable issuing at these levels in light of the attractive risk-adjusted returns available and the significant demand we saw from our clients. We currently expect maturities to outpace issuance in 2020 but recognize that we are in the middle of an incredibly fluid market. As such, we will continue to manage our unsecured funding dynamically. And to the extent we deem it appropriate to raise excess liquidity levels or find attractive balance sheet deployment opportunities, we will adjust our issuance plans accordingly. Let's review our additional funding sources outside of our parent issuance on Slide 15. This includes our structured notes and GS Bank USA issuance programs that provide us with diversified funding opportunities across products, channels, issuing entities, currencies, tenors and investor types. In the first quarter, we raised $19 billion through structured notes. This program allows the firm to tap different pockets of investors across the institutional and retail channels at attractive rates. We also view this as a countercyclical source of funds as demonstrated in the past few months when we saw increased demand for our structured notes in a wider credit spread environment. Additionally, while deposits are the main source of funding for GS Bank USA, over the last couple of years, we have issued $2 billion in 3(a)(2) notes and expect to continue to tap this market periodically. Our issuance in this market will depend on the overall needs of the bank and levels of deposit growth, which means we may not issue every year. Now let's turn to Slide 16 on liquidity risk management. As you know, we primarily manage the size and allocation of our liquidity pool based on our modeled liquidity outflow, or MLO, which assesses the firm's potential liquidity risks under a combination of very conservative market-wide and firm-specific stress scenarios. In the first quarter of 2020, our GCLA averaged a record $243 billion, and the firm's eligible high-quality liquid assets, or HQLA, averaged $179 billion. At these levels, we are comfortably above our MLO requirements and reported an average LCR of 131% for the first quarter. As Stephen mentioned, during the quarter, we saw $19 billion of revolver drawdowns as corporate sought to increase their cash balances. As prudent risk managers, we plan for such events and maintain excess liquidity to cover a range of scenarios. I would note that the draw levels we experienced last quarter were within the amounts contemplated by our liquidity model. Turning to Slide 17. Despite the market volatility and increased client demands on our balance sheet, our capital levels remain strong. As of the end of the first quarter, our standardized CET1 ratio was 12.5%. We are committed to our 13% to 13.5% capital target described at Investor Day, which we'll achieve over the medium term as we remain dynamic with a flexible approach to capital management. We have a demonstrated track record of prudently managing our capital. Following the onetime impact of U.S. tax legislation on our capital ratios at the end of 2017, we decided not to utilize our full CCAR repurchase authorization for the 2017 cycle. This proactive response, combined with our strong earnings, allowed us to rebuild our capital levels in a matter of just a few quarters. As you'll recall, Goldman Sachs, alongside the members of the Financial Services Forum, voluntarily decided to temporarily suspend buybacks through the end of the second quarter of 2020. This will allow us to continue to deploy resources to support our clients as well as enable the continued resiliency in our capital levels. Going forward, we will continue to be nimble and dynamic to ensure we remain appropriately capitalized in the context of the rapidly changing environment. Lastly, on Slide 18, I want to give an update on the upcoming LIBOR transition, which may not currently be top of mind for many investors but is for us here at Goldman Sachs. Stephen, Brian and I have been very focused on the end of LIBOR, which we continue to expect by the end of 2021, in line with recently reaffirmed regulatory announcements. This transition remains a huge undertaking for us as well as the broader industry. We will continue to be an industry leader in the transition, and we are committed to ensuring that it will be seamless for our clients, the firm and the marketplace at large. We've made substantial progress and are well positioned for the upcoming milestones. Our Chief LIBOR Transition Officer has been actively managing the process, and we continue to proactively engage, innovate and partner with our clients and regulators across the globe. As for our LIBOR exposure, currently, Goldman Sachs has approximately $38 billion of vanilla floating rate debt outstanding and $9 billion of preferred shares that referenced U.S. dollar LIBOR. While we have a meaningful book of LIBOR-based derivatives, we do not have as extensive a legacy book of assets linked to LIBOR, especially in the consumer space. We are finalizing our operational, legal and client outreach strategy in advance of publication of the ISDA protocol for amending fallback language and legacy derivative contracts. We continue to closely monitor the markets, and we'll look for opportunities to diversify our funding sources, utilizing alternative risk-free benchmark rates. With that, let me conclude with a few comments on Slide 19. As we continue to navigate this unprecedented backdrop, we remain well positioned and committed to serving our clients' needs. Our resilience in the first quarter, during which we facilitated extraordinary client volumes in global markets while maintaining record liquidity levels, is a testament to that fact. Furthermore, we remain committed to executing our long-term strategy as we retain our historical strength, including our premier investment banking franchise and our mark-to-market discipline. I am confident that our strong culture of risk management, coupled with our robust control processes, will help us serve our clients and successfully navigate this period of volatility. With that, Stephen and I are happy to take your questions.

[Operator Instructions] And your first question is from the line of Brian Monteleone with Barclays.

The first question, I guess, on issuance. In the comments you provided, obviously, there's $30 billion of deposit inflow during the quarter. The LCR still remains high and above peers, but you pointed out that you issued to take advantage of some of the attractive opportunities out there. Was there anything specific business activities like required or drove the funding on the unsecured side? And I guess as you think about it going forward, obviously, revolver draws have slowed down. There's a lot of questions in the market about kind of pace of issuance for the rest of the year. I guess if market volatility and kind of corporate client demand remains similar, should people expect issuance to slow dramatically from the first quarter pace or anything you can kind of provide there would be helpful.

Sure. Thanks for the question, Brian. So when I look at the needs that we saw in the first quarter, I would say it was primarily driven by our global markets and the activities that we saw there. As we've progressed through this period, you're right that we've seen a slowing in the revolver draws. And we're adapting our plans dynamically in the context of the ongoing environment. What we said is that we do expect at this current moment in time for our maturities in 2020 to outpace the issuance. But again, it's a very much a fluid situation and things will continue to evolve. So as we look at our robust liquidity position right now, we feel like we're in a very good spot, having done all the issuance that we did in the first quarter. But as we get towards the end of the year and we look at what the maturities will be for 2021, there might be an opportunity to potentially pull forward some of that in the fourth quarter. But again, we're going to be dynamic within the context of the overall environment. And our best estimate right now is that the maturities should still outpace issuance for 2020.

And then I appreciate the incremental disclosures in the Q and in the presentation on topical industries. Is there any incremental color you can provide on reserves that are currently set up against those topical exposures or anything incremental on kind of the health of that exposure?

Sure. Why don't I take that question? I think first of all, I would say that we called out oil and gas, gaming and lodging and airlines as 3 areas of particular focus. I would not say, though, that they represent a material component of risk at the firm. I think as I said in the prepared remarks, they amount to about $7 billion of funded exposure. So I just want to bring proper context to it. But just to give you sort of the dynamic sense of how we reserve, we doubled the reserves in the first quarter around oil and gas names. It's at the highest reserve coverage ratio of any of the segments there. And it naturally flows from where we see and perceive risk to be in setting reserves in and around those sectors. Like all risk, what we evaluate and look at is the amount of security that underlies the broader portfolio, the attachment point, the quality of the collateral that sits in it and the like. And so in that regard, I think we feel comfortable. And we'll obviously need to measure sort of where we are in the context of the second quarter as we look to sort of set reserves against the loan portfolio itself.

Your next question is from the line of Robert Smalley with UBS.

And echoing Brian's comments on the increased disclosure. First question on Slide 6 where you have the breakdown. Could you give us an idea of how much of this is middle market, how much of this is large corporate, considering that in past calls there's been talk about more focus on middle market? And also how much of this would be considered levered loans, how you're looking at that market? That's my first question. My second question is on Vice Chairman Quarles' comments yesterday on scenario planning around CCAR. Could you talk about how any of that has changed for you in terms of increasing your loss assumptions? And if there is some kind of stoppage or curtailing of dividends, how do us in the credit market, how should we interpret that? Do you see that as positive, negative or neutral for creditors?

Sure. I'll take your first question and then we'll come on to the second one. In terms of middle market, I would say that the overall loan book, so it's $128 billion in total. And as you refer to Slide 6, it's $69 billion in corporate. It's a mix of middle market and corporate. I would say that the reference to our intended acceleration into the middle market, as we articulated at the Investor Day, has begun but did not yet sort of take rise with this crisis now in place, meaning we slowed the number of bankers that we were hiring in to cover those new companies. And so the trajectory of that, while still compelling, is not going to be near term. But this number reflects both middle market and large-scale corporate, both investment grade and below investment grade. On levered loans in the so-called deal book, I would say there, we've been very, very careful in the context of managing that portfolio with a very, very sort of keen focus on velocity turn of balance sheet. And that has helped us come in to the beginnings of this crisis and obviously through it with a much more conservative bias and the deal book being smaller than it's been for a long, long time. I would also say that we have used market access during the course of this crisis, including over the course of March, April and May to look to reduce down commitments that stood on our books. One that I would draw attention to is the financing that got done for Sprint on the combination of Sprint and T-Mobile, which took down our exposure by about $3 billion in the aggregate. And so we'll continue to look for opportunities to do that in the context of the deal book overall. Turning to your second question on CCAR. I don't think it's for us to try to divine sort of precisely what the Vice Chairman was signaling in terms of what the ultimate outcome will be on CCAR. The CCAR results will no doubt come out before the end of June. There's been some suggestion that it might be earlier just in the context of this crisis. All banks, including ours, have been very engaged with the regulators in the context of the CCAR process, which is a dynamic one. I think it was to be expected that Vice Chairman Quarles signaled that the Fed is not looking sort of simply at a static picture but is taking stock of a number of different scenario outcomes and sensitivity analysis that no doubt keys off of a variety of different views that Fed economists have as to where we are in terms of a severely adverse outcome. Are we in the kind of early days or the late stage? And obviously, that determination will need to be met. So we await the outcome of CCAR. We await the outcome of the stress capital buffer and where that sort of puts us in terms of what we need to do from a CET1 ratio, both standardized and advanced. And I would say that I'm comfortable and confident that this organization will be able to adapt itself with great agility to get to the capital levels we need to be at on the back of CCAR on a time line that the Fed will no doubt set for us.

Our next question is from the line of Scott Cavanagh with APG.

And I would echo that the increased disclosure from both management commentary and from the presentation is greatly appreciated with this new dynamic out there. So just from a much higher level basis, could you comment on what your conversations are with the companies that you're advising from either an equity or a fixed income perspective and raising capital? What their concerns are and how this dovetails into your kind of evolving economic assumptions for looking at the second half of this year? And then my second question is, on an ESG perspective, could you give us an update on 1MDB and what your timing potential is on a green bond?

Sure. Okay. Let me take the first. The advice that we are giving our clients is informed by the house economic view that Jan Hatzius has put forward which calls for a very meaningful contraction in this second quarter with a rebound slower in the third and then more pronounced in the fourth quarter but leaving the U.S. economy contracted on a GDP basis by about 6-plus percent for the year in its entirety. I think the advice we give is also informed by an uncertainty, which may manifest itself over the next 30, 60, 90 days as to the duration of this crisis, meaning as more geographies move back toward reopening the economy on a transitional or graduated basis, it's with all great hope that we will be successful without resurgence of the virus. If it does resurge, obviously, that will bring about more pronounced challenge. And it's in that context that we're advising clients to access market windows as and when they appear. And obviously, clients are disposed from a number of different positions. There are those that are not necessarily in need of liquidity but take that advice and look to bolster their liquidity in the uncertainty that sits in front of us. There are those at the extreme other end of the spectrum who are trying to avoid more dramatic restructuring or even bankruptcy. And therefore, they look to access all aspects of the market, not just fixed income but equity and hybrid markets in order that they, too, can bring some assurance to their own standing in the uncertainty in which we're sitting. And so our advice is to access these windows. And I think and suspect that, that advice is being given out by more than just Goldman Sachs if you just look at the sheer volume of activity that has come into the investment grade and other financing markets. And so that's the tone, and that's how it's influenced by economic assumptions. In terms of 1MDB, we remain in dialogue with the authorities. So there's not much more that I can offer you in terms of where we stand with respect to that. And on the green bond, maybe I'll ask Beth to step in and talk about that.

Sure. Scott, thanks for the question. ESG is definitely a space that we are committed to. And as we're thinking about it, we do think about it more broadly than just green bonds because we are thinking about that full $750 billion commitment that we've made across the 9 themes that we've articulated for the ESG sector. So that is an area that we are continuing to look closely at. We want to make sure that if and when we come to market with such a product that we're doing it at a time that's a good time for marketing for the inaugural issuance and that we're doing it in the best-in-class way. So we have a pretty active franchise on the banking side where we're advising clients on their issuances, some classic ESG, some green and recently even some COVID-19 type bonds. And so we're in active conversations about that. But we think we'll move forward in that space if we are to move forward in that space when we feel like there's a good window and the time is right.

Your next question comes from the line of Kevin Maloney with BlackRock.

Your CET on a standardized basis, it fell 80 basis points Q-to-Q, and that's all real logical. I was wondering if you could come up with a minimum ratio that you would allow the bank to fall to. One of your competitors mentioned that they'd be willing even to go under 10%. Just wondering if you have thought about that.

Well, I think it's hard for me to pinpoint a level to which we would go. What I would tell you is that our broader strategy has always been that capital and balance sheet follow client needs. And that has been true over the course of this crisis, and it will remain true. It is why you've seen a decrease in the CET1 standardized ratio, it's because we saw opportunities to be in the service of clients and equally deployed liquidity and capital for highly accretive returns, notably in the context of our global market segment. And so I'd be reluctant to sort of pinpoint where we would take that, but we would never take it to a place where we felt uncomfortable that we couldn't in due course take ourselves back to a ratio level otherwise required of us by the various regulators or for that matter take it to a place that we felt uncomfortable sort of opportunities notwithstanding.

Your next question is from the line of Arnold Kakuda with Bloomberg.

First question is, can you talk about your progress on transaction banking in the context of, I think you mentioned $19 billion of revolver drawdowns. And then I think in the quarter you saw $6 billion of deposits increase from transaction banking. So I think the bigger -- would you expect more kind of a 100% kind of recapture like some of your bigger peers on a full rollout? And then the second question is, we've seen a pickup or we've seen the restart of preferred and sub debt issuance from some of your peers. So can you just remind us of what sort of things you might factor in to kind of get restarted in those markets again? Is it a constraint on Tier 1 leverage? Is it an increase in balance sheet size or RWA?

Sure. So I'll let Beth take the second question. Let me address the first, which was transaction banking. So we've long said that it was our intention over the course of this year to bring corporate clients onto that platform. That's every bit our intention. In fact, there are several that are on the platform as well. Much of the deposit inflow related to transaction banking at this point is not yet, at least in size, operational deposits. Those will come as people more formally come online in greater size. We've been taking deposits in from corporates who have -- we have and they have an expectation of using the platform. Once the platform is fully operational and operational at scale and those deposits become operational deposits as opposed to seed deposits, if you will, in anticipation of more client activity, they will become of increasing use to us, particularly in the MLO calculation. Again, operational deposits are sticky. And because of that, of high utility to us in the context of the overall substitution of retail and corporate deposits as substitution for wholesale funding. And that will continue over time to serve our liquidity needs, not just in the context of revolver drawdowns but equally in business as usual in terms of our ability to fund an increasing amount of commerce in the bank with those deposits. And with that, I'll ask Beth to address your second question.

Sure. On preferred stock issuance and redemptions, again, I would frame that in the context of our overall capital management. We spend a lot of time trying to make sure that we're operating as efficiently as possible as it relates to the capital structure. And so we did do a number of redemptions and reissuances last year. Given the preferred market has moved pretty significantly, I know it's improved in the past couple of weeks, but it's still not necessarily the level that would look particularly economic relative to some of the outstandings that we have. But again, the market is quite fluid and could change. And so we'll continue to evaluate it within the context of the capital structure, the economics and the overall opportunity set for ourselves.

Your next question is from the line of David Jiang with PGIM.

I had 2 quick ones. Just in the Asset Management segment, in the equity and the ones in debt line. At quarter end, we saw some markdowns in your portfolios. Can you just kind of give us a little more color on the environment now versus then and kind of whether these marks have kind of reversed from where you had them at the quarter end?

Sure. So in the first quarter, you saw marks across both the public and private equity portfolio. Just to decompose the equity position in the Asset Management segment, as of the first quarter, it was $21 billion of equity, $19 billion of that private, $2 billion of that in the public domain. Obviously, the public marks are reflective of where the market moved. That was about a $500 million downtick in terms of losses relating to that component of it. On the private side, there were 2 sort of countervailing moves. There was a component of the private portfolio, as I mentioned in the remarks, that were positions that were sold. They yielded about $775 million of positive revenue on sale, add to that about $200 million of revenue related to consolidated investment entities. And all of that was offset by $500 million in marks to the negative relating to the balance of the portfolio. What I will tell you as it related to the first quarter, and then I'll come on to where we are now, is that in the first quarter when we looked at the private portfolio, about 65% of it was performing well in the context of the first quarter's view of where the virus and the crisis stood. About 20% of that private portfolio was materially or in some sense impacted by COVID and carried with it the majority of the markdown in the private portfolio itself. And obviously, the balance or about 15% is what generated positive gains on sale. The process we go through in marking this portfolio weighs very heavily the underlying operational performance of each individual name. And so as we did in the first quarter, we will, in the second quarter, look to re-underwrite the performance of these businesses and make appropriate adjustments to the marks. It may well be that the 65% that was performing well drops to a lower percentage in the context of where the second quarter and the duration of this crisis is. It may well be that the 20% that was impacted by COVID is more materially or more negatively impacted, but we'll need to see as we re-underwrite. We do not mark the private portfolio in kind of exclusive reliance, for example, on public comparables. We do look at, as I say, the underlying performance. And the consequence of that over time is that it yields a more narrow band to where we mark these positions. Evidence of that is look at what happens when we sell a position, it yields a positive revenue recognition on that sale, suggestive that we were not marking that to its highest level. And so it's in that narrow band and it doesn't skew exclusively to the public markets. And so the second quarter occasioned, obviously, by a material deterioration in underlying macroeconomic circumstances, including elevated unemployment, might well lead to further marks in the private equity book and could equally yield away from the equity investments, it could yield to higher provisions in the context of unemployment being higher than that which was part of our model in the first quarter. Looking at the debt component in Asset Management, we saw a loss of $868 million in the first quarter. That was about $1.1 billion of mark-to-market losses, occasioned by credit spread widening, offset by net interest income of a positive $243 million, again, to produce the $868 million of loss. And in the debt component, that was almost entirely a function in the first quarter of considerable spread widening. U.S. high-yield spreads as of the first quarter had been wider by about 375 basis points and European even wider by 435. Obviously, those markets have shown improvement in the context of the second quarter. The consequence of which was we would have realized some reversion of those losses occasioned in the first quarter and the early part of the second. But obviously, we need to see how things play out. And I don't think it would be worth relying on that observation early in the second quarter as necessarily being determinative of what plays out over the course of the balance of this quarter.

Great. That's very good color. My second question is on the consumer book, consumer portfolio. It sounds like from the earnings call that you're kind of pulling back a bit on either originations or kind of underwriting on that part of the portfolio. And I'm just wondering are there any specific changes you've made in terms of open lines, et cetera. And then if you can give us any deferral statistics or payment holiday statistics in that book as it relates to consumer.

Sure. So just to sort of level set on fact, as of the first quarter, we had about $7 billion of credit extensions, $5 billion in the installment or unsecured loan product and $2 billion on the credit card side. And as we had long said from the beginning of getting into the Consumer business that we were not going to be guided by budget targets as if we were looking for kind of the next round of funding. We were going to be guided by prudence in terms of how we would underwrite. It's a long and super interesting and very attractive journey but a long journey and not one where we're meant to hit budget for the sake of budget. And so by virtue of that, we have put on more constraining underwriting parameters that will lead us to underwrite less, both in the installment product and in the credit card product. Each will grow. At least we expect it to grow year-over-year, but it will grow at a much more muted level, as I said in the prepared remarks, than what we had otherwise intended. There's no particular reason for us to do it, meaning we're not experiencing any elevated losses relative to budget in those portfolios. Obviously, we'll need to see how they fare in the course of this crisis. But this is all with and out of an abundance of caution in the context of it being a young portfolio, so a more limited data set that we have to look at and obviously in the context of the circumstances we're looking. But we are as ever committed and ever enthusiastic about what that business holds for us, but we're going to be prudent from a risk and credit point of view just in the sort of cadence of how we grow out that business. In terms of holidays and programs that we've put in place, we put a program in place for deferral on the part of customers, both in the context of the installment product and on Apple Card. We did it initially for the month of March. We extended it into the month of April. There was some discussion or some commentary in the press about 20% takeup. That number is really exaggerated to where it is. Each segment in each month exhibited different takeup. I would say the takeup is more in the low double-digit percentages than it is approaching 20%. And we did it, again, not because we saw anything happening. We did it in anticipation of our customers experiencing stress. And therefore, we wanted to engage with them early as opposed to late in terms of programs that would make their life easier in terms of managing their credit as we go forward and as they stand as good and hopefully, long-standing customers of our product set.

Your next question is from the line of Michael Rogers with Conning, Inc.

Given the shock that the COVID-19 pandemic has clearly caused on the global economy and to the way we all do business currently, I'd be interested in your higher level thoughts as to whether Goldman believes that there are likely to be permanent structural changes to key segments of the economy and/or, I guess, the way Goldman may do business going forward or will this ultimately be a transitory thing 2 years from now, let's say?

Well, I think it's always hard to draw too fine a conclusion while you're in the midst of the crisis itself. I'll speak for Goldman Sachs. I would say that there are certain reinforcing elements about what's playing out now related to initiatives that we began before the crisis. I'll give you some examples. I think that emphasis on technologically driven or digital platforms, not just in our new Consumer business, which I think has its attractiveness in the context of the crisis we're in given that there are no branches and it's contactless in the context of the card, but maybe more significantly in our global markets business or our securities business, meaning the fact that we are in a work from home as are our clients has set up electronic platforms that prove to be very usable. In fact, we hit record volumes. And these are technology-driven platforms that cut across credit, foreign exchange, commodities. They're being put to very high use. And it may portend a greater inclination on the part of clients to make use of these crisis notwithstanding. And this is just an experience that only reassures the kind of integrity of those platforms and the ability for them to be used. I think in the context of how Goldman Sachs will operate, we're not a firm, and this is not a business that is meant over the long term to operate from home. I think there's no doubt gives us added flexibility to accommodate employees in certain circumstances to have the flexibility of working from home. I think this, though, does validate the ability of our organization to work across offices in different locations, meaning if we're able to work with such operational resiliency with 98% of our employee base at home, it just suggests to all of us that we could with greater confidence operate from more locations with more people in them. Obviously, we've been doing that in Salt Lake City and Dallas and Bengaluru and Warsaw for now an extended period of time, but I think this opens up to the prospect of doing it on a lower cost basis across more locations than perhaps we imagined or had the confidence to imagine before.

If I could just follow up. So when you talk about key segments of the economy, Stephen, be it commercial real estate or airlines or hotels and leisure, have you thought much about the impact on those sectors and whether that would change your investment views going forward?

I mean I think you would -- it changes our risk aperture in the near term, but I don't think that, that's to be reflective of a view that there's a profound shift longer term coming. I mean people drive enormous energy from social engagement. It's all well and good for us to engage and, frankly, engage at elevated levels year-over-year with investment banking clients and the like, but none of that, at least in my view, is meant to be a substitute for human engagement, and the way to get there will be by airlines and by using hotels. And so I'm more optimistic in the longer term that we will over time, and in a transition, return back because I think that's how human engagement is meant to sort of play itself out. The near term will be different and will be a transition. But over the longer term, while I think all of us will avail ourselves for efficiency's sake to use Zoom or other forms of engagement, I don't think that, that will negate the human engagement that gives rise to business across many of those sectors.

And at this time, we have no further questions. Please continue with any closing remarks.

So since there are no further questions, I'd like to take a moment to thank everyone, again, for joining this call. On behalf of our senior management team, we hope to see many of you in the coming months. If any additional questions arise in the meantime, please do not hesitate to reach out to Heather and the Investor Relations team. Otherwise, enjoy the rest of your day. Please stay safe, and we look forward to speaking with you again. Thank you.

Ladies and gentlemen, this does conclude the Goldman Sachs Fixed Income Investor Conference Call. Thank you for your participation. You may now disconnect.