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

Good morning. I'm Susan Katzke. I cover the large-cap banks at Crédit Suisse. And on behalf of our entire financial services team, I'd like to welcome you to our 22nd Annual Financial Services Conference. Thank you all for joining us this morning. Over the next 3 days, we look forward to hearing from more than 70 presenters. We have over 120 participating corporates this year. And hopefully, you'll walk away with work their picture of prospects across the financial services industry. One thing I know is certain here and that there's never a dull moment in banking. Part of this conference for as many years as I think we posted this conference. I am very pleased to have with us Goldman Sachs, David Solomon. David, you need a little more in the way of introduction. We'd much rather hear you talk about Goldman. So let's get started. Before we jump into a fireside chat, for the investors who are registered into the conference, please send me an e-mail with the subject line of your question, and we'll be happy to try and leave it in as we go along here.

So Dave, why do we kind of the current macroeconomic and market environment to level set a little bit. How do you see the recovery unfolding? And then whether kind of whether or not there's a table or recession in the United States?

Sure. So I think the economic recovery is going to be quite robust. We obviously saw a decrease in economic output in 2020. That was very, very sharp in the second quarter and then recovered somewhat in the second half of the year. Goldman Sachs economists expect 6.5% growth in 2021. It's obviously very back-end weighted. And the other view is to the amount of economic acceleration in 2021 hasn't really shifted over the course of the last 6 months. It's definitely been pushed out as the vaccine distribution and the process of recovery has probably been a little bit slower here in the first quarter than some of us had hoped for during the fall. We are expecting at year-end 2021 to get to about 4% unemployment, which obviously is a significant improvement from here. The capital markets are extremely healthy, robust. They're obviously looking forward. Markets are clearly looking forward. The regulators have leveraged a playbook that, obviously, to some degree, was put in place in 2008 to have a significant monetary policy and now massive fiscal policy. The fact that we're sitting here in the first quarter and probably we're looking at somewhere between $1.5 trillion and $1.9 trillion of additional stimulus in the United States through reconciliation, plus the potential for an infrastructure go behind that is going to be obviously very, very inflative to risk assets. And so I think we've got a very, very strong tailwind for economic recovery as we head through the year. But also people are in the risk curve. Money is very, very expensive. And we're also at a moment in time where especially given the increase in the fiscal stimulus, we're going to see very, very robust opulent markets, and that's something we will watch.

Right. So it's interesting. Some would argue that this recession didn't really put the banks to a test, given the unprecedented level of stimulus and the continuation of the stimulus and the monetary support. How do you respond to these assertions? And what's your thought on both the regulation and the unregulated institutions as they performed through all this?

So I would, Susan, I have a different point of view, I'd refute the statement. This was real stress. I mean despite the stimulus, the hit to the economy was really, really significant. It was a 15% hit to unemployment versus if you look at CCAR, talks about a 10% unemployment swing through CCAR. I think the big thing that happened here, everybody has a tendency to look through the rearview mirror. And when you look through the rearview mirror, obviously, the first thing you're going to see is you're going to see the 2008 financial crisis. Banks were meaningfully more leveraged and had need for less capital as we went through that financial crisis. And therefore, banks were not in a position of stability during that crisis. The big thing that's happened. And to me, this is the most important kind of change in the structure of the financial system is we took the large regulated banks. We massively took down their leverage, and we massively increased their capital. Therefore, they're much more resilient. And you saw that resiliency in a period of enormous stress and what that resiliency allowed them to do is allowed them to operate for their clients and serve their clients relatively aggressively across the whole industry. If you go back and you look at 2008, Goldman Sachs did very well because we were open and available to serve our clients through that period. And so here, you really have the whole industry in a position of strike, being able to operate that way. So I think the banks were put to a test. I think you see the difference when you have reasonable leverage levels and significant capital in these institutions. And they are just much better position structurally than we saw back in the financial crisis. The second thing I'd say is you really saw how there are parts of these businesses, and we saw particularly at Goldman Sachs, that really are countercyclical, there are part of the broker-dealer model that if you're well capitalized, and therefore, you can focus on your business, you get a countercyclical tailwind, so to speak. I also think you saw across the industry, very, very strong resiliency in tech and flexibility in these models. At Goldman Sachs, we have 98% of our people working remotely almost immediately. We have made an investment to prepare for that. It was very little operational interruption. And so I think the financial institutions were tested. Now to your question about other parts of the financial marketplace broadly. I think that's a topic we're going to spend a lot of time on over the course of the next 5 years. Technology is getting ahead of market rules of regulations. And where that shows up, in particular, is outside the regulated part of the financial world. When you look at payments, when you look at shattered banking, when you look at private credit, we look at private capital formation, I think there's going to be a lot of focus, and I think it deserves more attention, candidly. I mean merging of fintech into some of the banking where there's something I think that's going to wind up getting a lot of attention over the coming years.

I would agree with that. So let's think about -- you're a planner, right? So let's think about how you've adapted your plan to the current environment in the wake of the pandemic and all this talk about normalization, aren't many of the factors that really boosted 2020 still in place as we enter 2021. So what do you think at this point, what's the new normal?

Well, I think it's hard to talk about a new normal when there's always an evolution. But the pandemic reinforced our strategy. We obviously had to pivot in terms of how we were working and what we are doing. But when you look at our overall plan, and I'll start at a high level and then I can break it down. We're very committed to leaving our midterm goals, and we're even more certain that we can drive the overall returns of the firm higher over time by continuing to invest in our businesses. And so when you look at our strategy, our strategy at a high level was to strengthen our core operating businesses, find market share and wallet share opportunities in those businesses to grow in certain select areas and diversify our revenue streams and to improve our operating efficiency across the firm. And in 2020 and into 2021, we're able to continue to make progress on all that. There are things that accelerated. So deposit gathering accelerated at the same point, there are things that slowed down our ability to monetize those deposits. Slowed down because interest rates were very low, and it took more time to move the deposit levels and to sync with where rates went so quickly. We raised more money in our Oils business than we expected to raise during 2020 because there were some opportunities that popped up that we hadn't anticipated. We raised a $15 billion special situation, special opportunities fund that were not anticipated being on our latest screen to try to take advantage of the opportunity to deploy capital for clients that needed to bridge their businesses because of the pandemic. There's no question that the launch of transaction banking accelerated because people have more cash. And so they were ready to move deposits and try our platform more quickly than we might have expected. And so there's no question that there is acceleration, but also slowing. I mentioned funding costs. We cut down our origination of consumer loans, both on an unsecured basis and with the card just to watch the economic environment and are now accelerating that as we feel more certain of the forward. So it's very difficult to predict the activity, but we're certainly starting off in 2021 in a very robust way. If you just look at volumes in the capital markets-related stuff. So far, in quarter 1, M&A volumes are up 20%. Equity capital market. Volumes were up 100%. DCM volumes are down slightly, down about 7%. Our clients remained extremely active off our global markets platform. And so we're off to a very, very strong start. Do I continue -- expect this pace to continue as a new normal? Is it permanent normal? Of course, not. But I also don't think we're going back to 2019. But if we did go back to 2019, because of the stronger wallet shares that we've built over the last couple of years and the operating efficiencies we've put into businesses, particularly in global markets, we generate meaningfully higher returns even if you went back to a 2019 wallet. And I don't think that's where we're headed in 2021 or 2022.

We're going to dig into all of that over the course of the next half hour or so. But let's just touch on for 1 minute before we go into the strategic initiatives. Let's start about the long-term effects of the pandemic to Corporate America. You've talked about footprint optimization opportunities at Goldman, what other direct impacts that it had on your operations.

Well, obviously, in the short term, it's had an enormous impact on how we operate by forcing a significant portion of the organization to be remote. And while we tried to be very front footed to where there's been opportunity over the last year, have people in the office and we had, generally speaking, we've operated around the world on average through the year with less than 10% of our people. And we got up to 25% here in New York. We got up to 25% in London during the summer into the fall. We got it to 35% on the European continent, over 50% in Asia, but that's obviously back to off in the late fall and into the winter as you have the surges that we had. So obviously, operating flexibility was very, very different. That's a temporary thing. I do think for a business like ours, which is an innovative collaborative apprenticeship culture. This is not ideal for us. And it's not a new normal. It's an aberration that we're going to correct as quickly as possible. And in particular, I'm very focused on the fact that I don't want another class of young people arriving at Goldman Sachs in this summer remotely. And so we're going to do everything we can to adapt and the environment. We have to adapt to whatever the environment is, but to not put ourselves in a position where we've got another class of people coming in, 3,000 young people coming in that aren't getting more direct contact, direct apprenticeship, direct mentorship. And so that's very, very important to us. Our clients are adapting business models and supply chains that creates opportunity for us to serve them. I think that's something that's going to have a lot of legs over the course of the next couple of years. There's no question. We've accelerated digitization for all our clients and for Goldman Sachs. And so that's something that's real and is here to say. More is going to be done digitally. There's more digital connectivity. But at the end of the day, I'm a big believer in personal connectivity in a business like ours. And I don't think as we get out of the pandemic the overall operating mode of the way a business like ours operates will be vastly different. There will be adjustments. I think we're making progress on efficiency and the pandemics allowed us to learn things about where there are opportunities to run more efficiently that we might not have seen and they're not been a pandemic. But generally speaking, I think the world while having accelerated digitization won't look too different in the context of how it is now as we get past the pandemic. I also think sustainability and ESG broadly is starting to shift capital flows, and that's a big opportunity for the firm, too.

And we're going to get to this a little bit more, but I assume some of the shifts that you're talking about are also really the key drivers of some of the strategic dialogue that you've already spoken to being so strong right now.

Sure. I mean there's no question that the pandemic accelerates trends, and we're certainly seeing much more offensive activity. But when you think about strategic dialogue and M&A, I think it's just a permanent part of the fixture of how business operates. There are periods when confidence ebbs and when confidence ebbs, you're going to see a real decrease in M&A activity. But if you look over any 5-, 10-year period, those periods with ebbing confidence generally, unless there's a really extraordinary disruption are going to be small. Now I think the pandemic was a really extraordinary disruption. But if you look at M&A activity, it really only decelerated for a quarter or 2.

Yes. Okay. So let's move on to your strategic initiatives. It's the fun part. And 1 year now post Investor Day, you have made significant progress, which I think you've discussed really at length on the January earnings call, but there was a lot of information in that earnings call. So let's go back and talk about the progress in the context of 2 recurring conversations that we're having. One is revenue sustainability in the core. And then the second is scaling the consumer initiatives. So let's start with revenue sustainability in the core, and we'll start with -- let's talk about trading a little bit, which you've touched on the strength year-to-date. But where did you gain the most share through 2020? And when activity to start to fade, where do you retain that share? And where is there more share to be gained?

So if you want to start specifically with share, I'm as opposed to talking about revenue sustainability specifically, we gained meaningful share in global markets. We also took share in certain parts of investment banking in the overall banking wallet, and that really came, I think, through our expanded footprint. I think the best way to think about global markets is a significant portion of the wallet in global markets comes from the top 100 accounts. As I think you know, when we highlighted this during our earnings call, we got focused on those top 100 and wanting to be top 3 with those top 100, 1.5 years ago. We went in 2020 from top 3 with 51 of those clients, the top 3 were 64. There's no reason why we can't be top 3 with 75 to 80 of those clients. I think when you get kind of into the 80s, it starts to get harder to be top 3 with everybody, but we certainly have upside based on our mapping. So there's more wallet share to accomplish there. And we're very, very focused on it. And this is not rocket science for us. This is something that we started back the first day I became CEO and really realigning the client centricity of the organization, taking a longer-term view, which had been consistent in our investment banking business and translating it over to our global markets business to really strengthen those relationships. You see the tangible results in 2020, that's going to continue in 2021. And I think these market shares are going to be sticky for us. A client orientation, while at the same time, we as one of the largest players in global markets, is benefiting from our scale and some of the, kind of, oligopolistic structure of that business to the largest players, I think, positions us very, very well. Now if you want to translate it to wallet share and sustainability, the message I've said to investors that are looking at this when we did Investor Day, okay, we didn't assume the bump in wallet we got in 2020. We assume 2019 wallet. And we assumed that we would do the things we had to do and grow from there, and we want a higher returning firm. And so the thing that I want to underline is even in a 2019 wallet environment, we think we've meaningfully strengthened the returns of the firm and we'd be on track to meet our targets through the end of the period we set out, even if we didn't have this increase in wallet and activity. Yet we did. And the world is growing and market cap is growing. And I think one of the things we're trying to do by creating more transparency for investors to get investors to think about our business year over year-over-year. And say, what is the base of the business? And then when there is upside opportunity to capture because of outstanding volatility of activity. Is Goldman Sachs going to be a better or worse capture of that upside activity. And I think we're going to be a better capture of that upside activity because of the nature of the way we positioned our franchise. And so I think on a relative basis, performed well when there's that extra activity. But if we go back to those levels, we've strengthened the business so that our returns will meet our targets. And I feel very good about how we're progressing with that.

So you had talked about this bump up in wallet in the 2019 wallet, but I might argue, and I think you are arguing this with me, that we're seeing the wallet grow. And so when people think about sustainability and going back to 2019, they might be overlooking the growth that we've seen in the wallet. And when I think about from an investment banking standpoint, the level of new issue activity. So the level of DCM issuance and monetary support so that we've got more in the way of tradable assets out there in the marketplace with all this liquidity, aren't we actually also seeing the trading revenue pool, in particular, expanding now?

Yes. Look, I think we're seeing the pool expand. Of course, people want to go back to 2009, '10, '11 and say, well, it's the same thing going to happen, the wallet is going to come down. I don't think the dynamic is going to be exactly the same. But to the degree the wallet goes back to where it was in 2019, the share gains we have in global markets are real. And I think you mentioned the debt underwriting business, we had #4 wallet share and get underwriting in fiscal '20. We had revenues of $2.7 billion. We were up 26% year-over-year versus the U.S. peer average being up 13% year-over-year. So we have a real wallet share gain last year. I can't tell you that every dollar of that wallet share gain will be sticky, but the wallet share gains are real. And I think we're just strengthening our position in all these businesses. And when you think about some of that capital markets issuance, I think one of the things people also say is, well, are you pulling forward issuance? Well, I don't think we're pulling forward issuance. I think there was a whole bunch of issuance that occurred that never would have occurred. So for example, we raised $75 billion of capital for the airline industry. We raised $25 billion for the cruise industry. And they're not going to pandemic, the amount of capital that those companies in those industries would have raised, would have been a fraction of that. So that's not pull forward. Okay. That's pandemic. There's aberrational activity, you capture it, okay? That's what we're really, really good at doing. Now one of the benefits of all that additional activity is there's more trading activity around it. And so it's not just the wallet share gain because of this additional activity, you create additional trading activity. Now some of that might not be purely stable for years forward. But these are big businesses. In 2019, our global markets business was a $16 billion business. And the way I keep saying it, if we went back to that -- and by the way, I don't think we're going back to that anytime soon. But if we did, can we want a much more profitable business and meet our return targets. And that's the way we laid out our Investor Day plan. And investors talk about all the sustainability, but we've been focused on running our business to drive those returns without these massive changes that we've seen because of the pandemic and the setup that's now going to run into 2021 and 2022. I think we have a very significant tailwind based on the macro setup that we started earlier in the year.

So let's talk about some of the other new initiatives that are really supporting sustainability here. And I want to talk about the middle market footprint expansion. As well as cash management. On the expansion strategy, on the fourth quarter call, you talked about generating $800 million of revenue from these middle market clients. But you have a huge expansion in that target market -- maybe not huge, a large expansion in that target market embedded in the Investor Day expectations. And since it's -- they're not all generating revenue for you quite yet. So what's the penetration of that opportunity? Do you see it expanding given the early success you've had?