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

Good afternoon, everybody. This is Gerard Cassidy from RBC Capital Markets, and I want to welcome Goldman Sachs to our 25th Annual Financial Institutions Conference. As many of you know, Goldman is a global powerhouse in the investment banking field, having offices and presences in all the major financial centers. They employ over 40,000 people. More importantly, they have a market cap today of about $123 billion. The stock trades at a premium to book value at about 1.4x. The company has a dividend yield of just about 1.5%, and it has a very strong CET1, common equity Tier 1 ratio of 14.7%, and they have recently announced, for this year, a $23 million share repurchase program. I'm very pleased and privileged to introduce our guest here, Stephen Scherr, the CFO and Executive Vice President at Goldman Sachs. Many of you know that he's held numerous positions throughout the organization in his career and is very well-versed in the happenings at Goldman Sachs. But with that, Stephen, thank you for joining us.

Gerard, thank you very much for having me. It's a pleasure to be here.

Thank you. Maybe we could start off, Stephen, with -- there's been a lot of changes since you've taken over as CFO. Maybe can you summarize some of the biggest structural changes the firm has made from your perspective?

Sure. So as you all know, about 2.5, 3 years ago, David Solomon, John Waldron and I took our seats. And I think we inherited what we viewed to be then a world-class franchise. But it was very clear to us that there are opportunities for growth and diversification in the business. And I think if I was to point to kind of 3 changes, if you will, that have transpired since we took our positions, I would say one was a recommitment to client centricity around the firm. We've talked a lot about One GS as kind of a working proposition across the firm. And this is kind of where we have brought the client focus that characterize investment banking and really took it across to global markets and elsewhere around the firm. And I think a focus on the client, less of a focus on any given transaction has put us into place over the last couple of years to really pick up higher wallet share and greater client presence most notably in global markets, but equally in investment banking. And I think the fact that there's been this recommitment to a client centricity or client focus has been one very big change that has sort of come about in the firm. The second is, I think we have adopted and the firm has followed a longer-term thinking and approach to the firm and its business. We're investing for growth. We are forward budgeting, as you know from our Investor Day, over a 3- year period. That's not something we had done previously. And we have set out to the market medium and longer-term targets that had not been characteristic of the firm before. And so that long-term thinking and setting objectives and targets against which we are accountable is itself new to the firm. The third, I would say, which relates, of course, to the second, is a commitment to transparency and accountability. We have -- David and I have both tried to really steadily improve disclosure over the last couple of years. We, obviously, with Investor Day, changed our segment reporting. David and I are both doing our earnings calls. On those calls, we obviously present material now in ways we hadn't before. And so we're trying to sort of cast the firm as a much more open and transparent organization, again, against which investors and a variety of different constituencies can measure what we, as a management team, are doing. And so I think those are 3 distinctive changes that have characterized the business since I took on the CFO position.

And I will say that speaking for many investors we talked to about Goldman Sachs, the disclosures on a quarterly basis are very good and very useful. So I think you guys have accomplished, I think, what you set out for more transparency. So I want to just give you some of that feedback.

I appreciate that. I appreciate that. And by the way, Gerard, I mean I think that we've been very open to kind of a 2-way dialogue on this. And so I don't view us as being done. To the extent that there are aspects where we can be and appropriately be more transparent, we will. And so I appreciate the feedback.

Good. Speaking of Investor Day that you held just over a year ago, you highlighted 4 opportunities for the firm: transaction banking, third-party alternatives, digital consumer banking and wealth management. Can you give us an update on the execution of those initiatives? How are they going?

Sure. I mean, I think, by and large, these initiatives are going well, and they are progressing well. And across many of them, we are achieving certain commercial criteria and thresholds that I think are in advance of that, which we thought we would over a 3- to 5-year period. So let me just take them as you listed them off. On transaction banking, I think this is one initiative, which had genuinely outperformed expectations, and the platform is progressing well. At year-end 2020, we had in that business about 225 clients, about $30 billion of deposits and about $135 million of revenue and multiple partnerships, both develop and developing around that business. And again, that business was one that we started, in part, because we had deep relationships across investment banking and elsewhere around the firm with corporates and recognize that there was a big piece of what they were spending, not just in the product set in which we were engaged, but in transaction banking. And so this is an area of considerable growth and promise, and it is progressing very, very well. On the alternative side, remember, this was a strategic pivot we talked a lot about at Investor Day. It is, at its core, a migration from on-balance sheet investing to one in which we engage in third-party funds. And so we switch from revenue generated on the performance of underlying equity or credit investments on balance sheet to more durable, predictable fee income on the funds. And to that end, we took in commitments over the course of last year of $40 billion across our key strategic funds. And I think that momentum is playing out and continues to play out. And I think it holds great promise against what we set out for ourselves at about $100 billion of fund generation. And again, this strategy is geared around a recognition that on-balance sheet investing is very capital dense. It's capital-intensive. It provides a lot of stress loss, which is obviously detrimental to us in the context of CCAR. And so this pivot is well underway, and I think we're seeing very positive results. I would also point out that what we are seeing in the -- in this fundraising around these funds is the firm's engagement with institutions with whom we had not done investing before. And so again, a lot of promise in and around that. On the consumer side, obviously, this has been a longer conversation. We saw in 2020 very robust deposit growth of about $37 billion in the retail sleeve. We launched 4 new partnerships in '20 following our first one with Apple and the Apple Card. We announced the second co-branded credit card with General Motors, which will launch in the latter part of '21. And I think as you saw around consumer, we launched our Marcus Invest, which is an investing competency on the platform. We'll have checking later in the year. And so I think our consumer business in Marcus is now pivoting literally at a critical moment from one that was probably characterized by products to one that is a broader, bigger, more robust platform. On Wealth Management being the fourth, we continued to expand our high net worth platform through both Ayco and our personal financial management sleeve. Ayco achieved its goal of bringing on 30 new clients on the platform. Mind you, these are an at-work channel where we engage with corporates among the Fortune 100. And while Ayco has traditionally been about managing and engaging with the upper tier of any given company's management team, it's now becoming more expansive through PFM, and we're beginning to see the synergies not just across Ayco and PFM, but equally across our ultra-high net worth and the consumer business. And so I think that this is a really big, very positive move in the contest of success we're seeing across wealth management.

Very helpful, Stephen. And I just want to circle back to transaction banking because of the initial success that you've already identified. Can you share with us what's brought on that success? Is it the technology that you guys are bringing to the table that's best-in-class? Or is it the relationships that you've already established with these companies through your investment banking partnerships with them? When you look at those 220 wins, if you will, what are some of the common themes of how did those people -- how do those companies come to you for transaction banking?

Well, the answer is it's a combination of both. I mean, the one thing we knew when we set out to build that business is that this would not be a cold call into a corporate client. Meaning if you look at the profound nature of the relationships that exist across investment banking, the door is open to introduce this product. And so we haven't experienced the cold call concept, and so the engagement is there. To be honest, I had thought initially that we would need to rely a bit more heavily on what we would pay for corporate deposits as kind of a teaser to bring corporates onto it. And it hasn't been that. In fact, it is the technology. It is the new platform that we've built with a white sheet of paper. And the truth is the way we've built it, the product set, the attributes that we've embedded in transaction banking are themselves the byproduct of our engagement during the build phase with many of our more profound corporate clients, asking them what they wanted out of it, we've built it in that direction. And now I think the technology, the edginess, the embedded nature of transaction banking on the desktop of the treasurer or the CFO is proving to be a winning technology ticket and a very attractive platform. But that door, if you will, the relationships that are there, again, in the spirit of One GS and the synergies that exist across the firm are playing to the high side.

Very good. Talking about investment banking. Obviously, 2020 was a gangbuster year in the investment banking business, including for Goldman Sachs, of course. And according to Dealogic, the North American investment banks, including your own, have steadily taken market share primarily from the European and U.K. banks. Do you see this trend continuing in terms of your ability to gain market share?

Yes. I mean, it was a very interesting year, 2020. If you think about kind of the whole sort of time line of the pandemic and what it did to the economy and how it played inside the boardroom and among management teams, it was heavy, heavy on financing, which itself was people setting themselves up for a protracted pandemic and those that were availing themselves of an opportunity with low rates. The middle of the year experienced really a drought in the context of M&A activity, which, as you point out, picked up quite considerably in the fourth quarter. But we maintained our #1 share in both announced and completed M&A. Equity underwriting, particularly, as we closed out the year, was off the charts in the context of that level of activity. We were #1 in that and #4 in wallet share for debt underwriting. So our share is indeed higher, and I think you're seeing that among a smaller group of U.S. banks. We ended 2020 with near record backlog, and we've since seen backlog increase to record levels during the first quarter. So we're seeing that pull-through in the beginning part of this year. And I think this is an observation worth making only in that, you look at our bookings in the fourth quarter and again, seeing that through in the first part of this year and seeing that happen while backlog continues to grow, I think is an impressive observation to draw in terms of the tone and nature of the business. Now very hard to say with certainty where we go from here. You could see the market turn for a variety of different reasons and see those elevated levels come up, but we still see strong M&A levels in the business. And again, historically, we've seen a correlation between global market cap and M&A volume. And all of this feeling good about the growing footprint in investment banking that we spoke about at Investor Day where Goldman is able to expand its footprint across multiple segments of the corporate space.

You have a unique position from your view being such a large global player in this strength that you're seeing that you just referenced. Geographically, is it North America, Europe, Asia or all of the above? What do you -- if there is any differences geographically, are you guys seeing that?

Well, we saw in '20, particularly in the fourth quarter, considerable strength in the North American or the U.S. market. And you saw varying degrees of progress in both Europe and in Asia. Again, each of those geographies exhibiting kind of very different time lines to the pandemic. It obviously began and began to subside sooner in Asia. You saw progress in both the U.K. and Continental Europe, but then a bit of a setback toward the latter part of the year and into the beginning of this. And we've seen now of late, a measure of progress in the U.S. And so each of those markets have reacted kind of commensurate with where they are in the context of the pandemic. But I would say the U.S. market exhibited probably the greatest strength in the context of those various product segments.

Very good. Moving to another one of your core businesses, of course, is Global Markets. And can you maybe talk through some of the structural enhancements that you've made in that business and how it's positioned you for a more normalized environment? It's hard to define normalized, but if you want to take a stab at that, that would be good. And then what gives you confidence in your ability to maintain the market share, the wallet share that you guys have gained in 2020?

Sure. So let me take those questions and sort of bring them all together. I would say that it's very difficult to predict forward volumes with any certainty. And the market volatility, whether exhibited in the rate environment or in a variety of different asset classes, will itself be exposed to sort of progress made on vaccine and what that plays out -- how that plays out in terms of GDP growth and the like. So very hard to predict with specificity. Personally, I think it's reasonable to expect that '21 is somewhere in terms of industry wallet size between '19 and '20, meaning, I think it falls somewhere in between the 2. We picked up meaningful share gain in 2020. And I think some of the structural changes that led to that pickup in share are, number one, the point that I was raising at the start of this call, which was we have made a very kind of organized effort to improve and deepen client relationships. So we are now top 3 with 64 of the top 100 clients. That's up from about 51 a year ago. And that's the byproduct of a very methodical, new but very methodical view about looking at each client within global markets and kind of plotting a course as to how we improve and elevate our game to be top 3 with them all, but we've improved from 51 of those 100 to 64. That's one. Two is we reduced expenses in that business. We achieved by the end of 2020, about $400 million or over half of the $700 million of expense savings that we thought we could by 2022. And again, that 700 within Global Markets is part of the $1.3 billion that we spoke about for the whole of the firm. So deepening client relationships, lowering our expense base. The third was around capital efficiency. So we reallocated, trying to be quite nimble, about $1.25 billion of capital to more accretive opportunities within Global Markets. So client relationship, expense, capital efficiency. And the last one was ongoing investments in platforms and technology. And what we picked up in terms of electronic trading, digital trading on these platforms, I think, has been fairly pronounced, and I think it's sticky, and we'll stay that way as we return to however we want to define a more normalized environment. And so those are, just to encapsulate them, part of what is driving improved wallet share, again, not being able to forecast where '21 will come out in terms of industry wallet size. I'm confident that what we've picked up in wallet share will enable us to extract adequate and attractive rent from the market.

Very good. And that top 3 market share in terms of your clients is very impressive. And to see that number grow the way it did, again, very impressive. When you approach those clients, it obviously is a multiproduct approach. Was there challenges when you think back over the years and maybe breaking down silos between the different businesses within global markets and now do they mesh together more effectively to generate these numbers?

Yes, there's no question that, that has been an input to our success. I would say a couple of things on that. First, you may recall that when we first came in to our seats, David, John and I said to the market openly that we were going to, in effect, re-underwrite the business. We wanted to make very clinical decisions about where we would stay and where we might not. And ultimately concluded that we were going to stay in the various asset sleeves in fixed income, most notably, but equally in equities. I think over the course of COVID, that has played to our advantage, meaning the firm has been open for business for our clients across a range of asset classes. Those asset classes are being run now in a much more collaborative way. And equally, we are bringing to global markets a more client-centric approach that is thinking about how do we bring the firm, how do we bring the division to the needs and objectives of our clients. And that's different than where we were. We were more in a transaction-based orientation, meaning let's look at each and every trade and decide that we're doing it or we're not based on returns. And I don't want to lead anybody to believe we've lost our eye or taken our eye off the ball, so to speak, on the risk/reward of what we do. But I think we're taking a longer-term view to the level of client relationship. And my experience in banking and now early in Global Markets is that -- that has paid off for the firm, and I think it's doing so here.

Very good. A couple of years back, there was a lot of coverage and attention paid to MiFID and what it might do to the equity business. And so when you think about your global markets in the equity side of the business, is MiFID still something that is discussed? Or it's really now water under the dam and everybody is moving forward? But tying that into also the Prime Brokerage business, which, of course, you're one of the leading prime brokers out there, just the enhancements you've made to that business, and one of your big competitors, of course, a couple of years ago, sold that business. Have you been able to pick up new clients because of your enhancements but also the disruption in the marketplace?

So I think MiFID II was kind of an ignition point. And it began a multiyear trend, particularly among the U.S. banks, whereby we were taking share from many of our European competitors. And among the U.S. banks, I think there was an acknowledged consolidation, broadly speaking, across the top 3, which would have been us, Morgan Stanley and JPMorgan. And so MiFID II was both the point of ignition and a bit of an acceleration as clients thought quality execution out of the provision of equity services. Our franchise, from that point, has remained really well positioned. And as a reflection of our own objective, we are taking in record Prime balances and had them at year-end. And Prime has been, as you pointed out, a very important sort of strategic objective for the franchise. It has relatively durable revenues, and equally it is a feeder into a variety of other revenue sources from the client in throughout equities and more broadly. Our activity in the beginning part of '21, January and February, has been equally robust, pivoting off of '20, and we've seen substantial market flows, and we have watched an accelerant, if you will, of our engagement with our Prime client base. Now the byproduct of our engagement in Prime, as a strategic objective for us, has been the investment in a tech stack, principally aimed at the systematic clients in Prime. But I would tell you that, that has paid off not just in the context of bringing more and more clients onto the platform, but I think a better experience for our clients more broadly across equities. And so I would say that's a positive byproduct of the focus around Prime. And Prime itself, a beneficiary of what you pointed out in the key part of your question, which is MiFID II beginning a moment of both momentum and consolidation to the benefit of Goldman Sachs and others.

Very good. Very thorough answer. Thank you. Shifting a bit into the consumer banking business. When you look at the firm's digital banking product and banking -- digital offerings, can you share with us what the future might bring for additional offerings? And can you contrast what you're attempting and strategizing to do to maybe some of the fintechs like a SoFi or a Chime?

Sure. So let me start by saying our strategy in consumer has kind of 2 primary components to it. One is the development of a proprietary platform called Marcus, which has a direct engagement with a customer set. The second is one characterized by partnerships, where we are taking platforms that we've built and we are engaging through APIs and otherwise so as to embed that platform into businesses, whether that is Apple or Amazon or others. And so those are kind of the 2 pillars of our consumer sort of proposition. On the proprietary market side, we began with rather bespoke products. We began with deposits and unsecured loans. We have now added to it Marcus Invest, and we will have checking as we move through the year. And so what's coming into focus is more of a platform orientation than a bespoke set of products. And I think this is where we will start to experience an accelerant in the context of clients coming onboard. And I think equally, particularly for the deposit side, the development of that platform, a multi-product offering into our customers, will enable us to grow our deposit base with less reliance on price and greater reliance on the overall product suite that is there. Now when you compare what we're doing and the success that we're meeting relative to certain of the nonbank fintech firms, I would say Goldman Sachs is uniquely positioned. First, we have a brand. We have network and scale that we've built. We have an ability as a bank to leverage our balance sheet. We bring to it a history of strong risk management. And I think we are now embracing the fact that we sit inside the regulatory moat and are availing ourselves, if you will, of that advantage. Now nothing that I'm saying is meant to sort of demean what certain of these fintech firms are doing. Many of them are developing innovative solutions, but they are, by and large, single products. They will remain that way. They don't have balance sheet. They're not a bank. And so they have certain challenges and disadvantages, whether it's funding, balance sheet, et cetera. But again, they're developing super interesting products, but they are operating from a different plane, a different platform than we are. And I think that's a distinction kind of worth pointing out. I would also say that on the partnership side, again, this is where One GS, if you will, a single firm placed to the high side for Goldman Sachs, which is many of the partnerships that we are developing, whether it's Apple or Amazon or otherwise, are themselves the byproduct of access that we have, trust that we have with corporate clients who have been banking clients of the firm for many, many years. That level of trust, that understanding on the part of the 2 institutions, I think, is enabling us to succeed on these partnerships in ways that might be more difficult for others. And I should point out, these partnerships are not limited to the consumer space. We are engaging with them through transaction banking, for example. Stripe being a good example where we struck up a partnership with them. And so that's kind of what we're doing and how we're doing it and how I would call out the difference between ourselves and certain of the nonbanking fintechs.

Great. We're running out of time. I do want to get this question in because it's important to most investors. Your capital is very strong. Can you share with us what you -- how you approach managing that capital for the next 1 to 3 years, let's say? I believe you're above your own internal targeted CET1 ratios, and just maybe share with us how you might try to get there as we move forward?

Sure. So mindful of time, I'll try to be efficient in the answer. I would say a couple of things. First of all, our overall philosophy around capital has not changed, which is as stewards of shareholder equity, our job is to deploy that equity against an accretive set of opportunities. And that's what we look for all the time and try to be agile in redeploying that across the business very quickly where those returns materialize. So moving it into Global Markets, which yielded very handsome returns in '20 or away from other businesses is a primary objective. Where those returns don't materialize, our objective is to return that capital to shareholders. Obviously, there's been a period of time where buybacks were suspended. We are back in the market now to the limit of that, which is permissible, and we will continue to engage in buybacks in that regard. I think as it relates to the dividend, again, where all banks have been limited in their ability to take up the dividend. Here, again, I think when permissible, our objective is to take the dividend up, to be competitive in the space and equally to reflect the general direction of the firm in terms of its ability to produce more predictable, more durable revenues. Also in the space of capital, it's important, again, to come back to our strategic pivot, which is to focus on that segment, Asset Management, where on-balance sheet investing proves to be capital-consumptive. And so the migration or the pivot to third-party funds will prove to be more capital efficient. It will release capital to either be deployed elsewhere around the firm, again, on a more accretive basis. And it will, at the same time, I think, take down the stress-loss intensity of the businesses profile, which we hope and believe will yield a lower minimum requirement on the part of the fed and then take us back to where we have otherwise set for ourselves the objective of a CET1 of 13% to 13.5%. But until that time, you should expect us to stay at a reasonable buffer above that. That's less defensive as much as it is offensive, meaning our ability, at a moment's notice to deploy capital against very accretive opportunities in a market that has shown considerable volatility.

Stephen, I could continue on, but we've run out of time. And I really, again, it's been a privilege to have you with us this year. Thank you so much. All your insights are very well said. And again, thank you very much.

Gerard, thank you very much. Appreciate the time.

You're welcome.