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

Good morning, everyone. Thank you very much for joining us for the fireside chat today with David Solomon. Many of you know, obviously, is Chief Executive Officer of Goldman Sachs. He took over this role in October of 2018, and he joined Goldman Sachs back in 1999. Goldman written, David really don't need any introduction, but just a couple of highlights for you. They've got about a $1.4 trillion balance sheet and a market cap of $120 billion. If you add back the AOCI into book value and tangible book value, you guys traded at about 110% of book and 120% of tangible book and they trade at 10x next year's numbers. So David, thank you so much for really coming. We really appreciate it.

My pleasure. Nice to be with everybody this month.

David, obviously, you have come off your recent Investor Day, your second Investor Day. And you said multiple times during the Investor Day, it's an evolution of Goldman Sachs and not a revolution. What are some of the messages you'd like to share with us today following your Investor Day?

Sure. First of all, it's been a very, very interesting environment for all of us. I would say the last -- you kind of look -- I tend to look at things in 3- to 5-year bites I tried to get out of the day-to-day kind of quarter-to-quarter and kind of look at the journey over a longer period of time. And the last 3 years has certainly been an interesting period. If you go back to 3 years ago kind of right now, we were just starting the pandemic. The pandemic was obviously a serious disruption. It was followed by a very significant amount of monetary stimulus and additional disruption. We then started to try to rebalance it. We had some other disruptions like the war in Ukraine. And you just look at the high, the lows, it's been a pretty big adjustment. And we're now going through a process. It's actually on the phone with [Sheara Fredman] this morning, just kind of comparing notes on what to expect out of [Jay Powell note] the Fed today. And she said to me, and I mean it's really true. One year ago today, the Fed was at 0 and was buying $120 billion a month 1 year ago today. And so if you really look and think about the change in the macro environment, it's been quite different. From our perspective, we've tried to navigate that with a constant focus on our clients, and I feel really, really good about our core franchise business, banking and markets and what it's been able to accomplish over the last 3 years. We really set out to be very, very focused on strengthening that business and really showing people that the breadth and depth of that business is, I think, much more diversified and much more broad-based than people think. Now I'm the first to say, it's a cyclical business. It responds to market environment. For example, it's very weighted to capital markets activity. And in 2022, we had really anemic capital markets activity after some of the most robust capital markets activity I've seen in my 40-year career in 2021. So there is cyclicality to it. But when you look at the breadth of the business and you look over a long period of time, kind of the base size of the business and the base revenues of the business has been uplifted over the last 3 years. And that uplift has come from: one, a focus on market share, really looking at our client base across both banking and markets and really saying how can we improve our client market shares. And we've moved our client market shares by over 350 basis points. And I think those market share movements are very, very durable. And then also finding ways to be much more involved in financing our clients. Our client base has grown and expanded. They need financing. We hadn't really been in that business as actively 5 years ago as we are today. And that business is actually more durable. You're doing collateralized lending to support your clients. There can be periods of time where that business is super competitive, but we're actually now in a period of time where there's real demand for that, and it's not as competitive, you have real pricing advantages in the context of how you position that. So I think we've really grown that business. I think we've strengthened our position. I think we have the leading business in that space. And if you actually look at our banking and markets business and its performance last year with a 16% ROE that outperformed our 2 most important competitors, whose ROEs were 14% and 10% in that business. So I feel very good about the way that's positioned but more work to do and more opportunity to continue to strengthen our market shares and grow our financing platforms to really serve our clients there. I'm also super excited about the journey we've been on in asset and wealth management. And the thing that we tried to explain at Investor Day is how we've really taken what were disparate businesses in Goldman Sachs 5, 10 years ago. We had a Wealth Management business. We had a Merchant Bank. We had a public side asset management business. We had a business in our trading business that used the balance sheet of the firm to make debt and equity investments. We had all these investing expertise, pockets of investing expertise around the firm. And we brought them together in a big platform. We put them under common leadership, and you look at it now, you have the fifth largest active asset manager in the world. We supervise over $2.5 trillion of assets. We have a full product range on a global basis, from liquidity, the public side to a big alternatives platform. If you look at others that are at scale, no one has that breadth. And we're very well positioned to grow that business kind of high single digits as we look forward over the next 3 to 5 years, improve the margins and improve the returns. And when I talk to big institutional capital allocators, and that's not an area of the world where we spent a lot of time raising money historically, they want to be able to partner with people that can really create solutions for them across the spectrum, on a global basis. And so I think we're well positioned to grow that business. Those 2 activities are like 97% of Goldman Sachs, and I feel very, very good about the way they're positioned. And so part of our message behind Investor Day is, this is the core of what we're focused on. It's working, it's growing, it's strengthening. Of course, we're susceptible to the environment. We made a 23% ROE in 2021. We made a 10.2% ROE in 2022. That's our business. And we embrace it. And over that period of time, we grew book value over the last 3 years since our first Investor Day by 40%. We doubled our dividend. If you look at our earnings, our earnings in 2022, which, by the way, there were headwinds in 2022 for a business mix like ours. Our earnings are 40% larger than they were before our last Investor Day at the beginning of 2020. So we've grown our earnings, and we're going to -- we're going to keep our focus on our clients, serving our shareholders and really advancing the franchise. And I feel good about the progress. Not a perfectly even straight line, but I feel good about the progress of the franchise, our people. We're just going to keep staying focused on the long term.

On the market share gain that you just indicated, 350 basis points. How much of that came, do you think, from your internal execution success versus maybe some of the competitors being on their back feet and not -- like the Europeans in particular?

Well, I think there's no question that both from a big picture perspective, both are factors. So for starters, I think these businesses, I think scale is mattering more and more in these businesses and the stronger are going to continue to get stronger and the weaker are going to continue to have significant headwinds. That doesn't mean that there are lots of people that can have very strong niche businesses across this broad platform of what is investment banking and markets. But you either have to be a player that has very strong niche penetration. Or if you want to play the big game, you really have to be broad, global, deep and a leader. Otherwise, the scale that's required and the capital needs that are required to really serve the biggest clients in the world, you don't know pencil from a return perspective. So I think in that context, we benefit from the fact that we are the #1 or #2 player across almost everything in that spectrum. And so I think that's a very good position to be in. We obviously benefited from that, and we'll continue to do that. At the same point, I think one of the things that we really feel good about is the client focus of the organization and some of the shifts we've made over the last few years to really change our mindset. If you think about all our firms in financial services, they all grew up in silos. It was a very silo-ized business. People were product experts and everything was done in our business over the last 30, 40 years from a product perspective. We now have lots of clients that are touching the firm in 50 different ways. And the mindset is really how do clients experience the firm, and how do we make that experience as good as possible? Literally, the first day that I became CEO, we decided to try something different for the sake of trying something different. We created a pilot that we called One Goldman Sachs, and we took 30 clients that we thought were, at the time, 30 of the most important, big clients of the firm and said, "Let's try a different approach to covering them and see if we can change the experience so it gets less siloed and it really answers their broad needs." And what do you know? It kind of worked. So we kept expanding it. And now it's become operating ethos inside the firm for really breaking down silos and having people operate across the firm in terms of giving clients the best experience possible. That doesn't mean we always get it perfectly right and that doesn't mean there's not more we can do. But what I'm hearing back from clients over the last few years is that the way they're experiencing the firm has really changed in a very positive way, and it's leading them to want to do more business with us. I mean, one of the things that I've heard that I like, we've got more work to do, is sometimes people would say, "We're doing business with you because we felt like we had to do business with you." Now I hear people saying, "Hey, we're doing business with you this we want to do business with you." And so I just think you always have to know where your compass points True North. For us it's the client centricity of the firm. And if you're always working on that, you're always trying to listen, you're always trying to make sure you're doing the right things. You get a good result. And we're going to keep working at that. So I think we benefited from both. And the good news is I think there's more opportunity in the years ahead.

Speaking of One Goldman Sachs, I think you indicated at your first Investor Day, you wanted to target the top 100 clients to be 1, 2 or 3. You've expanded that at the most recent Investor Day, I think, to 150 clients. I mean, how hard was it breaking down the silo? Because we are a silo businesses. How challenging was it to get everybody to embrace this?

I think we -- I think let's start with the fact that I think one of the things that I feel great about in the context of Goldman Sachs is we have a long history of a very, very collaborative and communicative culture. The partnership Ethos of the firm and the partnership structure of the firm has been a very strong tailwind over decades in teaching an Ethos of communication, transparency and cooperation inside the organization. And the real benefits with that. And by the way, sometimes there are headwinds and noise that come out of that, too. But I think it's been a hugely positive cultural force in the firm. So I think the bias is to think about things that way. That said, there are lots of incentives and motivational factors that require you, if you really want to get a different kind of cooperation, to really take a step back and try to break things down. One of the things we did is we changed some incentives. We changed some incentives in ways that we thought would shift behavior. And what do you know? It was effective. I'm a big believer in incentives. So when you make good incentives, things work. And we rewarded and we highlighted things that we think were beneficial to clients and beneficial to the direction that we wanted to go. And so I'm not going to say this is the hardest thing we've ever done. They're -- taking all these different asset management businesses around the firm and putting them in 1 big asset management business was a lot harder than creating these messages around One Goldman Sachs and really advancing this prioritization on client experience. But it takes work, it takes focus. You have to do things over and over and over again and repeat the messages, create the right incentives, and that's execution. That's what we're supposed to do.

Yes. At the first Investor Day, you had some medium-term return on equity targets, return on tangible common equity targets, and you mentioned they were medium term at the time. Now in the last Investor Day, you're talking more through the cycle ROE and ROTCE targets. Can you share with us what kind of time frame that is? And how you hope to achieve those -- reach those targets?

Sure. We said 2 things 3 years ago. And we're seeing 2 things now with a slight nuance. First, we said in a normalized environment. And at the time, we were, 3 years ago, we were trying to uplift the returns of the firm, and I think we've successfully done that to a degree. I look back, we did an Investor Day, I look over the last 3 years. We generally met our targets. If you remove the onetime litigation in 2020, you could add 130 basis points to them. But even with the litigation, we met our targets. When I say through the cycle, let's look at the next 3 years, that's kind of the way we're thinking about it. So I can't tell you what's going to happen in every year. 2022 and 2021 were not normalized environments, 2021 on the tailwind extreme, 2022 on a headwind extreme. It's -- I don't think, every year, there's going to be no equity capital markets revenue and the S&P is going to go down 20% and the NASDAQ is going to down 30%. I don't think that's a normal year. Now maybe I'm wrong, and that's what's going to happen every year going forward. Certainly, this year is not starting that way. But I think it's a good idea to look at things over kind of those time periods. And I think we can deliver those kinds of returns. And that's the way we're thinking about it.

Yes. Speaking of normalized environments, maybe if you can give us your thoughts on the macro outlook that you guys have for where we might be in the next 12 to 24 months.

Yes. Well, if I really knew the answer to that, I probably wouldn't be sitting here talking to you, I'd be in an office in Florida trading around it. But here's what I'd say. First of all, I'm a glass half full guy. And I think we have a way of muddling through and grinding and finding solutions. But this is a tricky, uncertain period because we've had such experience. Things have broken to the high side over the last 6 months. If we were sitting here last summer, I would have been much more forward and say I think the chance for getting through 2023 without a recession was not likely. When you're tightening monetary conditions so quickly, you're going to have an economic slowdown and it will have an impact. The economy has proven to be much more resilient here in the United States. Service industry, service businesses in particular, have been extremely resilient as the world's kind of reopened. Labor is still very, very tight. But we have, meaningfully to my point a little while ago, if you think back where we are now versus where we were a year ago, we've meaningfully tightened economic conditions. These things have a lag. And I think one of the things that the Fed has to wrestle with is the last thing in the world you want to do is you want to go too far and then have to reverse course. So I actually think it's interesting to see the Fed being a little bit more cautious in trying to see how is the significant change and monetary conditions affecting behavior. I think there's no question I'm in the camp of higher longer. I think that the chance of our having a soft landing here as we go through '23 into 2024 is meaningfully higher than I thought it was 6 months ago, but we've got a war in Europe. It's still very tough. We have very complex relationship between the West and China, particularly the U.S. and China, which is a headwind to growth and creates complexity. There's no question we've tightened monetary conditions meaningfully and there's going to be a lag. I think it's still uncertain, and we're probably going to have some headwinds and bumps as we navigate through this over the next 18 to 24 months. And I think you've just got to be prepared for that. We're trying to run our firm through a more conservative lens. I can point to very specific things we've done and we're focused on. We talked at Investor Day about tighter expense management. You know that we were running a 3.5% GSIB firm. And last summer, we made the decision to kind of get back to a 3% GSIB firm to run tighter capital allocation, take our RWAs down very nimbly. And so we're operating as though there's more uncertainty. As we have more clarity on the trajectory as we get through '23 and into 2024, we'll adjust accordingly. But I think you've got to be prepared for the fact that it could be more difficult than it is now. It doesn't mean it has to be a train wreck economic scenario. So far, the Fed seems to be doing a good job, but it's uncertain. There's a lot going on in the world. It's an uncertain period. And I think people have been very used to the benefits of very easy money for a very long period of time, asset prices across the board compounding at rates that are higher than long-term historical averages. I'm not a believer that it's different this time. Generally speaking, returns gravitate to means. Economic laws do matter. Companies are valued on some discount on their long-term ability to generate earnings. You can't just grow at all costs. And all this is getting rebalanced as money has more of a cost than a price, and therefore capital allocation shifts and changes.

Yes, absolutely. Coming down to the micro level from the macro outlook. Last year, you guys obviously had the realignment. And maybe you can talk to us what were the drivers of the decision to do that? And what have been some of the results that you've seen?

Yes. So things tend to get viewed through a window of the short term when they're seen. But when we did our Investor Day 3 years ago in 2019, we really spent time thinking about the direction of, as you started, draw the evolution of the firm. We really had a vision that this is where we wanted to kind of get to. We wanted the core businesses of the firm to be banking in markets, for sure, asset and wealth management. And we wanted some emerging businesses that gave us other opportunities to do some additive things. But if you look at the way other firms are set up, one of the things we kind of believe is, if you want to compare yourself to others, you want to make it easy for investors to understand you, it's better to organize in a way where you can be compared to others that you're competing against. So one of the things, for example, is we always thought we get to a place where banking and markets would come together in some sort of a structure. We're calling it global banking and markets. JPMorgan calls it the corporate investment bank. I'm not sure what Bank of America calls it, but they have the same thing. Morgan Stanley has the same thing. So you can actually look at the businesses because they're generally presented in a similar way, and you can metric that. I think that makes sense. And so we knew we wanted to try to get there. I also think from a client perspective, when you go back to serving clients, as the world has changed, there is more overlap between banking clients and securities clients. One of the big things is, if you think about alternative asset management firms, all these firms have started as private equity firms. They are actually now big asset managers that give out a lot of banking business and a lot of markets business, and they do a lot of business across banking and markets in a more integrated way. So there's a lot of benefit in bringing those businesses closer together. But that's something we have been talking about for probably a decade, and we were pushing in that direction. In terms of asset and wealth management, I think I talked earlier about the benefits of that. And so those are the things that drove our mindset. And as we determined that it was right to narrow some of our focus on the consumer and kind of look at the way the world looked in the early spring last year. As it was clear the landscape was changing, we just decided now is the time to kind of make those steps and move in that direction. So I feel good about the fact that we've gotten to that place. I think it sets the firm up in a way where it's going to be easier for investors to kind of understand our big businesses and how to metric and benchmark those big businesses against others that we compete with or are competitive.

But speaking of Global Banking and Markets. Financial sponsors are so important in the business. It's a key client group for you and many of the investment banks. Given the current backdrop, do you still see attractive growth in this industry? Or.

Absolutely. I mean that's what I was talking about the alternative firms and financial sponsors, it's a huge, huge group of -- it's a huge, huge collection of capital and a huge, huge opportunity set for businesses like ours. And I still think, if you take a view for the next 10 years, there's lots of secular growth there. And the secular growth is higher than the secular growth of other components that contribute to our business. And so at the moment in this environment, is on raising harder, let's say, growth equity and private equity for that group of clients? Absolutely. But the secular growth in terms of assets being controlled by these types of organizations, when you look at the capital allocators around the world and how they're thinking about things, I think there's still a very good secular growth trend for that space. And Goldman Sachs, given our business and our leading position in the banking and markets business, is a huge beneficiary of that secular growth.

Yes. Moving over to the Asset and Wealth Management group. You've seen some great growth, both organic and inorganic. How do you see that growth proceeding in the next couple of years in that group specifically?

Yes, we've got a lot to do there, and we think we've got a very good organic growth opportunity there. And 1 of the things that I think we have to do a better job talking about it and now that we're organized this way, I think it's easier, is we've got a very big asset management business. We've got a very big wealth platform. We have $1 trillion of wealth assets. And when you look at our ultra high net worth wealth business, it's an extraordinary business with a real, real leadership position, and it's been hugely important to our asset management business. And so I think we have a very good organic growth opportunity. When Marc Nachmann and Julian stood up in front of everybody during our Investor Day, they talked about the fact that they believe that we have organic growth high single digit with margin improvement opportunity as we continue to reduce our balance sheet concentration. So we've been on a journey, we significantly reduced our balance sheet capital. We're going to reduce it more, and we can improve margins, improve returns -- and so we've got a good organic growth story. And Julian also highlighted that we have a very strong investment culture, and both of them amplify there are 2 key things in that business. And we're obviously focused as a firm on growing our management fees. And we're approaching our $10 billion target we set out over 3 years ago, and I think there's room to grow past that. But the 2 key things are: client service, client experience and performance. If you get those 2 things right, okay, in that business, you will do fine. So I think we've got a very good organic opportunity. In addition, if there are things that we can do inorganically over time to accelerate that, we'll obviously look at them. We made a nice acquisition of a business called NNIP, an asset manager in Europe that significantly increased our footprint in Europe last year. But it's nice to have a big business at scale that you think that you can grow organically high single digits. It's a nice to have a business like that. There aren't a lot of businesses like that, that are at scale that you can say, "We feel pretty good that we can grow and improve margins and improve returns." So I think it's a really good opportunity for the firm. We're very focused on it.

One of the real success that Goldman has had over the years is your balance sheet investments. It's been very impressive. But unfortunately, they take a lot of capital. As you guys know, you referenced your [ GSAM ] buffer already. What's the plan to accelerate the divesting or the sale of some of those investments?

Yes. So 3 years ago, we talked about the fact that we wanted our strategy to evolve on that. When you talk about performance, the investors that made the decisions on those investments on the balance sheet are the investors that are now doing that more for clients. The investing, the performance thing is the same. That's one of the things that I think we've got. We've got extraordinary investors that are very, very focused on performance. It's a great business to invest your own capital, but it's not as good a business if the regulatory world keeps making it massively punitive to do so. And over the last decade, it has gotten massively more punitive to do that on balance sheet in a regulated institution like ours. So 3 years ago, when we stood up at our Investor Day, we said we were going to reduce that. We showed people the other day, we had about $60 billion of that stuff. It's now $30 billion. At Investor Day, we said, here's the journey from $30 billion down to closer to 0, and we're very focused on that. We will always use our balance sheet in funds where there's better diversity. We have to use our balance sheet for CRA investing, which is important as a regulated bank. But the size and the scale and the friction of doing a lot of this on balance sheet investing, we're replacing it now with client capital, and it's an attractive, higher-return business. And it's been a good journey. Stuff's sticky. That's why there was someone that stood up during the Investor Day and said, "Why haven't you gone faster? Why isn't it going faster?" I think we've done a pretty good job going from $60 billion to $30 billion. And by the way, it's not $60 billion to $30 billion at a constant 0, it's $60 billion to $30 billion with stuff over the last 3 years appreciating very significantly. So you'd sell stuff, and the stuff that you had would grow more than the stuff that you sold. So we real progress, and we'll continue to work at it.

Platform Solutions has received a lot of attention lately. Can you reiterate the forward plan for that business?

Sure. And I would say gets a lot of attention, but it's -- the primary focus, I think, should be in Global Banking and Markets. Platform Solutions is less than 5% of our revenue, less than 5% of our capital. And what we have there is we have a couple of interesting emerging businesses. We're extremely focused on making them more profitable. And we also said we're going to look at strategic alternatives for some of the consumer platforms. I laid that all out at Investor Day a week ago, I really don't have a further update, but that's what we're focused on there. But I'd amplify, again, it's a small part of our capital and a small part of our business. But Obviously, we're focused on it.

Within Platform Solutions transaction banking doesn't seem to get the attention. And that's really quite interesting, what you've done there. Maybe you can share with us some insights there.

Yes. We kind of came to 1 of the transaction banking business, but we're obviously a user of that service from other banks, and we kind of looked at the way we experienced the service. This would -- so go back about 4 years ago, 4, 5 years ago, looked at the way we experienced it. It was all analog. There was a lot of friction. And we said, "Can we build a digital platform that can make this more friction-free and kind of bring deposits to Goldman Sachs?" Which would obviously benefit for us. And it also made sense because it was our clients. I mean, there's no firm that has better relationships with corporates broadly. And when you looked at the business, it's a very good business for the people that have leadership position in the business, but it's a fragmented business. Leading share is 5%, 6%, 7% is leading share. And most corporations use multiple providers. There are very few corporations that do this with just one person. So we said we have a right. If we build something that's really powerful, we have the right to compete for that business. Can we build something that's differentiated? And we kind of looked at it and we said, "If we build it and we just wind up using it for ourselves, okay, the payback will be 2 or 3 years, versus paying others." But we really thought we'd have something. So now fast-forward 4 years later, we have a nice business. It's a profitable business, it's slightly profitable. We've brought in close to $70 billion of deposits. Clients, we have 450 clients who are working with us on it. And we're now looking at it and saying, "Okay, how do we get these clients to do more with us? To do more payments with us? To use the platform more as opposed to just leaving deposits and interacting with us on that basis?" And so I think when you look over the next decade, we're going to wake up and have a pretty big business. But I feel good about. We started something from scratch. It's got really good technology. We're getting really good feedback from clients. And I think it's a good opportunity for us to add another leg to the broad package of services that we can provide to corporate CFOs and corporate treasurers. So I feel quite good about it. But there's work to do. And we understood the incentives to get people on the platform because the technology was good, and we understand how to incent people to leave deposits. Now we want more beta on those deposits, and we want to start to incent people, and we're making progress on this to make payments through our platform. And we think we have some real advantages to do that over time, but that's going to take some time. And so I just want to be very candid about the fact that the growth and the progress should be slow but steady, but we will make progress. And that's part of what I think a big company has to do. You have to be able to do some innovation and some investment and try to grow some new things. Some of them are going to work, some aren't. But this is an example of something I think it's working where we have a lot of opportunity.

With that, I see the red light just went off. So your timing was perfect on the answer, finishing there. Please join me in a round of applause thanking David for coming.

Thank you, Gerard. Thank you.