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

Good morning, everyone. Thanks for making it in again for the second day. We'll get started here with our first session for today. We have Goldman Sachs again. Representing Goldman, we have John Waldron, Chief Operating Officer and President. Thank you, John. I think it's your probably seventh time at the conference.

I lost count, but I love this event. You guys do a wonderful job. It's always good to be here. Thanks for having me.

Great. We appreciate your time, yes. So thank you.

John, you guys put up a slide deck this morning about the Asset Wealth business. So we'll dig into that a little bit. But I wanted to kind of start a bit more broad picture and then we can go into the Asset & Wealth business. Think about over the last couple of years, you've described macro backdrop as challenging, some of the most complicated you've seen in a while. Curious what you're seeing right now and how it's affecting your client base?

Yes, so you're right. We've described it as challenging. I've described it as challenging. I actually think it's getting a little more benign and actually fairly constructive. I think there are 4 major -- if I think about our clients, what our clients are focused on, we tend to talk to our clients about their 4 major issues, one is the U.S. economy and inflation; two is geopolitics; three is the U.S. election, which is kind of coming into focus; and four is broad technology, AI, digital transformation. Those tend to be the big tentpole topics. On the economy and on inflation, I would say inflation is clearly moderating, disinflation is clear, but it's still sticky. I was talking, I was at an event yesterday with a handful of CEOs and most of whom are here speaking today. And we all kind of agreed. Still there, it's in the system. Companies are used to getting price. They plan to get more price. The customer, whether it's a consumer or an institutional business, B2B customer, is used to absorbing the price. And so it's in the system. Wages are still sticky. There's some commodity price inflation. So supply chains are still not fully normalized. So it's just stickier. And I think the Fed obviously sees that. Employment is strong. The consumer is very resilient, Maybe a little bit of weakness at the lower end, but broadly quite resilient. And the fiscal spend, particularly in the United States, but I would say globally, but particularly in United States, is a big tailwind. So in terms of GDP growth, you get a lot of fiscal impulse. So our view is a soft landing is still the base case. It seems to be fairly well baked in the cake. There's risk to it, of course, but it seems like the most likely scenario. Fed policy is basically working, I think, as designed. I think the lags are longer. I think because we had such a unique experience in the pandemic and all the stimulus, which was extraordinary, we're seeing longer lags than what the traditional kind of lags you would see a monetary policy. But their policy, I think, is basically working. It's putting some breaks. There are signs of slowdown. It's not dramatic, but you can see the economy getting a little bit softer. And I think if you're the Fed, you really have to slay the inflation dragon. The worst thing they can do is take their foot off that brake too fast and inflation doesn't really get subdued and you end up having it come back, and then they are a little bit chasing it, which was what happened in the '70s. This won't be anywhere near as pronounced in the '70s, but they have to make sure that doesn't happen. So our clients, I would say, are operating with a soft landing base case. But everybody is focused on inflation because it impacts the way you make decisions, whether you're an investor or you're running a corporation or you're running a government. It has huge implications. And most of us for most of our careers, haven't had to run anything with that kind of impact. So it's definitely the biggest issue. I think on geopolitics, markets to me are pretty good at seeing through geopolitics. But I think what I see with clients is this notion that we're 1 shock away, 1 more shock away from having an impact, whether it's on commodity prices or rates or putting the Fed in a tougher place. If you have a tough -- if you have a shock in the Middle East again, does that spike oil? And does that put the Fed in a tougher place than they're already in at the moment? So I think that's the issue people are wrestling with. And on the U.S. election, now I think the focus is beginning. We're just getting into the summer. The debates are set. There will be these 2 debates. I think those debates will be very important in the context of the election, but also in the context of how people perceive policy differential and where things are going. And so I think we're going to get a lot of focus this summer. And then AI and digital transformation is enormous. We could spend a lot of time on it. We don't need to do it here, but it's an enormous investment opportunity. We see a big super cycle coming in terms of investment. I think there's going to be an enormous amount of global investment made. You're going to see a lot of the global asset allocators who want to put money, I'd say, globally, but particularly in the U.S. in driving some of the infrastructure spend, power, data center and so forth that has to happen for the AI wave to really take hold. And then more broadly, every company is finding some way to get more automated more digital. And a lot of that is generative AI, but not all of it. And so there's an enormous amount of investment, enormous amount of focus, enormous amount of software spend, a lot of engineering capability being built, a lot of implementation going on, which I think is pretty fundamental and pretty important to a lot of companies around the world that we certainly see a lot in our dialogues.

Perfect. I'm glad you're sort of more constructive relative to the last couple of years. And we're certainly seeing that in your role, it's playing out. But let's just step back a little bit here. I think the company has call over the last 12 months, made strategic narrowing, however you want to phrase the shift in focus for Goldman. Maybe talk us through what you've done over the last year, how you think about the Goldman's strategy today and how that's playing out into your results.

Okay. So I appreciate the question. It's been, I think, a very constructive and productive journey over the last 5 years. Not a straight line. We obviously had the pandemic, and we've been really working hard on the firm. I would say there's 2 major things, I think, we've done with the firm over the last 5 years that have had a very significant impact. One is we executed this One Goldman Sachs strategy and architecture, which is much more than a slogan. It's actually an operating philosophy and an infrastructure approach to how we're going to run the firm, how we are running the firm, which really has a lot to do with figuring out a way to break down the silos in the firm, create incentives in the firm for everybody in the firm to serve our clients holistically. So when we think about going to market, we think about bringing the full throw weight of Goldman Sachs as opposed to just a product, a desk or a business. And that is having, I think, a very big impact on our client franchise, and you can see it in the wallet share. So over the last few years, we've gained hundreds of basis points of wallet share and with a pretty mature marketplace. And so that's had a significant financial impact on the firm. And the second biggest thing that we've done is we've invested enormously in an asset and wealth management platform, the pieces of which we had various parts of the firm. But in essence, you could think about we've done kind of a series of internal mergers. So it's almost like going out and buying 3 more businesses and putting them together. We've done that inside the firm in businesses that we already had in place, integrating them to 1 unified platform and really investing a lot in that platform. Those are the 2 biggest things going on in the firm, and they're having a disproportionate impact. So financially, we've grown our book value per share 54% over the last 5 years. We've more than tripled the dividend. We've more than doubled the stock price, and our TSR is 170% over that timeframe. So we've financially performed very well. And I think fundamentally, we've lifted the return profile of the firm, which has been an important element. And a lot of that has come in that market's banking business. So we've got 2 big businesses in the firm, both of which are large, global and now very interconnected. Global Banking and Markets, which is what you would historically think of as investment banking and our Sales & Trading business, and Asset and Wealth Management, which is the combination of our asset management businesses and our wealth management businesses. Both scaled, both now operating in a way where I would say One Goldman Sachs 2.0 is finding a way to create the synergies between these 2 platforms. So in banking and markets, very clear set of strategic priorities. One is to enhance the leadership position we already enjoy in a series of these businesses. So you think about Goldman Sachs, mergers, equity capital markets, rates trading, credit, commodities, equities, prime any number of other examples. We have #1 position in all of these major platforms, which is a super important place to be and an increasingly narrowed competitive set. So we're in a really good spot. We want to keep investing to strengthen those positions. We can -- by doing so, we can maximize that wallet share opportunity. There's more wallet share to get. We've gotten a lot, but there's more to get. But by investing in those franchises, we can continue to garner more share, which obviously helps you lift the overall returns of that business. And I'd say most importantly, we've shifted the mix of the business much more towards financing as a relative proportion of the total business. So we've been a very big risk intermediator over time. We continue to be that. We don't want to shrink that up that activity. But we've really grown our financing business. We think that, particularly in this new rate environment, there's an enormous appetite in the world for financing. All that secular growth in alternatives, private market assets, all has to get financed on some basis. There's a tremendous amount of AUM growth in the world and many asset classes have to get financed. Goldman Sachs are well positioned to do that. So by growing, financing, maximizing our wallet share, we believe we can really run mid-teens returns through the cycle in banking and markets, which is a scaled business that should be very, very accretive to the firm. And then when you get to asset and wealth management, here we see more of a secular growth opportunity, where we are underpenetrated. So we can really ride that secular growth opportunity and increase penetration. We think we can drive high single-digit growth in what we call durable revenues, which is really measurement fees and private banking and lending. Those are the 2 kind of big components of what we would call durable revenues. And we think we can grow those revenues at a high single-digit rate. We have been growing them at double-digit rates, but we don't expect that to continue at that pace at infinite, but we think we can for a long time to come, grow them at high single digits. We're going to release more capital from this business because we historically have been running more of a balance sheet intensive business and less of a funds intensive business. As we've transitioned largely now to funds, we released more capital. As we complete that journey, we think there's another upwards of $5 billion of capital that we can release. And we think we can run that -- this business in a -- at a mid-20s margin, which ought to be higher over time, but we're going to get to mid-20s before we can prove that we can get higher, and I'm sure we're going to come back and spend some more time on that. And we can run at a mid-20s margin this business with the capital release at a mid-teens returns. So you really have 2 large-scale businesses that can run mid-teens returns. We're going to continue to sustainably grow our dividend. We think that drives a lot of TSR for our shareholders, and it's a pretty clean and clear story.

Just a follow-up on One Goldman Sachs. I think it was one of the first presenters did at the Bernstein conference, and you really hammered home this One Goldman Sachs concept, and it seems to be paying dividends over the last couple of years. Is there a way you measure that internally in terms of how it's benefiting the firm and driving returns?

Yes. We measure it extremely prescriptively. We have a series of large, multi-dimensional clients in the firm that touch the firm in multiple parts of the firm, that we run through a very clear program where there are team leaders, there are broad-based teams across divisions, and there are metrics which typically are non-revenue metrics. We're very good accounting revenue, but we want to be very focused on the non-revenue metrics. So it would be share of wallet. It would be a number of times, if it's a corporate, you're in the boardroom, mandates, softer non-revenue metrics, where you're measuring effectively, are you strengthening your relationship? Are you becoming a trusted adviser? If it's an institutional client, it would tend to be more wallet share. But we're very clear and prescriptive, and we go out to each of these clients every year, and we ask them the same set of questions. And we've been doing that now for 5 years. So we now have baseline in terms of where we started and where we are now and where we want to get to. And we're getting now very clear feedback that this is working. It's made a big difference. But there's still room to go. And then what I would say importantly is we've actually expanded that program now. So in the institutional markets with large institutions, we were running a program for 100 large institutions. Now we're at 150. That incremental 50, not surprisingly, has lower penetration than the first 100. They're a little smaller, but they're pretty big. And we have a lot of running room there. And then in the first 100, we were measuring top 3. Now we're measuring top 1 and top 2. So it's kind of walking and then jogging and then running. And as we keep going, we're seeing really good returns. And I think now it's just becoming part of the way the firm behaves, which is a big victory inside the firm.

So on that theme of wallet share gains, it's been very clear, particularly in new markets business that Goldman is taking a lot of market share, particularly post COVID. So maybe a couple of questions on the banking and markets business. It feels like capital markets are reopening. It feels like we're an upward trend here. What are you seeing near term just here in terms of capital market activity? And then medium to longer term, how are you thinking about that business?

Sure. So in banking and markets, as I said, we're very pleased with how we're doing. We've driven 16% average returns ROE from 2020 to 2023. We think that's the highest ROE, fully allocated of anybody in our industry. And that was 18% in the first quarter of '24, which was an extraordinarily strong quarter and a very good opportunity set. So we're doing very well in terms of driving real returns in these businesses. There's clear upside from here because as you said, the capital markets are recovering. They're not anywhere near where they historically have operated. And Goldman Sachs is very well positioned to benefit from that recovery. I would characterize the investment banking opportunity, if you think about the banking side, the banking markets and the environment right now is kind of good, not great. So the capital markets are getting better. Debt capital markets have actually been strong kind of all year. We expect that to continue. The market is adjusting quite quickly to the new rate environment. Spreads have tightened a lot. There's an enormous amount of refinancing going on, and we think there's going to continue to be a lot of volume. So that feels very, very good. Equity capital markets is clearly improving, but it's been much, much slower. So if you look at equity capital markets, we're still at about a 30% discount to the 10-year volume average. So we're really not anywhere near where you historically would think equity capital markets would be. And in IPOs, we're actually at 50% discount to that 10-year average. So we're still really climbing our way back to more historical averages. We've priced a series of IPOs at the beginning of the year. I would say they went okay at best. They were priced pretty richly and they didn't trade as well. This last series of IPOs that we priced in the last 6, 8, 10 weeks have actually gone very well. The discounts have been bigger, broader. Stocks have traded very well. There's been a lot of demand. And so what -- this is what happens when you start reopening the IPO market is you start to see investors are making a little bit of money, they're feeling better about the performance that garners more confidence, and you can start to build on that, and we're starting to see that. So we're pretty optimistic about the second half of the year. But I would say thus far, on the equity side, it has been definitely slower. And then if you go to the M&A market. M&A market, I would characterize as very solid with some real signs of improvement. But you have 2 big components of the M&A market that are not really firing at max capacity. One is private equity portfolio companies, which at this juncture is a very significant piece of the M&A market, could be 30% to 40% of the M&A market over the next 5 years. And large-cap M&A, which really gets into antitrust territory, is also not really firing because we're in a fairly rough antitrust environment globally. If you could get those 2 pieces really firing, which I think will over time start to fire on a more substantial basis, you can really see a much better M&A environment. So right now, measure we look at a lot is M&A volume as a percentage of overall equity market cap. So right now, M&A volume is about 3% of overall equity market cap. Equity market cap has obviously grown a lot. M&A has been relatively stagnant. 5% would be kind of the 10-year average and it has run at 6-plus percent when you're in a really buoyant environment. So we've got a lot of running room to go. It's not here right now, although we're seeing some real signs of improvement in the last few months in terms of mandates and pipeline. And so I'm pretty bullish on M&A, but I think it's just taking a little bit longer to get on track. We really need those 2 pieces to fire. When you get to the markets business, clients are engaged, there's clear significant opportunity for activity. There's catalyst for activity, both in FICC and equities. But when you look more near term, this quarter, in particular, we had, as I said, a very strong first quarter. And 18% GBM ROE was a real outperformance in the first quarter. Typically, the second quarter seasonally is going to be slower. We're not really seeing that same level of strength in the first quarter -- in the second quarter as we saw in the first quarter. And so this quarter is trending down sequentially pretty significantly, which is not surprisingly -- not surprising to us. But I would say, importantly, our wallet shares are strong, and we feel very good about our client franchise. And I think you're going to see pretty good activity levels as we get into the back half of the year. But right now, we're still kind of navigating a little bit of a sequential decline from the first quarter.

Okay. Do you want to characterize that versus a year -- versus the year ago fourth quarter?

No, I think what I said is pretty clear.

Okay. Perfect. Let's dig into Asset & Wealth Management. It's one where we get a lot of questions in terms of what you're doing and opportunity sets. I think on some of your slides, you did put out some information around what you think their growth opportunities, kind of love you to maybe unpack some of those.

Sure. So we have a $3.5 trillion platform. It's a very global platform, and it's very deep across products and solutions. Basically, think about it as a large-scale active asset manager, a large-scale alternatives, private markets asset manager and a premier ultra-high net worth wealth franchise. So what I mean by ultra-high net worth is the wealthiest individuals and family offices in the world. That's like an $8 billion plus business -- that wealth business. So it's a scale business focused on the wealthiest individuals and family offices in the world. We're top 5 as an alternative player. We've demonstrated extremely strong investment track record through cycles. We've been at this a long time. So we're a very expressed investor over a long period of time. And as I mentioned and from a durable revenues basis, we're generating over $12.5 billion of durable revenues, which is really management fees and private banking and lending net interest margin. And we're growing and historically have been growing this platform at double-digit rates of return -- double-digit CAGRs. We see real significant opportunities for growth. So on Wealth, I would highlight 3 primary areas. First, we can grow footprint. So our wealth business at that high, high end is very focused on human trusted adviser set of relationships. When we put footprint and advisers out on the field, and we surround them with the content specialists and the investment around them to support, we get very good returns on that investment over time. I would say the firm has historically been a little episodic in how it's made those investments. And we're really trying very hard now to be focused on making those long-term investments persistently and consistently because we really like the returns we get. And you just have to be a little bit more patient over a 2-, 3-, 5-year period to see those returns start to come to fruition. And that's global. So we've kind of doubled our business in Europe. We've doubled our business in Asia. We ought to be able to do that again over the coming years. There's a lot of opportunity. We're very well penetrated on a relative basis in the Americas. We're very underpenetrated globally. So there'll be consistent investment on the adviser side and in footprint. The second major opportunity is in lending. We historically have been very adviser-driven, very advice-driven, very, very human driven, less capital driven, not surprising given our heritage. Our lending penetration is kind of at around 2% of client assets, which I think is very low relative to what I understand the average to be in the outside world of more like 8%. So we've got a lot of running room there, and we're getting much more focused on our lending capability, our lending penetration. This is very similar to what we did in investment banking back 10 or so years ago, when we started building our debt businesses to be much bigger. We did much more lending and we got very good returns. We're going to run the same play here. And then the third major area is an alternatives. Because our wealth business is focused on the wealthiest people in the world, they are big consumers of private market assets. They are very wealthy, they can suffer the illiquidity. They like the returns, and they want to be invested. And we've done, I think, a very good job over the years from an asset allocation standpoint of encouraging them to be persistently interested in alternatives. So that remains a very big opportunity. When you go to alternatives more broadly, in addition to the opportunity in wealth, we have a big opportunity in terms of our own asset management capability and alternatives, which is, as I said, a very big top 5 player. So we're building out our platform. We're going to continue to build new products and solutions across asset classes. The second thing we're doing is we're really focusing on our penetration in the institutional client base. So unlike the traditional managers, you would know in the alternatives world that built their businesses with those institutional pension funds and endowments, we historically were not really in that marketplace in the same way. So we've got actually a lot of running room there. And then away from our own wealth management channel, we've got a big third-party wealth opportunity on the big wirehouse platforms in the brokerage networks and with the RIAs. So you'll see us continue to build there. And then the third major opportunity in alternatives is margins. And I'm sure we'll talk more about that, but our margins are really not where they should be in that business. And when you get to solutions, Here, I would just focus on our clients are very clearly asking for demanding customization. So they want more SMAs. They want more direct indexing. They want active ETFs in a structured form. They want tax solutions, particularly on the wealth side. And so what I feel good about here with Goldman Sachs is we've actually spent a lot of time over the last 10 years building these capabilities, building customized -- investing in customized solutions. So one major example would be our outsourced CIO platform, where if you look at large corporations and insurance companies, increasingly, they are particularly those that don't have big asset management capabilities are saying, why are we really doing this? Why are we in this business? We ought to be focused on our core area of activity, whether it's insurance or running our corporation. And so you're seeing a big trend towards outsourcing those asset management plans. We have been a very, very big player and have won a lot of recent new mandates. I think we're the largest player in the U.S. now in OCIO. We just won a big mandate with UPS that got some press, $40-some billion mandate, and you're going to see us continue to invest in that franchise, which I think will be a growing piece of our AUM story.

Great. Let's dig into alternatives a little bit because it's one we get a lot of questions. There's clearly a lot of public managers out there with scale and size. How does -- where does Goldman fit in terms of its scale and size? And more importantly, how do you think about the competitive advantages of Goldman?

Sure. So we're not as well known as an alternatives investor as the traditional players, all of them are big clients of our firm and we love them all. Our business is over 30 years old. So we've been doing this a long time. But the way Goldman Sachs started in the alternatives business is with our own balance sheet and our partners' money. We never really started or got into a persistent kind of fundraising mode, and then we built it into the private wealth channel. So we had our own money, our partners' money, and then we went to our wealth clients. And we asked them to invest with us, and we started building the business that way. So it was really built more on a merchant banking model and with our wealth and our own capital versus that traditional institutional third-party channel. So that's one of the reasons why we're not as well known because we've not historically been in the funds business the way the other firms have been. We're $500 billion in assets. That's a top 5 player. So we're very big. We're very scaled. And we've grown our asset base in the funds model as we've transitioned now over the last 5 or so years at a 10% CAGR. So we've been growing funds at a very healthy clip. We've raised $265 billion since 2019, which I think is about 5th or 6th in the marketplace. So we've been a very persistent fundraiser and scaled ability to raise funds. Our advantages, I would say, really relate back to One Goldman Sachs. So we have great investors. We have a great track record. We know what we're doing. A lot of people can say that. There's a lot of good investors out there. But what we bring is we bring the full throwaway to the firm. That includes sourcing. So we've got this big investment bank out in the world that has offices and people out all over the place talking to companies, sourcing transactions. We can invest in those transactions. We partner with our clients often in those transactions. We've got a very big global footprint. So we want to have a private equity business in Asia, we can ride on the back of that broad franchise. We want to build something in Brazil, we can ride on the back of that broad franchise. We have long-term relationships with these big asset allocators. So while we haven't been persistently fundraising with the State of California, the State of Texas, the State of Florida over 30 years, we've been serving them as an intermediary in the marketplace. So we're well known to them. We just haven't built this particular part of the relationship. We have this wealth management franchise, which is an enormous advantage. Because as I said, our wealth management clients love to invest in alts, and we've been feeding them alts, both our own alts and our clients' alts for many, many years now, and they've been beneficiaries of that. So they have a very positive virtuous feeling about it. We have great risk management capabilities as a firm. That at the moment hasn't seemed to be so unique because the markets have been going like this and everybody has been performing quite well. But when we have a cycle, which invariably we will have, we will, I think, perform very, very well because we're pretty deep in terms of looking at structure and terms and understanding how to manage risk. And we've got an ability to really bring value add to our portfolio companies because of the breadth and depth of our firm. We've built a big value accelerator inside our asset management platform. We've hired a number of ex-executives that are on our platform now that help us from sourcing, marketing, purchasing, digital transformation and so forth. So we've got a lot that we can bring to the table that really speaks to the full throw way of the firm, which is very advantageous for our alternatives platform.