Goldman Sachs Group, Inc. (The)

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs second quarter 2019 earnings conference call. This call is being recorded today, July 16, 2019. Thank you. Ms. Miner, you may begin your conference.

Good morning. This is Heather Kennedy Miner, head of investor relations at Goldman Sachs. Welcome to our second quarter earnings conference call. On this call, we will reference our earnings presentation, which can be found on the investor relations page of our website at www.gs.com. No information on forward-looking statements and non-GAAP measures appear on the earnings release and presentation. This audio cast is copyrighted material of the Goldman Sachs Group, Inc., and may not be duplicated, reproduced, or rebroadcast without our consent. Today on the call, I'm joined by our Chairman and Chief Executive Officer, David Solomon, and our Chief Financial Officer, Stephen Scher. David will start with a high-level review of our financial performance, the operating environment, give an update on several recent strategic decisions, and discuss our stress test results. Stephen will then cover second quarter results across each of our businesses. We'll be happy to take your questions after that. I'll now pass the call over to David. David?

Thanks, Heather, and thanks, everyone, for joining us this morning. I'm very happy to be here with you. Let me begin on page one. We reported second quarter 2019 revenues of $9.5 billion, down slightly versus last year, but nonetheless reflecting solid franchise performance amid a mixed operating environment. Net earnings were $2.4 billion, resulting in earnings per share of $5.81. All in, we posted a return on equity of 11.1%. and a return on tangible equity of 11.7%. Our business performed well and remains solidly positioned for future growth. In investment banking, we ranked number one in global announced and completed M&A and number one in global equity underwritings year-to-date. Our equity market-making business delivered its second-highest quarter in four years, and our franchise continues to generate broad-based market share gains across regions. We produced the highest quarterly INL revenues in eight years, aided by significant gains from our private equity investing activities, reflecting our ability to source opportunities for the firm and our clients, and record net interest income in debt IML, which annualizes to $3.5 billion. Lastly, our assets under supervision increased by over $60 billion to another record of $1.7 trillion. Turning to page two, our second quarter results were generated in an operating backdrop that presented both opportunities and challenges. This quarter, perhaps more than others, reflected changing market sentiment in each of the three component months. Against this shifting sentiment, we continue to witness relatively solid underlying economic fundamentals. This year, we expect real GDP growth of approximately 2.5% in the U.S. and 3.4% globally. European growth remains a bit more subdued at about 1.5%. As recently reported, China is running in the low 6% range, slower than it has been in many years, but still supportive of global growth. All in while slowing, the global macro backdrop remains broadly constructive. The strong fundamentals that prevailed across markets were nonetheless overshadowed for most of the second quarter by geopolitical uncertainty. Client activity in April turned quiet amid low volatility, particularly in fixed income markets. Conditions in May deteriorated as geopolitical events caused significant shift in risk appetite. Fears of expanding trade wars drove concerns that new tariffs on China and Mexico would erode the prospect for continued growth. In response, equity volatility then increased, global markets turned risk off, the U.S. yield curve inverted, and client activity slowed across a variety of products as our corporate and investor clients stayed on the sidelines. The trade issues also catalyzed concern among global central banks. prompting dovish responses, with the Bank of Japan and the ECB emphasizing potential further stimulus and the U.S. markets now anticipating multiple Fed rate cuts this year. The articulated dovish sentiment spurred a relief rally and increased client optimism and activity, albeit late in the quarter. This set up June to be a stronger backdrop to close out the quarter. The market sentiment in June has continued through today. We've seen a pause in the U.S.-China trade war, accommodated views from central banks, and a continued march upward in global equity markets. Credit financing markets remain open and strategic transactions are getting announced. As we look ahead, we remain cautious on the geopolitical front, but optimistic given the resiliency of global markets. Importantly, our clients' long-term needs for advice, financing, and access to markets endure across cycles. Switching gears, I'd like to provide some insights on two important strategic decisions we made in the second quarter in our alternatives and wealth management businesses. First on alternatives, which is our core strength for Goldman Sachs for the past 30 years, we recently completed an internal reorganization of our investing activities across the firm. More specifically, we have realigned our special situations group, real estate, merchant banking, and several other investing platforms, under a common merchant banking business. We have a world-class investing franchise with a strong track record, unique sourcing and execution capabilities, and long-standing relationships with the largest institutional investors. Going forward, these teams will operate across four asset classes, private equity, growth equity, private credit, and real estate. By bringing together our investment professionals, we will accelerate our ability to raise significant third-party capital. We expect this change will enable us to generate more durable, recurring fee-based revenues over time. This will be a transition, and we are mindful of protecting the revenue potential of these businesses as we grow third-party assets. Second, we announced plans to acquire United Capital, a registered investment advisor with approximately $25 billion in assets under supervision. 220 advisors, and 90 offices around the country. United Capital represents a key step forward toward our long-term strategic goal of providing comprehensive wealth management services to individuals across the wealth spectrum. Upon closing the transaction today, United Capital will become a powerful complement to our ACO business, our leading financial executive counseling and investment advisory business, which serves many of the largest corporations in the United States. We are excited about the incremental scale that United Capital brings, allowing us to serve a broader set of wealth management clients. On a combined basis, ACO and United Capital will serve clients with over $80 billion of assets under supervision, representing a strong base from which to grow our mass affluent wealth franchise. It remains our ambition to continue to serve ultra-high net worth individuals for our longstanding PWM business. Individuals with $1 to $5 million of investable assets through ACO and the broader mass affluent segment to a hybrid of digital and human engagement as an extension of Marcus over time. Before turning the call over to Stephen, I would like to spend a moment on the recent Federal Reserve stress test results released in late June, which showed banks' ability to withstand over $400 billion of stress losses. Overall, the industry fared well in this year's examinations. From where I sit, the results of the stress test clearly demonstrate the overall safety and soundness of the U.S. financial system. We also appreciate the ongoing efforts to increase the transparency of the test and very much agree with the Fed's overall assessment that the U.S. banking system is sufficiently well-capitalized to support the economy, even after a severe shock. Turning specifically to our performance on the 2019 CCAR examination, as you no doubt are aware, we disclosed that the Federal Reserve did not object to our plan of up to $8.8 billion of capital return, including a 47% increase in our quarterly common stock dividend. This change reflects the Board and management's view that dividend growth is a critical component to delivering strong shareholder returns and reflects our progress over recent years increasing more durable fee-based revenues to support the higher dividend. Lastly, I would like to briefly touch on our strategic communication plan over the coming quarters. Importantly, we continue to work toward providing a strategic update this coming January and will share a specific date once confirmed. This update will include the financial targets for the firm to which we will hold ourselves accountable and a broader review of our business strategy. With that, I will turn it over to Stephen to walk through the results in each of our businesses.