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 2020 Earnings Conference Call. This call is being recorded today, July 15, 2020. Thank you, Ms. Minor. You may begin your conference.

Thanks, Dennis. Good morning. This is Heather Kennedy Minor, Head of Investor Relations at Goldman Sachs. Welcome to our Second Quarter Earnings Conference Call. Today 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 I'm joined by our Chairman and Chief Executive Officer, David Solomon. and our Chief Financial Officer, Stephen Scher. David will start by reviewing the second quarter and first half performance. He will then provide an update on several key strategic growth initiatives and the macroeconomic backdrop. David will also address the firm's commitments to diversity and discuss a return-to-office strategy. Stephen will then discuss the recent stress test and our second quarter results in greater detail. David and Stephen will be happy to take your questions following their remarks. I'll now pass the call over to David. David?

Thanks, Heather, and thank you everyone for joining this call this morning. I would like to start by saying that all of us at Goldman Sachs hope that you, your friends, and your family remain safe and healthy during this unprecedented global health crisis. Let me begin on page one of the presentation to review our financial results. In the second quarter, we produced net revenues of $13.3 billion, up 41% versus a year ago. The strength and breadth of our client franchise was evident this quarter as we delivered solid net earnings of $2.4 billion, earnings per share of $6.26, and a return on equity of 11.1% and a return on tangible equity of 11.8%. Our results in the quarter were strong. even while incurring higher credit provisions and litigation expenses, both of which impacted our returns. Our second quarter results contributed to solid first half 2020 revenues of $22 billion, net earnings of $3.6 billion, and an ROE of 8.4% and an ROTE of 9%. Litigation costs burdened our first half returns by approximately 280 basis points. Returns were also impacted by higher reserve bills for credit losses. The second quarter demonstrated the strength of our diversified business and was driven by significant new issue volumes and the counter-cyclical performance of our market-making activities. We maintained our leading position as a strategic advisor of choice for our investment banking clients and our strong lead table positions across underwriting markets with extraordinary volumes in both debt and equity enabling us to pick up market share. We delivered exceptional performance in FIC and equities on high levels of client activity. deploying our risk intermediation expertise in our balance sheet on behalf of clients in a volatile market. We continued to provide high-quality advice to our wealth management clients and generated another quarter of solid consumer deposit growth. In asset management, we recognized gains from market appreciation in our public investments, continued to harvest private equity positions, and experienced a partial recovery in our credit portfolio from the first quarter. Importantly, we maintained a strong and highly liquid balance sheet with an improving capital position amid high levels of market volatility and economic stress. Turning to the operating environment on page two, we are navigating an uncertain macroeconomic backdrop brought on by an extraordinary global health crisis. During the second quarter, we experienced both positive and negative forces, reflecting the near-term economic challenges related to recent business shutdowns counterbalanced by continued support from central banks and governments, and market optimism as certain economies began to reopen. However, as we speak today, the path to reopening in many U.S. states and corresponding economic consequences remain unclear. Since our April earnings call, our economists' estimates for 2020 U.S. GDP improved from an expected contraction in 2020 of 6.2% to 4.6% today. driven by expectations of a faster rebound from a deeper trough. That said, on a global basis, growth expectations for 2020 deteriorated from an expected 2.5% decline in April to a 3.4% contraction expected today, with the second quarter reflecting a deeper decline in activity than expected three months ago. The prospect for a steeper recovery in the second half is in no small part due to the forceful and rapid action by government central banks by global central banks and governments, which are providing exceptional levels of liquidity and ongoing fiscal stimulus. These actions have been key to market resilience, tempering the economic impact of the virus. In the United States, we are seeing early indications of economic improvement, including the better-than-expected 18% rebound in retail sales and notable improvement in unemployment in June to approximately 11% for more elevated numbers in May. As markets assess the impact of the virus in the second quarter and its potential economic consequence, we experienced a rise in the valuation of risk assets. During the second quarter, the S&P 500 rallied by 20%, marking its best quarter since 1998, while broader global equity markets rose a similar amount. Investment grade spreads tightened by over 80 basis points, and high yield spreads tightened by roughly 140 basis points this quarter. In the context of these moves in financial assets, strong levels of client engagement during the second quarter demonstrate the breadth and the strength of our franchise. As we go forward as risk managers, we continue to prepare for the prolonged economic challenges and look beyond market valuations and our overall assessment of risk. We maintain a strong financial profile and remain agile with our balance sheet as we continue to serve our clients. Pivoting for a moment, I am pleased to note that volatility in the first half of 2020 did not hinder our progress on most of our key growth initiatives. On June 16th, we officially launched our transaction banking service to U.S. clients on time and below budget, despite the unexpected challenges of shifting our global team to work from home and launching the platform remotely. As of quarter end, we have over 175 clients on the platform and $25 billion in deposits, many of which we expect will become operational as clients begin their utilization of the platform over time. Second, in alternatives, we accelerated the marketing of a new credit fund called West Street Strategic Solutions as a part of our transition to fund-driven investing. Client receptivity has been very strong. We believe this strategy is well-timed to capture opportunities in the market today and provide critical private financing to companies in need. Our approach is highly differentiated, leveraging the broad global sourcing capabilities of Goldman Sachs. Just this week, we have closed on over $6 billion of commitments. Ultimately, we expect to raise in excess of $10 billion in the coming months. What is most impressive is that our first close occurred in less than 90 days entirely via virtual meetings. We are broadening our client base to include leading institutions and pension fund investors that have not partnered with Goldman Sachs before. These expanding relationships will be helpful to our efforts as additional strategies and funds are launched. You will recall that this initiative was part of our strategy discussed at Investor Day in January and promises to be significant in our move toward a less capital-intensive, more fee-driven model for our investing platforms. Third, in wealth management, we continue to integrate our new high net worth business, which we recently rebranded Personal Financial Management. Year-to-date, we have generated over 400 client referrals between Personal Financial Management and our flagship ultra-high net worth private wealth business, representing $1.5 billion in assets under supervision opportunity, as we now have a credible offering to serve high net worth clients. That said, establishing new wealth management relationships in the current environment with only virtual communications is challenging. we would expect our progress to accelerate under more normal circumstances. Fourth, we continue to expand our digital consumer business. We were pleased to announce our new small business lending partnership with Amazon, which will allow us to leverage our proprietary digital underwriting decision platform using data shared by Amazon's third-party sellers to provide inventory and operational financing to support their growth. This partnership, which is being launched on a smaller scale at this moment, is another example of our innovation and our ability to partner with leading corporations to deliver differentiated value to our customers. Our consumer partnership also included our recent point-of-sale financing engagement with JetBlue and, of course, our credit card with Apple. Before turning to Stephen, I would like to spend a moment on diversity and inclusion, which is a critical priority for the firm and a personal focus of mine for many years. Like so many others over the past six weeks, I've spent a lot of time listening and learning about the challenges we face as a nation on racial equity. While Goldman Sachs has long sought to advance diversity and inclusion, we are still not where we need to be. It is both a moral and economic imperative that we make progress. We must be a diverse and inclusive organization to unlock our full potential as we serve a global marketplace that is diverse in all aspects, including race, ethnicity, gender, and sexual orientation. Lastly, let me review our business resiliency and return to office strategy, which has begun in our major offices globally. The firm continues to seamlessly serve our clients, while the vast majority of our employees work remotely, demonstrating the dedication of our people, the strength of our technology, and our business resiliency. Our firm has always had a team-oriented apprenticeship culture, and we benefit from being and working together. So as each of the communities where we operate reopens, we are taking the necessary steps to gradually return to office in a safe manner. We are following the lead of our Asia colleagues. We're in Hong Kong using a split-team approach with up to 50% working from the office. We're also making progress in Europe, where on the continent 35% returned, and in the U.K. where approximately 15% of our employees are back in office. Recently in New York, a small group of employees have returned to office. Going forward, our progress will be dictated by circumstances in each region, and we will adjust as needed. We are taking many new precautions to ensure safety, including through masks and social distancing, and it's certainly not business as usual, but we're making tangible forward progress. As we take these steps, we will continue to keep the health and safety of our people as our top priority. In closing, I would just like to say how proud I am of the people of Goldman Sachs. They have worked tirelessly during this time to engage and serve our clients, leverage technology to ensure our resiliency, and prudently manage our risk and financial resources. With that, I'll turn it over to Stephen.