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 fourth quarter 2020 earnings conference call. This call is being recorded today, January 19th, 2021. 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 fourth quarter earnings conference call. Today we will reference both our strategic update and the earnings presentations, 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 in both presentations. This audio cast is copyrighted material of the Goldman Sachs Group, Inc., and may not be duplicated, reproduced, or rebroadcast without our consent. I'm joined by our Chairman and Chief Executive Officer David Solomon and our Chief Financial Officer Steven Scherr. This morning we are pleased to review the firm's fourth quarter and full year performance in addition to providing an update on the strategic plan we outlined at last year's Investor Day. David and Steven 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 everybody for joining us this morning. Let me begin with page one of our strategic update presentation. I'm pleased to report that 2020 was a year of strong performance for Goldman Sachs as we successfully navigated an unexpected operating backdrop characterized by near record volatility and correspondingly high client activity. This year was marked by an extraordinary decline in economic activity in the second quarter brought on by COVID-19. and a dramatic reversal in the third and fourth quarter as economic output and unemployment partially reversed course. This volatility contributed to severe dislocation across asset classes, which was met by profound fiscal and monetary action taken across the globe. Goldman Sachs met the needs of our clients, relying on dynamic management of the firm's liquidity and balance sheet to provide complex risk intermediation, financing solutions, advice, and innovative thought leadership. Momentum remains strong into year end as we produce record revenues for the fourth quarter of $11.7 billion, resulting in record quarterly earnings per share of $12.08. For the full year, we grew revenue by 22% to $44.6 billion, our highest revenue production in more than a decade, which allowed us to generate meaningful operating leverage. We delivered a full year ROE of 11.1%, notwithstanding a nearly four percentage point impact of litigation expense. This revenue growth was clearly driven by a larger opportunity set given the extraordinary activity throughout 2020. While industry wallet grew, we also took meaningful market share across businesses and geographies. We continued to demonstrate the strength of our diversified business. We maintained our leading global position and completed M&A as we have for 19 of the past 20 years. and strong leadership positions, strong league table positions and underwriting including a number one ranking in equity and equity linked offerings and a top three ranking in high yield. We delivered robust performance in global markets in both FIC and equities on solid client activity across our global platform and grew market share across businesses and client groups. Our next generation trading talent now in positions of leadership demonstrated strong risk management discipline and client focus in executing against an expanding opportunity set. In asset management, we had record management and other fees as well as continued growth in our assets under supervision. We also generated solid revenues from on-balance sheet investments driven by public marks and event-driven gains on our portfolio. We continued our broader effort to reduce the balance sheet intensity of this business as we transitioned to more third-party investing. We continue to provide high-quality advice to our wealth management clients, producing record revenues and generated strong growth in our consumer business. Finally, and perhaps most importantly, we maintained a resilient and highly liquid balance sheet and demonstrated agility in the deployment of capital to serve clients amid high levels of market volatility and evolving regulatory constraints. While we are cautiously optimistic given improving macro trends, we recognize that the operating backdrop will continue to evolve. Although we are now seeing the initial rollout of vaccines in the US, UK, and other nations, there remains significant uncertainty in the path forward related to virus resurgence, vaccine distribution, and further fiscal stimulus and geopolitical risks. Let me underscore that progress on economic growth is contingent on an effective vaccine rollout program globally. I urge political leaders at all levels and across all jurisdictions to do everything possible to implement a coordinated and comprehensive distribution plan. In its absence, economic recovery will be unnecessarily delayed. Economists continue to anticipate a mixed outlook for near-term growth. The expectation is that we'll take until at least the second quarter return to pre-pandemic levels of output. Our economists expect GDP growth this year of roughly 6.5%, both globally and in the U.S., which would suggest a more rapid recovery. Still, circumstances around COVID-19 remain fluid and we remain vigilant about risks in the markets and potential weaknesses in the broader economy. Looking ahead, the extreme volatility of 2020 is unlikely to repeat, given the government actions taken last year. Nevertheless, I am confident that Goldman Sachs will continue to benefit from the established wallet share gains made in 2020 across an expanding client set, particularly in investment banking and global markets. and continue to develop more durable revenue sources across asset management and consumer wealth management. With that, let me turn to page two. In the 12 months since our Investor Day, we have made steady progress towards our medium-term goals, and we remain confident that we will achieve these targets as well as our longer-term goal of mid-teens or higher returns. Our 2020 ROE, when adjusted to exclude the impact of litigation, comfortably exceeds our 13% medium-term target. We are pleased with our progress on funding diversification as we grew deposits by $70 billion in 2020. While the Fed funds rate declined faster than the reduction in our deposit rates, we have since adjusted our pricing, which should allow us to achieve our funding optimization goals by 2022. We are making headway in realizing expense efficiencies throughout the organization and have achieved approximately half of the $1.3 billion initial target we presented at our investor day. We will continue to make progress from here and will evaluate additional opportunities for further expense savings. Finally, with respect to capital, our CET1 ratio stands at 14.7%. This positions us well to serve clients and accelerate capital returns to shareholders in the first quarter. We continue to believe that a 13% to 13.5% ratio is appropriate for the firm over the medium term. We are encouraged by the results of the recent mid-cycle stress test. That said, we will continue to proactively reduce the stress capital intensity of our businesses, including through continued sales of our on-balance sheet private equity investments. As John, Steven, and I have emphasized many times, we are committed to holding ourselves accountable and being transparent with our stakeholders on our progress. We are tracking roughly 30 firm-wide KPIs and many additional business-level metrics on a regular basis to measure our success as we execute on all aspects of our strategy. Let me now turn to page three. While last January's Investor Day seems distant given the events of the past year, the pillars of our strategic direction remain unchanged. Our strategy is simple. First, to grow and strengthen our existing franchise and capture higher wallet share across a wider client set. Second, to diversify our products and services in order to build a more durable earnings stream. And third, to operate more efficiently so that we can drive higher margins and returns across the organization. We are seeing early success in each category. Moving to page four, the strength of our firm's culture is the foundation for our performance as individuals on the firm and is central to the success that we achieved in 2020. Delivering the entire firm to our clients through our one Goldman Sachs approach is is crucial to our mission, and clients remain at the center of everything we do. The investments we made to break down internal silos and motivate better collaboration across the firm have been critical and will continue to guide our approach going forward. Equally, core to our mission is delivering on our firm's purpose to advance sustainable economic growth and financial opportunity. This purpose is fundamental to our 10-year, $750 billion sustainable finance commitment that cuts across two broad pillars climate transition and inclusive growth during the year we have worked closely with our clients to deepen knowledge and expertise develop capabilities and accelerate commercial activity we are delivering integrated ESG solutions across our client base and I'm proud of the firm's leadership on this topic and optimistic about the benefits that these opportunities will bring to our clients as we pursue these ambitious goals we will also continue to focus on our people Diversity is an imperative for our organization. For Goldman Sachs, it is about bringing diverse people, perspectives, and abilities together to best serve our stakeholders. It fosters more creative thinking and supports the inclusive, sustainable growth that is core to our long-term business strategy. While our recent progress is encouraging, including the most diverse campus analyst class ever to join the firm this past summer and improved diversity of our most recent partner and managing director classes, The events of the past year have reinforced how much further we have to go to enhance diversity and inclusion throughout the firm. This remains a personal priority for me, and we will continue to hold ourselves accountable to make further advancements, including through our new aspirational goals to drive diverse hiring at more levels of the firm. Let me now take you through each of our four operating segments. I will start with investment banking, where we remain the advisor of choice for corporations around the world. In 2020, as measured against the goals set out at our investor day, we maintained our number one ranking and announced and completed M&A and equity and equity-linked offerings. We also ranked in the top four for wallet share and global debt underwriting through the third quarter. We spoke last January about our aim to grow share in our core business. We began to execute on this goal in 2020 as announced M&A deal count was up along with our equity underwriting wallet share. Our footprint expansion efforts, on our footprint expansion efforts, we have met our investor-day target for client coverage. We generated an excess of $800 million of revenue in 2020 from this client set, and we expect this to be an important source of growth going forward. Across the business, we have added approximately 2,700 net new clients since 2017, and we will continue to add new clients to sustain this base. We are cautiously optimistic on the outlook for investment banking given the robust activity levels in the capital markets and the elevated strategic activity on the back of improving CEO confidence reflected in our near-record backlog as the end of the year. We are also pleased with the early success of our transaction banking platform with which, since its launch last June, has attracted roughly 225 corporate clients and nearly $30 billion of deposits and is well positioned to drive growth and more durable revenues for the firm. The combination of our attractive product offering, strong client receptivity, and tailwinds created by the macroeconomic environment drove deposit growth ahead of expectations. As we work to deliver greater functionality to clients and continue their onboarding, we will convert more of these deposits to operational, providing increased funding utility to the firm. We also continue to look for innovative ways to expand the reach of our platform to new clients, as we did with our recent partnership with Stripe, which embeds our transaction banking payment and deposit solutions directly into Stripe's platform, making these products available to its millions of small business customers. Let me now turn to page six. In 2020, our global markets business posted its strongest net revenues in a decade, exceeding the return targets laid out for the business at Investor Day. Global markets is a business that many believed should have been downsized when John, Stephen, and I took our seats. While it's only a single year, the performance of the business in 2020 is an early validation of our decision to stay the course. Our teams work diligently to serve our clients through the challenges of 2020, providing liquidity across asset classes, intermediating risk, and engaging in structured solutions, while also supporting significant volumes across expanding digital platforms. We also advanced on our Investor Day objective of moving into a top three position with more of the top 100 institutional clients. We are now in the top three across 64 of these firms, up from 51 a year ago. We gained 120 basis points of wallet share through the third quarter of 2020, which we intend to maintain through our deepened client relationships, superior risk intermediation, and ongoing investment in technology platforms. We set a goal in January to increase our client financing activity. Our record-six financing revenues for 2020 demonstrate our ability to meet this target. Additionally, we continued to strengthen our prime business, where we closed the year with record balances, the result of a multi-year investment in platform enhancements and other client-oriented initiatives, particularly in the quant space. Finally, while we saw meaningful revenue growth in global markets, we remained focused on operating efficiencies. We achieved roughly $400 million in expense efficiencies last year and allocated $1.15 billion of capital in that business to more accretive opportunities, both ahead of schedule. Across any level of industry wallet, the progress that we've made in global markets has improved the business's structural return profile. Let me now turn to page seven. Our asset management business experienced solid performance in 2020 marked by continued growth in assets under supervision, driving record management and other fees. Our status as one of the world's leading global asset managers has served us well during this volatile period. Our asset management business provides clients with offerings across the spectrum, from liquidity to alternatives, and we will continue to grow this business opportunistically by serving our clients' needs and differentiating our offerings with holistic advice, investment solutions, and portfolio implementation. We are progressing well towards our longer-term objectives of $250 billion of growth in traditional equity and fixed income products and $100 billion of net inflows to alternatives. To that end, we spoke at Investor Day about growing our third-party alternatives business, and we are pleased with our early achievements. We have raised approximately $40 billion in commitments to date across asset classes, including private equity, private credit, and real estate. This is good progress toward our goal of $150 billion in gross fundraising over five years. Additionally, we are encouraged by the expanding number of institutions that are investing with Goldman Sachs. Many pension funds and international institutions participating in recent fund offerings are new investing clients to the firm. As we shift toward the greater emphasis on third-party funds, we also continue to work to optimize the capital consumption of our asset management business. To that end, we sold or announced a sale of over $4 billion of gross equity investments in 2020, with a related $2 billion of expected lower capital. We will continue to advance the sell-down process in 2021 and beyond to achieve the objectives we set out in our Investor Day. Importantly, as we highlighted at Investor Day, incentive fees on portfolio remain unrecognized until investments are sold and fund return thresholds are achieved. Our estimated unrecognized incentive fees currently stand at $1.8 billion. Turning to page eight, we made meaningful advancements this year in growing our consumer and wealth management segment, particularly in expanding our customer base, building our technology platform, and leveraging our corporate franchise. We remain committed to delivering tailored advice and simple and transparent financial solutions to our individual clients across the wealth spectrum, and our goals here remain integral to our strategic priorities. Our wealth management franchise remains a crown jewel for the firm. Revenues grew 10% year over year to a record $4.8 billion, as our clients largely remained invested through uncertain market conditions. In our private wealth management business, this success has long been built on the strength, depth, and trust of client relationships, which became even more relevant as COVID-19 limited face-to-face interactions. Throughout this period, our private wealth advisors have continued to maintain high levels of client engagement and deliver trusted advice. While the environment has caused us to slow some of our hiring efforts in this area, we remain committed to the growth potential of this franchise. We also continue to expand our high net worth platform through ACO and personal financial management, our rebranded United Capital business. Our ACO platform achieved its annual goal of bringing more than 30 new corporate clients onto the platform in 2020, as corporates of all types increasingly look to ACO for financial planning and wellness solutions. We remain well-positioned to meet this ongoing need, given ACO's broad spectrum of offerings, as well its connectivity with our investment banking franchise and our new personal financial management capabilities. We have already begun to see significant synergies as a result of these advantages, with over 4,000 referrals in 2020 representing over $7 billion of AUS opportunity across these channels. Moving to page nine, I want to provide some additional detail on our consumer business, which continues to perform well and deliver strong growth. The pandemic has reaffirmed our view that traditional banking has not kept up with the way people live their lives today, and that Goldman Sachs is uniquely placed to step into this gap. We've had early success launching online savings, lending, and credit cards. And we are now moving to the next phase of our growth plan, taking us from a series of singular products to a more comprehensive offering. We are particularly excited about the launch of Marcus Invest platform in the US this quarter, which for the first time brings the investing expertise of Goldman Sachs directly to Mass Affluent customers. Following our US launch, we plan to expand to the UK in the second half of the year. Marcus Invest will offer individuals the ability to invest as little as $1,000 and our proprietary asset allocation strategies with options raising from index funds to ESG-focused ETFs. Digital investing features will be integrated into the Marcus app and website and will combine the accessibility, simplicity, and transparency of Marcus with our leading investment advisory capabilities. In addition, our new digital checking offering, also scheduled for launch this year, will deliver an enhanced customer experience that is simpler, and more transparent than what traditional banks have historically offered, providing smart money management tools that help consumers take control of their financial lives. As we grow, we will not only serve customers directly through the markets platform, but we will also serve customers through our growing partnership channels. In 2020, we launched four new partnerships with Amazon, Walmart, JetBlue, and AARP, all following our first partnership with Apple. We also recently announced our second co-branded credit card with General Motors, another sign of our ability to be the banking partner of choice for leading corporations across a variety of industries. Our partners value our scale, innovation, engineering prowess, robust infrastructure, regulatory status, and importantly, the power of the Goldman Sachs brand. The opportunity set here is very large. with each partner reaching tens of millions of individuals through their existing customer bases. Without his background, let me also comment on 2020 consumer performance, which exceeded our expectations, but which also has implications for our financials as we go forward. We proactively adjusted our strategy beginning in March as the impact of COVID-19 and the evolving market conditions began to take shape. We tightened underwriting standards to reduce risk deliberately slowing our consumer loan growth across both unsecured loans and Apple Card. Given the economic outlook, we also significantly grew our reserves for potential future losses. At the same time, we continued to raise deposits at a pace meaningfully higher than we had expected, as clients remained attracted to the value of our products and the strength of our brand. Taken together, our pre-tax loss in consumer, excluding reserve build, was reduced versus 2019 levels and lower than our expectations for 2020. Looking forward, we have a clear opportunity to achieve break-even, excluding reserves for our existing product set, including checking and investing in 2022. That achievement would be one year later than initially anticipated due to business adjustments driven by COVID. For 2021, pre-tax loss for our consumer business, excluding the impact of reserves, is likely to be higher and look more like what we had initially expected for 2020. This is driven by lower value on deposits, tighter credit standards, and additionally the investment in our new General Motors credit card. Beyond 2021, we will continue to invest where appropriate and opportunities to build additional functionality with our digital bank as well as to pursue further growth in our partnership channels. In terms of broader functionality, we may look to develop additional products to drive a more comprehensive customer experience over time. These investments, if pursued, may delay our planned break-even for the business. I want to emphasize, however, that should we choose to invest in additional products to broaden our consumer capabilities, it will not affect our ability to meet our enterprise-level targets. With respect to partnerships, these opportunities with corporate clients of the firm allow us to commercially engage with a broader consumer population and are designed to build on the platform-based architecture that we have built for our proprietary markets business. Just as we did with Apple Card, our intent is to develop differentiated products and service offerings that are embedded in our partners' ecosystems and tailored to the spending, borrowing, and investing needs of their customers. From an economic perspective, these opportunities are designed to materially reduce our customer acquisition costs and leverage the embedded cost base of our systems. Furthermore, partnerships we seek to pursue offer the firm potential for mid-teens returns at scale. Each partnership is intended to extend beyond a single product and bring scale to our business on favorable economic terms. Goldman Sachs has a history of building businesses with a long-term orientation. Our investment in our consumer business will continue to be dynamic and appropriately sized to support our ability to achieve our long-term financial targets, and in the interim, it will not prevent us from reaching our medium-term firm-wide goals. Before I close, let me share that I am incredibly proud of the progress we've made in 2020, which was a transformative year for Goldman Sachs. Our success could not have been achieved without the extraordinary efforts of our people. who continue to put clients at the center of everything we do. I am humbled by the level of commitment I see across our organization every day, knowing many of the personal and professional challenges our people are navigating. As we look forward, I know there will be further challenges, but I am optimistic about the potential for Goldman Sachs in the coming years. I believe in our strategic plan, in our leadership team, in our culture, and in the raw talent of our people. Taken together, these attributes will better enable us to achieve higher and more sustainable returns for our shareholders. Let me now turn it over to Stephen to review funding, expenses, and capital as a part of the Investor Day update.