Goldman Sachs Group, Inc. (The)

Good morning. My name is Katie, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs fourth quarter 2023 earnings conference call. On behalf of Goldman Sachs, I will begin the call with the following disclaimer. The earnings presentation can be found on the investor relations page of the Goldman Sachs website and contains information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of the Goldman Sachs Group, Inc., and may not be duplicated, reproduced, or rebroadcast without consent. This call is being recorded today, January 16, 2024. I will now turn the call over to Chairman and Chief Executive Officer David Solomon and Chief Financial Officer Dennis Coleman. Thank you. Mr. Solomon, you may begin your conference.

Thank you, Operator, and good morning, everyone. Thank you for joining us. 2023 was a dynamic year. the U.S. economy proved to be more resilient than expected despite a number of headwinds to growth, including a significant tightening of financial conditions, regional bank failures, and an escalation of geopolitical tensions. Against this backdrop, this was a year of execution for Goldman Sachs. In addition to narrowing our strategic focus, we further strengthened our core businesses. As we enter 2024, the potential for rate cuts in the first half of this year has renewed optimism for a soft landing. We are already seeing signs of potential resurgence in strategic activity, which is reflected in our backlog. I'm starting today's presentation with a strategic update, and Dennis will provide comments on the financial results. Beginning on page one, we aspire to be the world's most exceptional financial institution, united by our shared values of client service, partnership, integrity, and excellence. And over the last 155 years, we have created one of the most aspirational brands in financial services. Goldman Sachs is a preeminent global investment bank and a leader across asset and wealth management. We've continued to simplify our strategy, and today is an opportunity to take stock of our progress, as well as highlight avenues for further growth. Strategic objectives on this page underscore our relentless commitment to serve our clients with excellence and to further strengthen our client franchise. As we show on page two, we have two world-class and interconnected franchises that are well-positioned to achieve these strategic objectives. First, Global Banking and Markets, which includes our top-ranked investment bank with an unparalleled merger franchise and a leading capital markets business. It also includes our number one equities franchise and top three FIC franchise, where we are uniquely positioned to serve our clients across geographies and products. And second, our unified asset wealth management business where we are leading global active asset manager with a top five alternative business and a premier ultra high net worth wealth management franchise. This is a scaled business with over $2.8 trillion in assets under supervision and where we see significant opportunity for further growth. Across these two businesses, our extraordinary talent and unmatched execution are bolstered by our one Goldman Sachs operating ethos. On page three, we lay out our progress across a number of key priorities that we discussed at our most recent investor day in February 2023. Global banking and markets, we've maintained and strengthened our leadership positions across investment banking. In FIC and equities, we have improved our standing with the top 150 clients. We generated record total financing revenues across these businesses in 2023 and have demonstrated impressive growth over the last four years. In asset and wealth management, we've driven solid investment performance and consistent growth and a more durable revenue base of management, other fees, and private banking and lending revenues. This past year, we reduced our historical principal investments by $13 billion and also surpassed our five-year alternatives fundraising target one year ahead of schedule. I will talk more about each of these businesses in a moment. Before I do, I would like to speak about how we've narrowed our strategic focus. We made several important decisions and swiftly executed on them. We exited the Marcus lending business and sold substantially all of our Marcus loan portfolio. We sold our personal financial management business. We announced the sale of Green Sky, which remains on track to close this quarter. We also sold the majority of our Green Sky loan portfolio, which settled in the fourth quarter. We've also reached an agreement with General Motors regarding a process to transition their credit card program to another issuer. We remain committed to supporting the products and servicing customers through the various transition agreements in our consumer activities. I firmly believe companies should innovate and seek out new opportunities for growth, but it is also important to be nimble and make tough decisions when needed. Our consumer ambitions have produced over $150 billion of deposits, which we expect to grow further from here. These deposits have materially improved the firm's funding profile. Now we are focusing our growth in other areas where we have a proven right to win. We recognize that scale matters as it allows us, it allows the firm to operate more efficiently and manage incremental regulatory and other costs, making unit economics more favorable. And we need to be measured and focused in our execution. Our narrowed strategy is now focused on our two core businesses where we have a proven right to win with our leadership position, scale, and exceptional talent. On page four in global banking and markets, our leading and diversified franchise has produced average revenues of $32 billion over the last four years across a number of different market environments, demonstrating the diversity and relative durability of this business in aggregate. In the last several years, we made a concerted effort to grow our wallet share and financing revenues, which have clearly raised the revenue floor for these businesses. We have also generated attractive returns with an average ROE fully allocated of over 16% over the last four years. Turning to page five, a key part of enhancing this durability has been executing on our strategic priorities. Our efforts to materially strengthen the client franchise are evidenced by wallet share gains of roughly 350 basis points since 2019. We've maintained our league table rankings of number one in announced and completed M&A, number one in equity and equity-related underwriting, number two in high-yield debt. In FIC and equities, we're in the top three with 117 of our top 150 clients. These competitive positions are a reflection of our one Goldman Sachs approach and our clients' confidence in us. In addition, we have significantly increased more durable financing revenue. FIC and equity financing together have grown at a 15% tagger since 2019 to a new record of nearly $8 billion. Turning to asset and wealth management on page six, we've continued to make progress on bolstering more durable revenue streams. Management and other fees and private banking and lending revenue together have grown at a CAGR of 12% since 2019. We've also made swift progress in reducing our historical principal investments and are already approaching our pre-tax margin target on an adjusted basis. Turning to page seven, our solid investment performance across both traditional and alternative channels as driven inflows. Over 75% of our traditional funds performed in the top half of Morningstar funds, while on alternatives, over 90% of our funds were in the top half of Cambridge funds, both over the last five years. The fourth quarter represents our 24th consecutive quarter of long-term fee-based net inflows across our platform. I want to reiterate that we have reached a milestone by raising over $250 billion in alternatives since 2019. surpassing our $225 billion target a year early. This fundraising success has been the result of our continued innovation and developing new strategy, as well as our ongoing focus on investment products where we have deep expertise and longstanding track records. Fundraising has been broad-based across geographies and asset classes, with approximately 40% coming from our ultra-high net worth relationship. I'm very proud of this achievement. When we were preparing for our first investor day four years ago, I remember how big a reach our initial target of 150 billion seemed. To surpass not only that target, but also our increased target of 225 billion, one year ahead of schedule demonstrates the power of our platform and the exceptional depth of talent we have in this business. Putting all this together on page eight, you can see how much we've improved the durability of revenues across the firm. On this slide, baseline revenues are shown in gray. which represent the sum of the trailing 10-year lows for each of the businesses that are considered more cyclical, namely advisory, underwriting, and intermediation. We believe this is a very conservative measurement because it's unlikely that every one of these businesses would ever hit a low point all at the same time. In fact, in all of the years since we became a public company, it has never happened. In dark blue, you can see the more durable revenues from financing, management, and other fees, as well as private banking and lending, which in aggregate have grown at 13% CAGR since 2019. Taken together, these two components make up over 70% of revenues in 2023. On top of that, we consistently generate upside across different market environments because of our diversified franchise. The increase in the consistent bank baseline and more durable revenue streams coupled with the diversification of our scaled franchise and our ability to capture upside demonstrate the revenue generating power of our firm. Narrowing our strategic focus, our leadership team spent a significant amount of time in 2023 realigning the firm's priorities with our strategic vision, our values and our strengths, which we highlighted on page nine. You've heard us talk about many of these elements before, starting with our strategic objectives. First, to harness one Goldman Sachs to serve our clients with excellence. Second, to run world-class, differentiated, and durable businesses. Third, to invest and operate at scale. As you can see on the page, our execution focus areas for 2024 are aligned with these strategic objectives. Taking one example, investing in our people and culture. Exceptional quality of our people, supported by our unique culture of collaboration and excellence is critical in solving our clients' most consequential problems. and it's imperative that we continue to invest in them. All in these objective and execution focus areas will result in our desired outcomes, to continue to be a trusted advisor to our clients, to be an employer of choice for our people, and to generate mid-teens returns through the cycle and strong total shareholder return. With everything we achieved in 2023, coupled with our clear and simplified strategy, we have a much stronger platform for 2024. I feel very confident about the future of Goldman Sachs, our ability to continue to serve our clients with excellence, and that we will continue to deliver for shareholders. I will now turn it over to Dennis to cover our financial results.

Thank you, David. Good morning. Let me start on page 10 of the presentation. In 2023, we generated net revenues of $46.3 billion, net earnings of $8.5 billion, and earnings per share of $22.87. As David highlighted, we made significant progress this year in narrowing our strategic focus. We provide details on the financial impact related to these decisions, as well as the impact of the FDIC special assessment fees on the slide. In aggregate, these items reduced full-year net earnings by $2.8 billion, earnings per share by $8.04, and our ROE by 2.6 percentage points. Turning to performance by business, starting on page 12. Global banking and markets generated revenues of $30 billion for the year, down 8% as higher equities revenues were more than offset by a decline in FIC revenues and investment banking fees versus last year. In the fourth quarter, investment banking fees of $1.7 billion fell 12% year over year, driven by a decline in advisory revenues versus a very strong quarter in 2022. For 2023, we maintained our number one league table position in announced and completed M&A, as well as in equity and equity-related underwriting, and ranked second in high-yield debt underwriting. Our backlog rose quarter-on-quarter, driven by a significant increase in advisory. As David mentioned, we are encouraged by the robust level of dialogues with our corporate client base. And though we're only two weeks into the new year, there have been solid levels of capital markets activity in both the U.S. and Europe. FIC net revenues were $2 billion in the quarter, down 24% from strong performance last year amid lower activity in rates and other macro products. In FIC financing, revenues rose to a record $739 million. Equities net revenues were $2.6 billion in the quarter, up 26% year-on-year. The year-over-year increase in intermediation revenues was driven by better results in derivatives. Financing revenues of $1.1 billion rose year over year with continued strength on higher average balances. Across FIC and equities, financing revenues rose 10% in 2023, consistent with our priority to grow client financing. Moving to asset and wealth management on page 14. For 2023, revenues of $13.9 billion rose 4% year over year. As an increase in more durable revenues, including record management and other fees, and record private banking and lending revenues offset a decline in equity investment revenues and incentive fees. Fourth quarter management and other fees of $2.4 billion were up 9% year over year. Full year management and other fees were $9.5 billion, putting us on track to hit our $10 billion target in 2024, notwithstanding the sale of our PFM business. Equity investments produced net revenues of $838 million. Higher year-over-year driven by modest gains in our public portfolio versus losses in the fourth quarter of last year. Results in this line item also included a gain of $349 million from the sale of PFM. Moving on to page 15. Total firm-wide assets under supervision ended the quarter at a record $2.8 trillion, driven by market appreciation as well as strong net inflows across fixed income and alternative assets. and representing our 24th consecutive quarter of long-term fee-based net inflows. Turning to page 16 on alternatives. Alternative assets under supervision totaled $295 billion at the end of the fourth quarter, driving $571 million in management and other fees for the quarter and $2.1 billion for the year, surpassing our $2 billion target for 2024. Gross third-party fundraising was $32 billion for the quarter and $72 billion for the year. As David mentioned, third-party fundraising since our 2020 Investor Day now stands at over $250 billion. On-balance sheet alternative investments totaled approximately $46 billion, of which roughly $16 billion is related to our historical principal investment portfolio. In the fourth quarter, we reduced this portfolio by over $4 billion, including sales of $3 billion of CIEs across over 40 positions, bringing reductions for the year to $13 billion. We continue to focus on exiting this portfolio over the medium term, though we don't expect portfolio reductions in 2024 to be at the same pace as in 2023. I'll now turn to platform solutions on page 17. Full-year revenues were $2.4 billion, up 58% versus 2022. Quarterly net revenues of $577 million were up 12% year over year, on higher consumer platform results amid growth in average credit card balances. As David mentioned, we reached an agreement with General Motors regarding a process to transition their credit card program to another issuer, the impact of which was to move the loans to help for sale and release the associated loan loss reserves of approximately $160 million. We have no additional updates regarding our credit card partnerships at this time. On page 18, Firm-wide net interest income of $1.3 billion in the fourth quarter was down 13% relative to the third quarter, reflecting an increase in funding costs supporting trading activities. Our total loan portfolio at quarter end was $183 billion, modestly higher versus the third quarter, reflecting an increase in other collateralized lending, which includes the pools of signature banks' capital call facilities we won at auction in October. Our provision for credit losses was $577 million, In relation to our consumer portfolio, provisions were driven by net charge-offs and seasonal balance growth, partially offset by the GM reserve release I mentioned. For our wholesale portfolio, provisions were driven by impairments that were generally in line with the last two quarters, with roughly half related to CRE. Let's turn to expenses on page 20. Total operating expenses for the year were $34.5 billion. Excluding severance-related costs of $310 million, compensation expense was flat year-over-year amid solid poor performance and as the market for talent remains competitive. As of the fourth quarter, we achieved our goal of $600 million in run-rate payroll efficiencies, which allowed us to continue investing in our talent. Quarterly non-compensation expenses were $4.9 billion and included CIE impairments of $262 million. The year-over-year increase in non-comp expenses was driven by the FDIC special assessment fee of $529 million. Our effective tax rate for 2023 was 20.7%. For 2024, we expect a tax rate of 22 to 23%. Turning to capital on slide 21, our common equity tier one ratio was 14.5% at the end of the fourth quarter under the standardized approach, 150 basis points above our current capital requirement of 13%. In the fourth quarter, we returned $1.9 billion to shareholders, including common stock repurchases of $1 billion at an average price of $311 and common stock dividends of $922 million. While we expect to remain nimble with respect to capital return, given the ongoing uncertainty around the Basel re-proposed rule, our capital management philosophy is unchanged. We prioritize supporting client deployment opportunities, sustainably growing our dividend, and returning excess to shareholders in the form of buybacks, particularly when valuation levels are attractive. In conclusion, we made solid progress on narrowing our strategic focus in 2023 with our execution driving a much stronger platform for 2024. Our best-in-class core businesses are well-positioned to execute on our strategic objectives. We will continue to harness one Goldman Sachs to serve our clients with excellence, run world-class differentiated and durable businesses, and invest to operate our businesses at scale. Additionally, the execution focus areas we've identified for 2024 will help us drive the outcomes of delivering for clients, our people, and our shareholders. With that, we'll now open up the line for questions.