Goldman Sachs 3Q17

Marty Chavez – CFO

M&A pipeline

The pipeline, as you noted in equity underwriting is strong also in our conversations with clients on the advisory side. There’s no sense of slowdown. We’re seeing a pickup in client dialogue, particularly I would note in technology, media, telecom, as well as industrials and natural resources. And so, it’s strong for all of the reasons that you would expect that CEOs are confident, equity market support valuations and acquisition currencies, the financing markets are open, the overall levels of financing costs are relatively low by historical standards. That’s all constructive on tax reform which you also mentioned, that is certainly a part of our engagement with clients. And I will also note however that clients, it seems to us, have moved towards saying, well, tax reform would be a good thing but it’s not stopping us from considering strategic acquisitions and sales right now.

Fed unprecedented but good backdrop 

note that there’s a positive backdrop, so the U.S. economy is performing, there’s improving GDP growth depending on who you talk to, the U.S. is at or perhaps even beyond full employment. And at the same time, all of this unwinding quantitative easing is unprecedented territory, never happened before. So, you could see volatility and spikes showing up in this process, simply because it’s never happened before. We don’t see duly unwind risk priced into the markets. You could imagine of all spikes that that client confidence make market making difficult, you could also imagine a positive scenario with modest fall, more conviction, more activity, all of these things could be catalysts for the FICC business, rising inflation, any changes in central bank policies against the expected trajectory, clarity on U.S. policies of all kinds, tax, obviously regulation, also infrastructure, all of these things you could see as better catalysts.

Goldman Sachs at Barclays Conference Notes

Harvey Schwartz – President and Co-Chief Operating Officer

The environment could get better

“We also know that the environment could get better. For example, both interest rate and volatility could increase from near record levels. The yield curve could steepen. Our investing clients could post better performance and have more conviction. There could be more clarity on economic policy and the global economy could grow at a higher rate. Any or all of these factors could drive greater client activity and a better opportunity set for the firm. That would provide even more potential revenue upside to both our initiatives and the firm more broadly.”

Goldman Sachs 2Q17 Earnings Call Notes

Martin Chavez – CFO

Rising market values and low volatility

“many of the themes that we discussed during the first quarter continued into the second, rising market values and low volatility. On one hand, rising market prices were supportive of capital markets activity, investment management performance and our investing and lending activities…On the other hand, low levels of volatility sequentially lower in several fixed asset classes, negatively affected the FICC environment.”

CEOs are confident

“I look at the backlog and really, it’s driven primarily by underwriting but looking at banking broadly I would say the CEOs are confident, the conversations are happening all the time and strategic M&A in the U.S. those discussions are occurring especially in technology and consumer retail in natural resources in Europe. I would say it’s hard to predict given the Brexit uncertainty there is healthy activity and we certainly see opportunities in Europe for debt underwriting. In Asia, we’re still seeing the trend of Chinese buying and international assets. And we remain optimistic over the long-term and as for the debt markets again no predictions here other than to note what we all know which is that trends in rates, and spread and volatility in M&A activity all drive demand for issuance.”

Goldman Sachs at Deutsche Bank Conference Notes

David Solomon

Client activity has remained subdued

“No, look you know that we don’t provide inter quarter detail and so I’m not going to provide that. I did just make the comment that volatility, client activities which were more subdued in the first quarter kind of in these first two months have continued in a comparable fashion in the second quarter. There are obviously four more weeks left to go. You know and we know the stuff can ebb and flow. So I leave my commentary at that and we’ll see as the quarter plays out.”

CEOs have to move forward, they can’t just sit around and wait

“They have to, I mean, look we can talk about tax reforms, but I’ll tell you just in January talking to CEOs, it was less about tax reform, more about what is Donald Trump mean and very quickly CEOs got to the point where they said the administration, yes the administration might mean some different things, but we have got to move forward. If you think about the average life of the CEO, you don’t get a number of years to sit around waiting for policy changes to kind of move their growth trajectory forward. And so CEOs by nature has to act they have to move forward, they don’t spent a lot of time waiting, they take the current environment and they figure out how to do what they need to do strategically in that current environment.”

There is no question there’s a tonal change from the new administration

“Look, it’s very hard to know exactly how this will play out. And so I don’t like the idea of predicting, but there is no question there is tonal change with the new administration. The whole industry is benefits from that tonal change. And regulations are very, very important in this industry. And we can kind of understand how we got here. We had a very, very deep crisis. There was a massive amount of regulation that was really focused on safety and soundness of the system that’s good and that’s important, but it all happened quickly. It came together very there were lot of rules. And now we’re eight years out and it’s very appropriate to kind of look at all those rules and say okay what matters for safety and soundness.”

Goldman Sachs CEO Lloyd Blankfein on CNBC

Goldman Sachs Chairman and CEO Lloyd Blankfein on CNBC’s Power Lunch

The low volatility period usually precedes a shake up

“Every time I get accustomed to low volatility like we were towards the end of the Greenspan era, and we think we have all the levers under the control and there’s low risk in the world and the world is awash with liquidity that pounces on every aberration in the market so things go in. Something erupts to remind us of our – that that idea that anybody is in control of anything is hubris and the world doesn’t perform like that for long periods of time. So I don’t know what brings us out of the doldrums, but my expectation is that this is not a normal resting state.

Some warning signs point to a bubble

“Not as many warning signs…if I had to look for anything specifically, I would say asset prices are high…credit is very tight. So, I would say distressed credit as people search for yield… people are ploughing money into equities because the dividends are higher than the interest that some of these companies are paying. That may be evidence of a bit of a bubble. The low volatility itself might be a kind of bubble of confidence, but we won’t know until we know”

Forecasting vs risk management

“I always differentiate forecasting what do you think will happen from the exercise of risk management. In risk management, I don’t care what anybody thinks. I don’t care what I think. I’m just preparing for contingencies. On the other hand, in our trading businesses and trying to anticipate flows and what clients want to accomplish, there I have to try to guess the future and where thing are going. So those are two different exercises.”

They are positioned for a return of the Glass-Steagall Act

“We are probably the large bank that’s best positioned for a return to Glass-Steagall because we’re not a universal bank. We have some of those functions, but very minor in relation to our investment banking activities…our adaptation to that would be relatively easy….with that kind of remoteness and that kind of perspective I could say in 2017 it’s really hard to differentiate functionality such that one institution could lend money and complete a loan and another institution could underwrite a bond for the company which may be the economic equivalent, but that’s a security.”




Goldman Sachs 1Q17 Earnings Call Notes

Harvey Schwartz – President, Co-Chief Operating Officer

Martin Chavez

Ultimately we didn’t navigate the market well

“Having said that, we did underperform, and the underperformance was driven by commodities and currencies. Ultimately we didn’t navigate the market well, but no quarter defines the franchise. There is always things that we can do better, and it’s important to note we’re constantly analyzing our results with an eye towards continuing to improve on them.”

Cautiously optimistic on M&A advisory

“So the pipeline is good and we’re cautiously optimistic. Many of the factors that one would look for remain in place, so CEO confidence, attractive financing levels, relatively supportive equity market backdrop. So I’ll say cautiously optimistic.”

We have a Brexit plan but not taken any action

“Sure. So I think not crystal clear what all the different terms around Brexit mean, including hard Brexit. Obviously it continues to evolve. We’ve all seen Prime Minister May calling a snap election this morning, as we all know. The U.K. triggered Article 50 a couple weeks ago. We have our Brexit contingency plan in place, and as far as that plan is concerned, we’ve taken no material actions yet along that plan, and we have a plan.”

Goldman Sachs 4Q16 Earnings Call Notes

Harvey Schwartz

Shifting policy around the globe is an extraordinary catalyst for client dialogue

“And as you know over the past several years there’s been a general sense of concern with respect to global growth that was reinforced by a lot of the monitory policy around the world. And so I would say as we come into 2017, activity levels are quite high. You know we can’t – we’ve come out of a very low volume, low volatility environment for a number of years. We’re happy to see how this year progresses. But with the shipping policies around the globe, it’s an extraordinary catalyst for client dialog, for decision making and for content and that’s really where as a firm that’s where we really want to drive value and drive value with content.”

Lots of opportunity if rates rise in connection with expectations of growth

” I would say the following I think if rates continue to rise and it’s a reflection of optimism and concerns around deflation abate and concerns around economic decline debate and they are replaced with expectations of economic growth and activity and confidence and client sentiment continues to shift. I think there is meaningful upside in terms of the activity levels we could see in fixed income. So we’ve been pretty optimistic now. We’re positioned for a number of scenarios obviously given all the steps we’ve taken over the years. ”

It’s pretty difficult to predict

“I think it’s very difficult to quantify just like it was difficult to quantify in 2012, 2013, 2014 how concerns around deflation and low economic growth will impact activity in a number of businesses. I think it’s very difficult to quantify how increased optimism. You know we like to say in some respects, confidence is the best stimulus. And the extent to which we enter a period of increased confidence with respect to economic growth, physical policy, you mentioned tax policy, I think there could be a lot that happens. Now we’ll have to see all these policies of ours. But who knows we could be at the beginning of a long term trend, we may not be. Again it was difficult to predict things in 2012 and how they will be in 2013, 2014 and 2015.”

This is a huge body of work compiled by regulators

” I think what we’ve seen and one of the things I think gets lost in the global dialog around regulation is that you know eight years past the crisis, the body of work that’s been created by the regulators whether it’s Basel capital ratios, the implementation of CCAR, stress testing broadly globally, the leverage ratios, the requirements around liquidity, all those things that were designed to address points to systemic risk, clearing, margin requirements, all of that data reporting, I think sometimes gets lost in the narrative and have to step back and look at the past eight years and realize that and it’s a credible body of work that regulators, the industry participants and the clients have actually created.

I think long – I think the dialog around regulation and whether or not there should be some degree of pause and stepping back, I think that started really at the beginning of last year maybe a little bit before you saw some of that in the Basel Committee across the second half of the year, and obviously I think market participants regulators and also it seems like a very reasonable point in time to step back and assess we obviously have gotten some great benefits out of the regulation and the question is, is there a cost in economic growth. So this seems like a pretty normal part of the process in terms of taking a step back and evaluating it.”

Goldman Sachs at Bank of America Conference

Harvey Schwartz – EVP and CFO

Client connectivity feels super strong

“So the client connectivity feels super strong. I think the world is a little bit uneven obviously but I would say that again the client feels quite good coming into the US elections as is the case in a normal election environment, sort of a bit of a decline in activity levels, that is to be expected. And then obviously as you would expect post the election which I think came as a surprise to obviously all the pollsters and everyone, a big uptick right alongside the election. Now we are only talking about several days but I think that institutional clients, corporations, investors are all reassessing what do these things mean in terms of the long-term forward profile for activities. So we are seeing some of that adjustment.”

Hoping that we can get back to a more normalized environment

“I think in terms of the growth, the numbers in some of the data have looked better but yet large parts of the world have been in negative interest rate territory for a while and in very low rate policy. And so as we talked about many times, we don’t want to view that policy globally or locally certainly as normal and so to the extent to which we can get back to a more normalized rate environment when we are normalized economic growth globally, that should positively correlate for us. And we root for growth. So I think we will see over the next several months and years the extent to which the policies are supportive of growth, it should translate quite well.”

Goldman Sachs 3Q16 Earnings Call Notes

Goldman Sachs Group’s (GS) Management on Q3 2016 Results

More favorable backdrop

“Ultimately a more favorable backdrop and improved client sentiment translated into year-over-year revenue growth in three of our four business segments. ”

Launched online personal loan platfrom

“Last week we launched a new online personal loan platform Marcus by Goldman Sachs. Marcus’ goal is to enter the consumer credit market and provide a product that is simple, transparent, flexible and provides consumers with real value. Like any new effort, we are taking a slow and methodical approach with Marcus. We are leveraging all the firm’s pre-existing strengths across risk management and technology and we have brought an experienced team of consumer lending professionals to drive Marcus forward led by Harit Talwar.”

Brexit could drive share to the US

“I would say that Brexit potentially is something that could drive share to the U.S. I think what we’ve witnessed over the last several years is U.S. firms like ourselves with really, really strong market shares and leading business positions whether you look at FICC, investment banking, equities, asset management, if you’re a leader in a franchise throughout this cycle, particularly as activity picks up, I think there is share to gain. I think our European clients need us. But in terms of Brexit, I think it’s unclear whether that’s having any impact at this stage. It feels like early days.”

M&A pipeline feels pretty good

“So the pipeline feels pretty good when you talk our M&A team. And the backlog sequentially was up, not down. But the activity levels that I mentioned in terms of completed transactions in the market, obviously down over year after very, very healthy levels. The best perspective I can share with you is the one I get from talking to our M&A bankers. And it hasn’t shifted much over the course of the year. The same fundamental factors that are contributing to the last two years of M&A activity, generally low topline growth, a desire to drive efficiencies, access to the capital markets, all those factors still in place.”

Still feel reasonably good about activity in IPO markets

“So in underwriting as you saw, we’ve had very strong debt performance and we had a record for the first nine months of this year on a year-to-date basis. I mentioned before that half year IPO volume or meaningful portion of the IPO volume actually occurred in September. So it does feel like we are starting now again into a market where a lot of that activity that got pushed from the first quarter into the second quarter that that still exists. So we feel reasonably good about activity levels in the capital markets on an intermediate basis.”

Goldman Sachs 2Q16 Earnings Call Notes

Goldman Sachs Group’s (GS) on Q2 2016 Results

Harvey Schwartz

Clients continue to wrestle with uncertainty from Brexit vote

“In response to the Leave vote on June 23, market volatility spiked and global equity markets declined significantly, with the MSCI World down roughly 7% in two days. While equity markets largely reversed those losses in the last three days of the quarter, clients and the border marketplace continue to wrestle with the Brexit vote and related uncertainty.”

Economic growth is the most important long term driver of our business

“In conclusion, the first half of 2016 has certainly presented its fair share of challenges and concerns. At the core of these concerns is the outlook for the global economy. As you have heard us state many times before, confidence in economic growth is the most important long-term driver of our business. Confidence incentivizes client activity, which increases demand for our advice, our content and our execution capabilities. While like the rest of the world we would welcome more robust economic growth, ultimately we have to manage the firm for both the current environment and potential future opportunities.”

At this point our bankers don’t feel that Brexit is going to be a headwind

“In terms of Brexit, where we sit today, given I think that the base case expectation is that the dynamic is going to play out over a long period of time, and in some respects it may contribute to some of the same factors that contributed to a very active M&A environment, other than maybe very specific transactions that are geographic in nature, that are really driven by geography, which is generally few, when we talk to our bankers, if we continue in this low growth environment, they don’t feel sitting here today that Brexit is going to be a headwind but obviously it’s going to be a dynamic situation.”

We were prepared for Brexit, saw volumes pick up after

” obviously we were preparing for Brexit well in advance, even though we all expected it to be a very, very unlikely outcome, but we were significantly prepared for that and that really left us in a position, we feel, to be very front footed with clients. Going into Brexit, client activity tapered off, but at the point of Brexit and potentially thereafter in a number of our businesses, we either near-peak volumes or peak volumes, or new peaks, so that was quite good to see.”

We’re hopeful that the Brexit negotiations will be thoughtful

“In terms of the longer term perspective on Brexit, as I said before, this looks like this process is going to take a while, and we’re hopeful, along with everyone else, that the parties that are engaged in these negotiations will be prudent and thoughtful because obviously it’s good for all of us, a thoughtful negotiation and outcome will just be good for economic growth.”

I think you would’ve been surprised that equity markets would rebound so strongly after Brexit

“Yes, I think that’s a reasonable question in terms of just the unique nature of Brexit. It’s interesting how the world—so the market reaction, the activity level right around Brexit obviously I don’t think was surprising to any of us. I think you could have sat there those couple days after Brexit and if you were forecasting the next month of activity, I think you might have been surprised if we could have known in advance that equity markets would rebound so strongly, there would be a rebound in currencies, and the world would sort of normalize.”

The speed with which things have rebounded may be a harbinger of better activity

” I think that may be a little bit different, to go back to the core of your question about things we’ve seen in the past, so this normalization was so quick that it actually may be something that’s a better harbinger in the near term usually following one of these events for activity levels. I can frame that for you in a bit more detail. So I talked about the merger business earlier. If we stay in this low growth environment, unless something is really uniquely impacted by Brexit and if the negotiation process takes a long period of time, then as I said, our bankers don’t necessarily see this being a headwind. If we stay in this low interest rate environment and you take a look at our asset management business, then this is really an environment where clients need advice, and that also translates into our ITS business.”

There’s always something that could cause a client to delay making decisions until a later period

“Look, I think this cycle will have its unique aspects to it versus other presidential cycles, but historically there’s always been some element which may have ultimately deferred a decision that a client might make to a later period. But these are short term in nature, so we don’t see any significant impact in terms of the near term.”