Katie welcomed everyone to the Goldman Sachs Second Quarter 2023 Earnings Conference Call and Carey Halio, Head of Investor Relations and Chief Strategy Officer at Goldman Sachs, passed the call to David Solomon. David reported that net revenues were $10.9 billion and earnings per share were $3.08 with an ROE of 4% and an ROTE of 4.4%. Certain items related to strategic transition and positioning the firm for the future, such as shifting the asset wealth management business to a less capital-intensive model and pivoting to narrow consumer ambition, reduced EPS by $3.95 and ROE by 5.2 percentage points. Additionally, the challenging macro environment and headwinds facing the firm's mix of businesses contributed to the results.

CEOs around the world remain cautious due to economic and geopolitical factors, but there are signs of increased activity in equity capital markets and M&A. The Fed's efforts to fight inflation are showing progress and Goldman Sachs is in execution mode to achieve its strategic goals. The firm has a long track record of serving clients and has strengthened its efforts to bring the best of its capabilities to clients. Client feedback has been encouraging, and there are further opportunities to improve.

Goldman Sachs has a global, broad and deep platform with capabilities that span across products, geographies and solutions, and is backed by a culture of collaboration and excellence. They have reduced the capital intensity of their business and have executed a $30 billion share repurchase program and a 10% increase to their quarterly dividend. Despite headwinds in the economic cycle, they remain confident that they will deliver mid-teens returns on significant value for shareholders. For the second quarter, they generated net revenues of $10.9 million and net earnings of $1.2 billion, resulting in earnings per share of $3.08.

In the second quarter, losses from Asset and Wealth Management and GreenSky resulted in a $1.4 billion reduction in net earnings and a 5.2 percentage point drop in ROE. Global Banking and Markets produced $7.2 billion in revenues, with advisory revenues down versus the prior year period. Equity and debt underwriting revenues were slightly down, but the client franchise remains strong. Fixed net revenues were $2.7 billion and equities net revenues were $3 billion, both roughly flat year-on-year. Equities financing revenues set a record at $1.4 billion.

Asset & Wealth Management revenues were down 4% year-over-year due to weaker results in equity and debt investments. Management and other fees increased 5% year-over-year to a record $2.4 billion, largely driven by higher assets under supervision. Private Banking and lending revenues were also a record at $874 million. Equity investments generated losses of $403 million, primarily due to markdowns on investments in office-related commercial real estate. Debt investments revenues were $197 million, with the year-over-year decline driven by weaker performance in real estate investments. There were also $485 million of impairments on the real estate-related CIE portfolio which negatively impacted the segment's margins by 15 percentage points for the first half of the year.

In the second quarter, total firm assets under supervision reached a record $2.7 trillion, driven by market appreciation and long-term net inflows. Alternatives assets on supervision totaled $267 billion, with gross third-party fundraising at $11 billion for the quarter and $25 billion for the first half of the year. Platform Solutions revenues were $659 million. The Company also took a $504 million impairment charge on the goodwill associated with consumer platforms and reduced its historical principal investment portfolio by $3.6 billion.

The efficiency ratio for Platform Solutions is expected to be below 100% by the end of the year, and net interest income was $1.7 billion in the second quarter. The provision for credit losses was $615 million, and CRE loans represent 15% of the overall lending book. A comprehensive asset-by-asset review of the CRE-related on-balance sheet alternative investments was conducted this quarter, and office-related exposure represents 2% of the portfolio and 15% of the CIE investments. No single position is more than 1% of the total investments.

In the second quarter, 50% of investments were historical principal investments that the company intends to exit over the medium term. Total operating expenses were $8.5 billion with a compensation ratio net of provisions of 34%. Non-compensation expenses were $4.9 billion, excluding CIE and goodwill impairments. The effective tax rate for the year is expected to be 22%. The common equity Tier 1 ratio was 14.9% and the company returned $1.6 billion to shareholders, including repurchases and dividends of $2.75 per share beginning in the third quarter.

Denis Coleman explains that Goldman Sachs is working to transition their business and improve their overall return profile in order to pay shareholders a sustainable growing dividend and maintain a competitive yield. They have also announced a $30 million share repurchase program and are confident in their ability to deliver for shareholders while continuing to support their clients. In order to reach their through-the-cycle returns, they need to focus on achieving their top line targets and driving capital efficiency.

David Solomon adds that there could be a slight loss or gain when reducing positions, but nothing material. He emphasizes that Goldman Sachs has narrowed their consumer ambitions and is focusing on two big businesses, investment banking and asset management. Investment banking is currently performing at a lower level of return and activity than in the past decade, but Goldman Sachs believes it can deliver mid-teens returns through the cycle. Asset management is aiming to grow the top line of asset management ex the legacy balance sheet by a high single-digit percentage and to drive the margin ex the legacy balance sheet up to 25%, which would be a mid-teens return business.

David Solomon of Goldman Sachs notes that the investment banking environment has been improving over the last 6 to 8 weeks, with more activity in equity capital markets and more M&A dialogue. He believes that the macro environment has created a sharp drop in investment banking activity that will last for a year or so, but is starting to improve due to better inflation data and client sentiment.

David Solomon of Gold Minister commented on the progress made in rightsizing the business to meet efficiency targets. Solomon mentioned that noncomp expenses have been down for two quarters in a row and that they were early in January in terms of headcount sizing. He also mentioned that they will resume their regular performance-based process in terms of compensation at the end of the year.

The company has taken action to reduce headcount and payroll costs, and is aiming for a $600 million run rate in payroll efficiency. They are also planning to increase their buyback rate in the back half of the year, and are pleased with their CCAR results which have given them a 190 basis points cushion. The Fed Basel NPR is an unknown factor in their capital deployment plans.

David Solomon explains the company's plans for its consumer business. He states that they will manage their capital to grow the firm and deliver returns of capital to shareholders. The company intends to deploy some of their excess capital into the client franchise in order to continue to grow their activities. They have also announced an increase in dividend and are mindful of Basel III revisions. Solomon emphasizes that they will optimize for their client franchise and shareholders while also making sure they are able to adopt new guidance on time.

Goldman Sachs made difficult but appropriate decisions to narrow their consumer ambitions, including the wind down and sale of the Marcus loan portfolio and exploring options for GreenSky. They are also working to improve their credit card partnerships with Apple and GM, which will reduce the drag of those partnerships. They have also launched an Apple savings platform to grow their deposit base. Steven Chubak asked about the durability of the gains from the financing component of the trading business across equities and FIC.

David Solomon and Dennis Coleman have discussed the strategic focus of the company in the past decade to improve its equity business. This quarter, the equities performance has been positive and the feedback from clients has been good. Equities financing revenue is now nearly 50% of overall equities revenue and the company is continuing to allocate resources to grow in this area.

Denis Coleman noted that while fixed income financing revenue was slightly lower than the previous period, this was due to a lack of contribution from commodities-based financing activity. He cautioned against predicting growth off of record performance, but expressed optimism that there remains opportunity for growth in collateralized lending and repo activities.

David Solomon and Dennis have discussed the potential of deploying capital to finance growth opportunities, as well as the option to return capital to shareholders through buybacks. They have also discussed their ability to meet the requirements of Basel III early within the phase-in period. Betsy Graseck asked how to think through meeting the requirements early versus leaning into financing versus other options, to which David Solomon responded that they are focused on deploying capital and have greater flexibility to look at deployment opportunities.

Wells Fargo's Mike Mayo asked about the rightsizing of headcount and if this was as bad as it gets. Denis Coleman responded that severance expense year-to-date was $260 million and the comp ratio net of business was 34%. He also mentioned that the company is focused on pay-for-performance and balancing returns for shareholders while protecting the talent and franchise to capture the upside.

David Solomon discusses the financial impact of the actions taken in the quarter, noting that the legacy balance sheet has been hard hit by the environment, but there are still opportunities for improvement. He believes the strategic decisions and executions will lead to better performance, and the firm is aiming for mid-teens ROE in the medium term. Mike Mayo then asks what metrics should be looked at to measure the progress of this transition.

David Solomon is discussing the progress that will be made in the banking and markets sector over the next couple of years. He also mentions the importance of sponsors to the banking franchise and how the levered loan market must recover before they can come back in full force. He notes that M&A responses have come to a halt and that this has affected both the buy side and the sell side of the business.

The sell side has seen a slowdown in the sale of assets due to the current environment, but there is hope for an acceleration in the future. Financial sponsors have a lot of dry powder and need to deploy it, which will help the investment banking ecosystem. Underwriting appetite is available and there is financing available in both clients' buckets and the firm's own funds. The process of selling GreenSky has resulted in a goodwill impairment, but the reception has been positive.

Denis Coleman explains that the decision to explore alternatives for the $1.7 billion business purchased by Goldman Sachs was made because it was not the right fit. The company has written down the goodwill in the Consumer platform segment and there is no more goodwill to be written down. They could sell the platform, the historical lending book, or both. Devin Ryan then asks about the intermediation results being off from the great quarter last year, and Coleman confirms that June got much better for intermediation.

David Solomon of Goldman Sachs discussed the improvement in the second quarter of 2022 compared to the first quarter. He noted that June was better than earlier in the quarter, but that there was more of a risk-on sentiment in July. Devin Ryan then asked about the growth potential of the transaction banking business, which is currently a small part of Goldman's business. Solomon discussed the possibility of step-function growth if certain capabilities are added.

David Solomon discusses the progress of Goldman Sachs' platform in bringing deposits to the firm, as well as their efforts to get clients to use their platform for payments, which will take some time. He also mentions Goldman Sachs' particular opportunity in financial sponsors, and that the private banking and lending business has seen growth, with prospects for continued growth going forward.

Goldman Sachs has identified Asset & Wealth Management as an area of growth and stability due to the success of its deposit platform. They are focused on further developing their wealth lending activities, and have recently brought on new leadership to help them do so. Additionally, Goldman Sachs is on track to reduce their balance sheet investments to below $15 billion by the end of 2024.

David Solomon explains that the main factor in reducing the SCB to 5.5% is the on-balance sheet investments, and activities such as the sale of Marcus loans, GreenSky loans, and potentially exiting the credit card business will be considered in the next test.

David Solomon highlights that even in a challenging environment, Global Banking and Markets has a close to 14% ROE for the first 6 months of the year. He goes on to say that investment banking ROE is running much lower than it has been in the past 5-10 years, and that investment banking ROE does not need to return to 2021 levels in order to see a material uplift in the overall through-the-cycle uplift of the Global Banking and Markets franchise.

Denis Coleman and David Solomon discuss how investment banking revenues have dropped significantly in the past two decades due to changes in the environment. They note that while 2021 may be an unusual year, the average lies somewhere in between. Coleman adds that some capital-efficient activities are beneficial to the firm's overall results and have the capacity to catalyze other activities. Solomon states that looking back over the last 20-plus years, there have been other times when investment banking revenues have dropped, and when the cycle is over, there is typically growth in the economy and market cap.

Gerard Cassidy asked a two-part question about GreenSky, wondering what would trigger it to move into held for sale and if an intangible impairment would need to be taken at that time. David Solomon answered that when they decide to sell the business and loan portfolio, they will designate it as such and the P&L consequences will be seen at that point. They evaluate the intangibles every quarter for impairment and will analyze them for impairment in the next quarter. James Mitchell asked about Platform Solutions profitability, noting that the net charge-off ratio was 5.8% for consumer platforms, and wondering how to think about the credit quality in the book and where it would normalize.

Goldman Sachs executives discussed the charge-off in consumer for the quarter, which is expected to increase over the next few quarters, and their reduction in coverage ratio due to better performance than expected. They also discussed their AECO platform, which is well-received by their C-suite clients, and their plans to expand their offering in the ultra-high net worth space in the US and abroad. They concluded the session by thanking everyone for joining.

The speaker encourages the audience to contact them or the team with any further questions and expresses their anticipation for further communication.

This summary was generated with AI and may contain some inaccuracies.