GS
#Thank you, <UNK>.
First and foremost I would say the thing that drive the strategy is not digitization in and of itself, it is how we engage our clients.
You are right to point out that the equity business went through a pretty significant evolution.
While that evolution in historical perspective feel short, it was a multi-year process that really began in 1999, and it finished in the mid-2000s and continues to evolve.
I don't know necessarily that I would agree that we are at a tipping point.
It is all about opinions, but it feels like we're in an evolution where obviously clients are looking for efficiencies and we're looking for efficiencies.
But the reality is that a vast majority of the fixed income market is more bespoke.
It will not lend itself to that, but to the extent to which we can deliver to our clients and drive efficiencies, we are obviously very focused on it.
You've seen some of the evolutionary steps we've taken in terms of the balance sheet reductions and the risk-weighted assets that I talked about earlier.
It may be the case that over periods of time, depending on how much client activity there is, but the extent to which it shifts to electronic channels like we've seen under the regulatory framework for our swap execution facilities, those transitions happen very, very quickly.
We adjust very, very quickly.
Sure.
Thank you
As you and I have talked about over the last couple of years, I don't think we would've imagined a couple of years ago that the industry would be in a position where three of the largest firms were going through a change in leadership and what appears to be a very significant change in strategy.
And that change in strategy is different for all of them.
Some of them it is geographically driven some so far, some of it's pulling resources back from certain business like derivatives.
To us it feels like the feedback is quite good.
Obviously difficult to see that in a really tough first quarter.
But I would say on the ground the feedback is good, and it continues to improve our position.
With respect to how we're positioned, I think we feel tremendously well positioned given our footprint.
So as I spoke about in the early remarks, commodities was down year over year.
That really ---+ the VAR reductions you are really seeing are more a reflection of the environment.
While there was volatility during the course of the period obviously in commodities, client flows were pretty muted as people really were a bit taken back.
I wouldn't say in shock, but a bit taken back by the depressed energy prices and the movement down.
It did not translate into lots of activity during the course of the quarter.
Yes.
As I said before, March was better than February and February was certainly better than January.
I would say that's been the general trend, and as I said before the factors that really were impacting the market so severely in the first quarter, at least for now that they seem to have abated.
So I would say with respect to the liquidity dynamic, if I had to rank factors, and it's very hard to quantify these things, I would say factors like conviction around the markets because of the sharp decline in the oil price and obviously the negative interest rate environment and the big shift to the buy side holding lots of assets.
I think those are as significant a driver in the current environment as is regulation, given the banks are holding less inventory globally.
I think that underpinning all of that is when you look at the client base regardless of how much velocity may be in their current trading activities quarter to quarter, the core needs in terms of their need for liquidity and our desire to provided it, that remains.
So I think the core of it is the same.
To the extent to which we can ---+ sorry, I didn't mean to ignore the last part of your question.
I think you're right to say that obviously the big universal banks, they are two or three times our size, they have much bigger lending profile and bigger retail commitment.
They will naturally participate in some flows that, given their size, we will not participate in.
But the value is really in servicing the client.
And so to the extent to which we can provide value to the client, obviously we want to make sure we're doing that.
We saw obviously to the extent there were financings in the first quarter that were obviously energy-related financing activity, and we were very involved in that.
I would say that, look, this space has been under extreme stress which emerged over a fairly short period of time measured more in months than years.
So I think our expectation is that there will be active dialogue across the industry.
Whether or not that manifests itself immediately in the near term we will have to see.
Obviously the industry is going through quite a bit in this price environment.
Thanks.
We think of all of our clients as important, but obviously we've had a big commitment to the hedge fund industry across equities and fixed them for a long time.
We're always rooting for their performance.
And so to the extent to which they have improved performance, it may be a catalyst for increased activity, because in periods like we went through in the first quarter, obviously they have a tendency to derisk.
It reduces trading velocity over many months, although it may be for example an active day from time to time.
I think sentiment seems to be improving, but we're going to have to see.
As I said before, it is still a little fragile.
Sure.
So as I mentioned, the backlog was down sequentially, but it's up year over year.
When you look across the business, the advisory portion of the backlog was down versus a very strong level at the end of the year, but that is up year over year.
Versus the end of the year, as you would imagine given what happened in the equity markets, the equity backlog is up.
And obviously we had a bit of an outperformance it looks like versus the rest of the industry on debt underwriting, and that is down sequentially.
In terms of the high-yield markets, over the last couple of weeks still a bit selective, but they seem quite strong.
One of the largest transactions was done just last week.
So the markets are quite receptive to good solid transactions.
Are you there, <UNK>.
No problem.
I think you have to give the regulators a lot of credit over the last several years for making the ---+ and I'll focus more on the US financial system, including things like CCAR.
I think that the safety and soundness of the large US banks and the whole system, they deserve a lot of credit for driving some of that.
And obviously we made a lot of changes to our balance sheet even prior to the regulation.
But I think you have to give them a lot of credit for it.
I think that all these good benefits which we all benefit from, they come at some marginal cost.
It's very hard to measure that marginal cost.
I have yet to see a very good analysis that breaks down in great detail the impact of negative rates, the fact that we had declining spreads for multiple years that increase asset holdings for mutual funds compared to the shrinkage of bank balance sheets and come up with something that really does a great cost benefit analysis.
I do not think we have seen that.
I think we have to argue the benefits are pretty clear.
Now as it informs our strategy, we have an obligation to deliver to our client, and we have an obligation to make sure that we comply with the rules in the way that we can most thoughtfully.
And so that is how we approach our strategy.
To the extent to which there was demand for the balance sheet and client activity picked up and that demand was accretive to returns, we would be happy to grow the balance sheet given the strength of our capital ratios.
But we just have not seen that.
So you're not seeing us do this, but over time the system is going to have to balance liquidity needs.
And I think that will happen, it just may take a while.
I think if you go back through history even ignoring the recent regulatory changes that both clients and market providers participate in, if you go back just to the formation of Tradeweb, back into the early 2000s, I think all of those vehicles, and there may have always been challenges at the start whether it's Trace reporting or Tradeweb or things like that, I think over time those generally have been at the margin.
Maybe not in all cases, they've contributed to increased liquidity.
I think so far the markets have adjusted to things as I said before very well, and the regulators have done a very good job of introducing swap execution facilities and gradually implementing these things.
I think the extent to which those things have occurred, it's been helpful.
I think where most people talk about liquidity in the marketplace really relates to transacting corporate credit and high-yield credit.
I do not know of a technological solution that is a cure-all for that.
It's all very bespoke, and that may be an area that for a while the market struggles with.
But not just because of regulation, it's because of all the factors I talked about before.
So obviously we're paying very close attention to it, whether we're monitoring it from a market and credit risk perspective or from a strategy perspective.
As you know, under the framework as we understand it is a multi-year transition to the extent to which Brexit goes under.
But we feel when we look at it, again I want to caveat this given there is a lot of uncertainty.
When we look at it we feel like in terms of our physical commitment to the region that we are well prepared.
But again, there will be a lot that all of us will learn to the extent of which the referendum goes through on June 23.
But that will be a multi-year process.
We're obviously always focused on running the business efficiently.
We do not target a pretax margin for the business.
So over time you may see that move as we are investing in the business, as we are taking on different types of asset pools.
But we look at it across the whole business.
We do not target it.
So the preferred that you saw us do this quarter was the exchange of preferreds.
So we were net neutral on the preferred order.
But you're right to point out that last year ---+ all the things you pointed out by last year are accurate.
We'll utilize preferreds to the extent to which they are consistent with our capital plan and our objectives.
Generally speaking as you have heard me say before we view them as reasonably expensive securities.
I know we're not desirous to use them beyond where we think they fit optimally in a capital structure.
There were during the quarter.
They were not material, but I do not have that number off the top of my head.
There was one large transaction in the marketplace which looks like in part in response to treasury actions.
It is no longer in the marketplace; we were a participant in that.
But I would say that's a minimal factor in status of the backlog.
I would say these are small impacts.
It feels like the fundamental conditions for an elevated level of M&A activity, they all feel like they are still in place.
And those things are challenged top line growth, slow to very moderate GDP growth globally.
And so it all feels like it is still in place.
So we really try never to drive balance sheet to different parts of the firm in a top/down way.
It really comes bottom/up.
And it comes bottom/up because it's in response to exactly what you're describing.
It is client activity.
If our bankers need more capital and more liquidity for their clients because they are financing M&A transactions, we cannot obviously from the top, we cannot control that from the leadership of the firm.
And so it is really in response.
I would say velocity broadly, whether it is in M&A, debt, financing, the ICS businesses, that really is the driving motive for the firm.
Obviously we look to be as thoughtful and efficient about our balance sheet as capital as we can in the context of that.
It really is about velocity and activity levels.
Well thanks for acknowledging what we've done over the last couple of years.
Look, we're net ROE focused, and that ROE, as I just talked to you about, that's going to be driven in part by client levels of activity.
For example as you know at the beginning of the year we go through a firm-wide review of resources.
And when you look at that over historical time periods, that has resulted in about a 5% adjustment to resources in the firm.
This year as we went through that exercise, parts of the businesses that were more challenged, like fixed income, they elected to take more significant action.
And so they would have been greater than 5% during this period.
But they are just responding to the market environment and the demand for their services in the short run.
Hi, <UNK>.
Great question.
It's less the absolute price level, it was more the shock and the nature of the decline.
And so when you think about the precipitous nature of the decline and you go through the various client segments, so think about producers responding to that decline in prices.
And for example, certainly you did not see much incremental addition to hedge portfolio activity.
On the consumer side when you get those moves down so quickly they tend to be a delay until you find some price stability.
And for investors I think the move was so volatile that it was difficult for investors to participate.
We have certainly seen some stabilizing in those flows and increased market participation over the last several weeks.
What we saw in the first quarter, really not surprising in terms of client behavior.
So I wouldn't ---+ just to get a little ticky-tacky on language, I wouldn't say that there is a shyness or lack of shyness or aggression or anything like that.
We very specifically and carefully go through our capital plan and we ask for what we think is appropriate.
And so that is the way I would describe it.
So, I guess I would say a couple of things.
Over the last several years, as you pointed out, we've been a $34 billion firm.
However, we have changed.
During that time period we sold off $2.5 billion plus worth of businesses, and we replaced those revenues.
You've seen us grow our asset management business.
Over the time period when you look at our performance versus the peer group, and I thank you for acknowledging we're the best, we have continued to outperform the peers, we have grown book value, we've returned $25 billion to shareholders over the past four years.
And so we have done many things.
We cannot control, we cannot control what happens in terms of the environment.
We do not believe negative interest rates are going to be here forever.
We don't believe client activity is going to be low forever.
You really have to look at this over long periods of time.
Look, I will go back to book value.
You look at it over the past decade, we have grown it by three fold.
I think that is contributing value.
So again, it's all about language.
I would agree with some of the things you're saying, I certainly wouldn't agree with your statement that we're sitting here waiting for the world to do what it does.
If we felt like there was a client segment or a transaction we could do that would benefit our shareholders and we can deliver to those clients, we would do it.
We are open-minded.
There's a reason why we're the leading advisory firm in the world.
We would take our own advice, Dick.
Thank you.
At this stage it's our best estimate, <UNK>, in terms of where we think the year will go.
Obviously the performance was challenged in the first quarter, and you saw compensation and benefit expense come down 40%.
It is pretty meaningful.
I understand your point.
It really is our best estimate.
We're going to have to see how the year progresses.
When we budget and plan for it, it really is a process through which because of the nature ---+ again this is a long-term business where we're committing long-term capital.
It really is done under a very controlled process where the businesses request that capital.
As you pointed out, we had roughly $240 million of NII in there, and now the majority of the balance sheet ---+ and this has been a transitional for several years ---+ the balance sheet has transitioned more to debt and lending activities.
But that is not something again that we drove top down that was driven by the client demand and the opportunity set.
As I said, you have to look at this over the long term.
As I said earlier including their first quarter, it's been an $11 billion of revenue over the last eight quarters.
You have to look at this in the long term.
Because it's going to be ---+ it's pro-cyclical and there is going to be volatility quarter to quarter.
I would say that this has been a pretty extreme quarter.
You have to go back to the third quarter of 2011 or back to other periods where markets have been extremely volatile to see this kind of performance.
Again, it reinforces what we've told you already which is it is price-sensitive, its pro-cyclical and quarter to quarter, but you really have to look at it over the long term.
Well, that's your job.
Thanks, <UNK>.
Since there are no more questions, I would like to take a moment to thank all of you for joining the call.
Hopefully I and other members of senior management will see many of you in the coming months.
If you have any questions come up, please don't hesitate to reach out to <UNK>.
Otherwise enjoy the rest of your day.
Thanks, everyone.
