高盛 (GS) 2014 Q1 法說會逐字稿

Good morning.

My name is Dennis, and I will be the conference facilitator today.

I would like to welcome everyone to the Goldman Sachs first quarter 2014 earnings conference call.

This call is being recorded today, April 17, 2014.

Thank you.

Mr. Holmes, you may begin your conference.

Good morning.

This is Dane Holmes, Head of Investor Relations at Goldman Sachs.

Welcome to our first quarter earnings conference call.

Today's call may include forward-looking statements.

These statements represent the Firm's belief regarding future events that, by their nature, are uncertain, and outside of the Firm's control.

The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for the year ended December 2013.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, capital ratios, risk-weighted assets, and global core excess.

And you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.GS.com.

This audio-cast is copyrighted material to Goldman Sachs Group, Inc, and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, Harvey Schwartz, will now review the Firm's results.

Harvey?

Thanks, Dane, and thanks to everyone for dialing in.

I will walk you through our first quarter results, and then I'm obviously happy to answer any questions.

Net revenues were $9.3 billion.

Net earnings $2 billion.

Earnings per diluted share were $4.02, and our annualized return on common equity was 10.9%.

The first quarter reinforced two consistent themes that we have seen over the past few years.

First, the continued uncertainty around the strength of the global economic recovery, and, second, the dominant role that central banks play in driving broad economic activity and capital market sentiment.

With respect to the first, market participants struggle to reconcile mixed economic data across different regional economies that weigh the prospect of a strengthening US economy against an improved but still relatively weak European economy and a slowing economy in Asia.

As it relates to the second theme, discussions among market participants also centered on the potential for additional central bank activity.

In the United States, the focus remained on the pace and potential magnitude of further tapering to the Federal Reserve's bond buying program.

In Europe, the market attempted to weigh the potential for either negative interest rates or the introduction of an asset purchasing program.

In Asia, market participants questioned whether the upcoming hike in Japan's consumption tax would weaken positive momentum and require the Bank of Japan to boost its quantitative easing.

Given the uncertainty surrounding the outlook for central bank activity, it is understandable that overall client sentiment and risk appetite was subdued.

With this backdrop, we are all reminded of the importance of a strong and diversified business.

With respect to the client franchise at Goldman Sachs, we continue to see strong relative positioning and performance across all of our businesses.

Within investment banking we maintain our market leading position in completed M&A.

We advised on 31 transaction valued -- transactions valued at $1 billion dollars or more, the highest number in the industry.

We helped under write $55 billion in global equity offerings during the quarter making us the market leader.

We also helped to bring $194 billion of high-yield and investment grade debt offerings to market, which is a quarterly record for debt underwriting volume.

Within investment management, total assets under supervision reached a record $1.08 trillion, up 12% over the past year.

Despite market headwinds, our performance within FICC demonstrates the benefits of offering a diversified product suite meeting their needs across rates, credit, currencies, mortgages and commodities.

Whether it's from a business, product or regional perspective, the value of diversity was reinforced in the first quarter of 2014.

Now I will discuss each of our businesses.

In investment banking, we produced first quarter net revenues of $1.8 billion up 4% from the fourth quarter.

This was our highest quarterly performance since 2007.

While our investment banking backlog declined from year end levels, it is up significantly compared to this time last year.

First quarter advisory revenues were $682 million up 17% sequentially.

We advised on a number of significant transactions that closed during the first quarter including Vodafone's $130 billion disposal of its US group whose principal asset is its 45% interest in Verizon Wireless, Cole Real Estate Investment's $10.9 billion sale to American Realty Capital Properties and Bristol-Myers Squibb sale of its global diabetes business to AstraZeneca for up to $4.3 billion plus future royalties.

We also advised on a number of important transactions that were announced during the first quarter.

These include Safeway's $9.2 billion sale to an investor group lead by Cerberus Capital Management, Hutchison Whampoa's $5.7 billion sale of a 25% stake in AS Watson to Temasek and Foster Wheeler's $2.9 billion sale to AMEC.

Moving to underwriting, net revenues were $1.1 billion in the first quarter, down 3% compared to record fourth quarter results.

Equity underwriting revenues of $437 million were 30% lower as industry wide activity declined in the first quarter particularly for IPOs.

Year-to-date Goldman Sachs ranked first in global equity and equity related common stock offerings and IPOs.

Debt underwriting revenues increased 29% sequentially to $660 million due to higher issuance activity in both investment grade and leverage financed markets.

During the first quarter we were committed to meeting our client's diverse financing needs, whether it was McKesson's $5.5 billion bridge loan and $4.1 billion investment grade notes offering or Hong Kong Electric Investment's $3.1 billion IPO or X2 Resources', $2.5 billion private placement.

Turning to institutional client services, which comprises both our FICC and equity businesses, net revenues were $4.4 billion in the first quarter up 31% compared to the weaker fourth quarter.

FICC client execution net revenues were $2.9 billion in the first quarter.

Excluding DVA, net revenues were up 50% sequentially.

Rates and mortgages were both up significantly relative to the weak fourth quarter although client activity and volatility remain relatively muted.

Credit improved slightly and was supported by stable credit markets.

Commodities revenues improved significantly relative to a weak fourth quarter as market volatility and client activity increased.

Currencies was modestly lower sequentially.

Equities includes equities client execution, commission and fees and security services.

Net revenues for the first quarter were $1.6 billion.

Excluding DVA, results were down 7% sequentially.

Equities client execution net revenues up $416 million were down significantly due to less favorable market conditions in certain areas including emerging markets in Asia, particularly Japan.

Commissions and fees were $828 million up 11% relative to the fourth quarter on solid cash volumes.

Security services generated net revenues of $352 million up 4% sequentially.

Turning to risk, average daily bar on the first quarter was $82 million roughly consistent with fourth quarter levels.

Moving on to our investing and lending activities, collectively these businesses produced net revenues of $1.5 billion in the first quarter.

Equity securities generated net revenues of $702 million primarily reflecting company specific events including divestitures and pending IPOs.

Net revenue from debt securities and loans were $597 million and benefited from net gains on certain investments and net interest income.

Other revenues up $230 million include revenues from the Firm's consolidated investments.

In investment management we reported first quarter net revenues of $1.6 billion.

Management and other fees were roughly flat sequentially at $1.2 billion.

Incentive fees were largely driven by a performance fee related to the sale of an investment.

During the first quarter assets under supervision increased $41 billion to a record $1.08 trillion.

This growth was driven by record long-term net in-flows of $40 billion largely in fixed income assets.

During the quarter, long-term net flows were strong across each of our client distribution channels, institutional, high net worth and third party.

During the quarter we also had market appreciation of $14 billion largely in fixed income and equity assets.

Now let me turn to expenses.

Compensation and benefits expense which includes salaries, bonuses, amortization of prior year equity awards and other items such as benefits was accrued at a compensation to net revenues ratio of 43% which is consistent with the accrual in the first quarter of 2013.

First quarter non-compensation expenses were $2.3 billion, 24% lower than the fourth quarter and down modestly from the first quarter of 2013.

The fourth quarter included higher litigation and regulatory expenses, higher charitable contributions and higher impairment charges on consolidated investment entities.

Total staff at the end of the first quarter was approximately 32,600, down 1% from year end 2013.

Our effective tax rate was 32.7% for the first quarter.

In terms of capital, there are a number of items to cover.

First, during the quarter we repurchased 10.3 million shares of common stock for a total cost of $1.7 billion.

These repurchases reflected the completion of our 2013 capital plan.

As previously announced, the Federal Reserve did not object to our revised 2014 proposed capital actions.

With respect to our regulatory capital ratio, the Federal Reserve has approved the Firm to come off the parallel run, and, therefore, starting in the second quarter, our capital ratios are determined under the transitional provisions of Basel III.

As a result, the transitional ratios are not only the most relevant but also a better assessment of our risked base capitalization.

Our Basel III common equity tier 1 ratio on a transitional basis was 11.3% using the advanced approach.

Under the standardized approach, our transitional ratio was 10.9%.

Risk rated assets under the advanced approach are approximately $600 billion, $355 billion in credit risk, $155 billion in market risk and $90 billion in operational risk.

Let me make a few brief points on the supplementary leverage ratio.

Given that the proposed rule hasn't been finalized and won't take effect until 2018, to date we have not taken any significant actions.

When we have a final rule, there are multiple options that we can pursue.

On the capital side of the equation, our regulatory capital levels benefit from a natural tail wind over time as we comply with the Volcker Rule.

As you know, we have investments in funds where we invest alongside our clients.

Under the Volcker Rule, we are required to significantly reduce our level of fund investments which currently creates an approximately $9 billion capital reduction.

With respect to the asset side of the equation, there are also steps we can take if needed.

For example, as of year end, we had over $260 billion of assets associated with secured client financing activities.

These are generally lower risk collateralized assets.

We can ultimately decide, if needed, to reduce the lower returning portion within these balances.

Regarding the new proposal, our best estimate today is 4.2%.

Including the capital impact of reducing our fund investments to comply with the Volcker Rule, we estimated it would be 4.7%.

To sum it up, we feel confident about our ability to comply in advance of 2018 given the variety of actions that we can take, and we look forward to working with regulators to pursue the goal of enhanced safety and soundness while continuing to serve our clients and support economic growth.

Before I take questions, let me leave you with some closing thoughts.

Our performance in the first quarter is reflective of the on going challenges facing the broader marketplace as the global economy continues its slow recovery.

This has been counter balanced by the continued strength and diversity of our global client franchise.

A sluggish yet steady improvement in the global economy should drive greater confidence in the durability of the recovery.

In response, we would anticipate that market sentiment would improve which should ultimately drive more client activity and greater risk appetite.

As a management team, we are focused on two primary goals, first, to focus the bulk of our resources on serving our clients and in the process, grow our single most valuable asset, our global franchise.

Our second goal is to take a disciplined approach to adjusting and reengineering our businesses so that we are well positioned to protect returns in the current environment and more importantly, maximize returns when a more favorable environment emerges.

Simply stated, the goal is to consistently provide superior results for you, our shareholders, across the cycle.

Thank you again for dialing in, and now I am happy to answer your questions.

(Operator Instructions)

Your first question is from the line of Glenn Schorr with ISI group.

Please go ahead.

Thank you.

Good morning, Glenn.

Taking a look at I&L, and maybe we should only focus on the equity side, because I think most of the debt in lending will stick.

At last look there was about $20 billion in there, $16 billion of it private equity, and given that you reiterated that $9 billion of disallowed.

This is a question, I'm sorry.

I'm assuming that you had some realizations in the quarter, but market list still has you at the same level of equity.

I am going somewhere with this, because I am curious to see how you go about winding that down and getting in Volcker compliance over the next couple of years and what the backup plan is if you don't sell it off.

In other words can you spin some off.

Sorry for the long question.

Okay.

I understand.

That is obviously an important question, Glenn, thanks.

So, I think the right way to think about the Volcker compliance is if you look at the K, we roughly had at the end of 2013 $14 billion of investments in funds.

Now, we're obviously co-invested with our clients in all of those funds, and those funds are not just private equity, they are private equity, real estate, debt funds, et cetera.

The important thing is really to focus on the $14 billion.

Now, obviously there is a process where we can apply for extensions for two years, which basically takes us out three years in terms of compliance.

But, just to size it for you, I think it's worth breaking down the $14 billion.

If you start with $14 billion, you can immediately take off $2 billion for what I will refer to as permitted investments.

That brings you down to $12 billion.

And then you can take off another $1 billion that relates to investments in funds that we are already in the process of redeeming, hedge funds and credit funds where we have the flexibility to manage our own time path there.

And so that takes you down another $1 billion bringing you to $11 billion.

Now, within the $11 billion, obviously for several quarters we have been in a harvesting mode, and within the $11 billion, $2.5 billion is already public.

But there may be restrictions on sell down, et cetera.

So, when you add up all that math, the $14 billion at the end of last year brings you down sub $9 billion.

The sub $9 billion is the number we really have to manage.

And again we are invested alongside our clients in these funds.

Okay.

That's super helpful.

I guess the environment is pretty conducive for right now, so that's good.

Moving on, just a cleanup question related to CCAR.

Your plan wasn't objected to.

You got tons of capital, and you keep producing more.

So all those are all good things.

I'm curious to see why you think you were so far off from the Fed in both PP&R and R&R and RWA, and I'm not agreeing with the Fed's projections.

It's just you had the biggest distance to the Fed, and I'm curious on how you decompose that, knowing you don't have all the answers yet.

Yes.

That's an important question.

We obviously submitted a plan that we thought was significantly stressful, and you can see that in our year-over-year numbers.

We don't, as you know, the Federal Reserve by design has created a process that is not transparent.

They have communicated that clearly.

So, it's difficult for us at this stage to reconcile our results with the Federal Reserve's results.

We will obviously work with the Federal Reserve and the material they publish and will participate in their forums actively, and we'll try and get better insights.

I think an important take away here is, we certainly -- as a market participant, we are not encouraged necessarily to replicate their test.

So, in the end, they are our regulator.

We are their regulatee.

And so they see that -- their results are more severe than ours and guide the process.

And I think this window for modifying your capital actions is a good part of the process, which we obviously participated in.

Okay.

Appreciate that.

The last one is you have been able to put up ROEs in the 10%, 11% range in an environment that I think you all would describe maybe a 5 out of 10 over all.

So, with your cost take out and your share count shrinkage, I'm assuming you feel like you could do better over the cycle.

I'm not necessarily forcing you for a goal over the cycle, but just curious to get your thoughts on what you can do in a little bit better times.

So, you know, over the last several years as we have talked about, we have been focused on a number of strategic initiatives, things like, obviously, growing our asset management business and very focused, as you know, on cost reduction.

And that really is strategically about building operating leverage into the business.

As we have done that through this part of the cycle, we have done it with an eye on finding the right balance.

And by balance, I mean, we are obviously running these businesses for years and decades.

And so, as we are getting more efficient in creating operating leverage, we have to make sure that we protect that franchise.

I think this quarter's results really showed the diversity and the strength of the franchise, whether you look at investment banking, asset management, et cetera.

I think we found that balance, the right balance so far.

Now, if we were to get significant tail winds and a pickup in activity, we are very confident that we would participate in that significantly.

There is a lot of operating leverage in the enterprise.

With respect to our ROE, again on an absolute basis, it's not what we want to be able to produce for our shareholders.

But on a relative basis, it looks pretty good.

Okay.

Thank you very much.

Thanks.

Your next question is from the line of Matt O'Connor with Deutsche Bank.

Just coming back to the Volcker on the equity exposure, you went through how we should think about the $14 billion running off over time and addressing that.

But how quickly and how big can you rebuild the direct investment book that I think is still Volcker compliant.

So, it's not as much about speed of rebuilding and, as you know, we have never approached capital deployment about speed.

It will all be driven by opportunity set.

So, that's the way we think about all of our businesses.

As capital comes out of those funds, it can be redeployed, and obviously it can be redeployed anywhere, or it can be returned to the shareholders if we don't think the opportunity set offers the best.

So, over time, this will be completely driven by the opportunity set.

If you had to take a guess looking out three, five years, does the overall equity book get back to about where it is here, or I would think a little smaller, but maybe not a lot smaller?

It would be impossible for me to say.

Again, there will be maybe opportunities that are more driven by the real estate cycle versus others.

My crystal ball barely works for a week.

It definitely doesn't work that well for three or five years.

But I wish I had one that did.

Fair enough.

On the comp ratio looking out the rest of this year, I think last year you changed it up a little bit.

You kept it steady in the first half, then brought it down a little bit in Q3 and brought it down again in Q4.

Any comments how you think about the timing of pacing in the comp ratio?

So, as always, in this quarter, it's our best estimate for the year.

We will evaluate it as we go through the year and, again, really the philosophy on compensation hasn't changed at Goldman Sachs since the day I got here.

It's all going to be, again, the process driven by the performance of the firm and business units and the individuals, and, obviously, our management of expenses and the returns we want to provide the shareholders.

But right now it's our best estimate.

Okay.

All right.

Thank you.

Thank you.

Your next question is from the line of Christian Bolu from Credit Suisse.

Harvey, given all the debate around the cash equities market structure and the role of high frequency trading, I'm just curious to get your updated thoughts on plans for current trading business particularly, the future of the Sigma X platform.

So, we have been obviously an active market participant in the dialogue.

Gary Cohen, as I'm sure you saw, published and op-ed several weeks ago.

Our focus on the equity market structure isn't specifically around high frequently trading necessarily.

It's really about the fact that over the last 10 years plus the market evolution speed of execution has just gotten ahead of the market infrastructure and the market plumbing.

So, we are very focused on working with all market participants and regulators to ensure that the market infrastructure catches up with the speed.

There is other things in Gary's op-ed that I would refer you to, but that is the primary message.

With respect to our own Sigma X platform, I know there have been some things in the news.

We have no strategic plans for Sigma X at this stage.

Okay.

Switching over to FICC, just curious as to what happened to the credit business.

Your commentary on a year over year decline kind of contrasts with peers who are speaking to strength there?

Obviously from a debt underwriting perspective, I know your question was specifically about credit, but from a debt underwriting perspective, very strong quarter for us, I think, by any measure, breadth of transactions, as I highlighted, and certainly relative to opportunity in the marketplace.

In terms of any one quarter in credit, I have no insight into the competitors.

It seems like a reasonably solid quarter for us in credit.

There really are no major take aways there.

Thank you.

Thanks for taking my questions.

Thanks, Christian.

Your next question is from the line of Michael Carrier with Bank of America Merrill Lynch.

First question, I think you gave some updated numbers around SLR.

I just wanted to make sure I understand.

I know before there was the estimate of greater than five but the rules weren't finalized.

Now you are saying you have the finalized rules 4.2% but if you got out of the some of this fund you get to 4.7%.

Getting from 4.7% to above the 5%, if you can mention some of the things -- obviously there is earnings power.

You mentioned some of the repo part of the business.

But I just wanted to understand what is the map in terms of getting there.

So, if I wasn't clear, let me just clarify.

The 5% wasn't a move to 4.2%.

It was a reference to the proposal that came out, which incorporates the larger denominator.

We have done, as I mentioned in our prepared remarks, we have done nothing to mitigate that.

As you know, our strategic philosophy on proposed rules is to engage actively in the dialogue with the regulators, but more importantly, we really won't look to mitigate until we feel like we have visibility around the final rule.

Because we just don't want to mitigate things and quite frankly do them in error.

So we have done nothing to mitigate it.

The reason I highlight the natural tail wind, as I referred to it is, under the Volcker Rule the $9 billion has to come out of funds.

That is a dollar for dollar capital deduction.

Just standing still, we would move to 4.7%.

But we haven't specifically begun to articulate a strategy internally to get us to 5%, but this gap is not material enough for us at this stage to be extremely focused on it.

Okay.

That makes sense.

And, then, I guess when you combine the CCAR process and then with some of the other regulations like Volcker, there is obviously some constraint on payouts for everyone.

When you think about the other opportunities, so, investing in the business, making investments, but on the other hand managing the risk weighted asset side of the equation, are there starting either to be more opportunities to investment versus payout, and as the economy improves, does that pick up?

I want to get your sense on the balance there.

That's a great question.

I think the one word that you used that should resonate for the whole marketplace, not just Goldman Sachs is this notion of constraints.

So, every firm will be managing to whatever constraint they perceive.

Within that really how do you fundamentally manage your capital?

And at this particular stage we are not feeling constrained.

Obviously the 11.3% Basel III ratio I referenced gives you some sense of potential excess capital.

I think that -- you know, it's an important industry discussion, because obviously for Goldman Sachs but again the broader industry, the first priority is always about safety and soundness and adequate capital.

But I do think that the flip side is there is a risk to excess capital in the system.

What we are doing is no different than we would have done in the past.

If there are periods we are running with excess capital, we are going to be patient and disciplined and wait for opportunities.

And certainly we are in a position today where from a liquidity and capital perspective, if there is demand from our clients, we can meet them.

Okay.

That's helpful.

Then last one, on the fixed side of the business, you commented a lot on the quarter-over-quarter.

When we look at year-over-year and given that, at least on the OTC side, you've gotten clearing in place and you are starting on the electronic side, or the SEF side, I wanted to get your sense -- I know it's difficult to piece those changes versus the broad environment a lot of the volatility and uncertainty out there, but maybe just from client conversations how that's progressing and where you see that pan out?

So, I think if you look back over the past year, I think clearing certainly managed by the marketplace and the regulators extremely well.

I know there were a lot of concerns going into it, but I think the multistage launch, really you have to give everybody high marks for that.

Swap execution facilities now up and running, still relatively new.

A bit early to tell, but at this stage, really no significant impact in the marketplace and, again, we will watch it evolve and its impact with market structure, but really nothing to discern at this stage of any materiality.

Okay.

Thanks for the color.

Your next question is from the line of Mike Mayo with COSA.

Good morning, Mike.

Can you talk more about the non-comp expense.

I know that has been a focus of yours, and it certainly came down a lot.

How sticky is that decline?

So, at this stage, Mike, as you know, several years ago we launched the cost reduction initiatives.

That was a series of steps which brought us up to just under $2 billion.

At this stage, we are still being, at the margin, very focused on costs throughout the entire system.

And, so, the sequential decline as you know was obviously litigation.

So that is not the mover.

But the focus really is about, again, keeping costs significantly subdued during this part of the cycle and again at the same time positioning us for an upturn.

Are you still looking to have these non-comped expenses decline?

It's down year over year.

Yes.

As I said, at the margin, we are very focused on expenses in this part of the cycle.

In areas where we can get positive results, you should see them.

Okay.

A separate question.

The 2% buy backs were nice, but perhaps you could do even more.

The threshold for the SLR is $700 billion in assets.

I guess you are above $900 billion.

Is there a scenario where you say let's reduce our assets to below $700 billion so there is less regulatory burden on the Firm?

No, there is no plans strategically to shift the size of the balance sheet in any way to get underneath some regulatory threshold.

However, there is tactical things we can certainly do with the balance sheet, which I mentioned in my prepared remarks, which give us some flexibility.

And I think, for example, for any market participant, if balance sheet becomes a constraint, there are elements of the balance sheet that either can be repriced as we move through the cycle, or can certainly get smaller.

And I have asked this question on several calls, but do you have any published financial targets as of right now?

Mike, I always appreciate your focus on this.

There is no targeted ROE.

As I said earlier at this stage, what we are really doing is strategically finding the balance point with this part of the cycle to make sure that we position the Firm for growth, we provide you, the shareholders, with adequate and hopefully superior relative returns, and in the future, we are going to look to take advantage of all the market opportunities as the cycle improves.

As a key, should I be looking at the proxy?

I'm looking at page 38 of the proxy, and you have the long-term incentive plan.

That is based on ROE and growth in book value per share.

So, should I take that as an indication of what you are most focused on?

But then on page 33, I guess the compensation committee reviews results at Goldman versus peers.

It's a laundry list of ROE, EPS, earnings revenues, comp ratio, non-comp expenses, a couple of other items.

What are you most focused on if I'm looking at financial metrics?

Any day of the week as a firm, we are most focused on serving our clients and growing our activity levels.

In terms of aggregate financial metrics, all the things that you'll see in the proxy, whether it is book value per share, ROE, those are all components into the compensation methodology, as are those other things that are mentioned in the proxy, whether it's a focus on expenses and aggregate performance.

Those are part of a long-term incentive plan.

I wouldn't view those as specific metrics as it relates to how we think about our capital.

Lastly, at what point do you think you will have enough clarity to be able to give us financial targets.

I think, Mike, that we will continue to communicate our message in a way that we think is appropriate for the context.

Right now there is still a significant amount of runway in the finalization of rules, and as we get more clarity, we will continue to communicate with you how we think about capital.

But I'm not sure necessarily having a published target is necessarily the best way to think about how we are managing the franchise.

But we will continue the dialog, I'm sure.

All right, thank you.

Thanks, Mike.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Please go ahead.

Hi, thanks and good morning.

Good morning, Betsy.

A couple of ticky tacky questions.

One in on the I&L revenue line.

I was just wondering if you can give more color around how much was driven from the monetization of the investments and basically looking to understand how that contributed to the higher incentive fees in investment management?

So equity driven -- the equity line was driven by a portion of the portfolio that I referred to as divestiture and IPOs.

The debt line is really investment related gains and interest income.

Obviously, to a certain extent you see it in the broader market, this is a solid harvesting environment.

And so you are seeing us doing that.

Okay.

Did it have any implication for the incentive fees in investment management or not?

As I said, the incentive fees this quarter obviously largely influenced by a single asset that was sold.

Again I would put that more in the bucket of it's a harvesting environment, and so, when -- if we have performance, you are going to continue to see incentive fees.

Right.

I get that.

And then the $8.5 billion that you are going to be managing down over time, clients went into these funds with an expectation of typically 10-ish years or so.

But you are not beholden to that time frame if obviously there are opportunities to extract value early.

A number of these are older vintage stage funds.

Obviously, we had some visibility on the Volcker Rule when it was first launched.

We have obligations to our clients.

But again, we will work with the regulators and continue to harvest the funds in the profile that I gave you.

Okay.

Clients obviously value these returns.

Yes, absolutely.

Then just on the Basel III, the traditional -- transitional numbers we got, I'm just wondering if you can you give us a sense of what your fully phased in number is, since that's what we have been looking at for a while?

9.7% on the fully phased in, but I would remind you again that we have to have the capital coming out of the Volcker funds.

The transitional measure is maybe the best indicator.

Right, I get that.

And that 9.7% is standardized?

Advanced?

No, 9.7% -- sorry I apologize.

9.7% was advanced.

I thought that you were asking about --

Right.

Standardized is 9.3%.

9.3%, okay, all right.

Super.

Lastly on the SLR, you walked through how the Volcker is going to benefit it.

Can you give us a sense of how the SACCR would benefit it, as well?

Around Goldman Sachs we refer to that as SACCR, by the way, but I'm not sure if that's in the marketplace yet.

We've looked at it.

We've studied it.

At the margin, it could be in the neighborhood of 10 or 15 basis points, but we are still digging through the details of that.

But it's a tail wind, too.

Sure.

Okay, thanks.

Thank you.

Your next question comes from the line of Guy Moszkowski with Autonomous Research.

A follow-up on the last question.

The -- you gave us the fully phased.

The 4.2% on SLR, that is a transitional.

Is that correct?

No, that would be a fully phased in, if you will.

It is, okay.

I just wanted to check.

The increase to 4.7% would be just completely static if you were out of the $9 billion or so of funds today, without any other change?

Yes.

We stand still.

We do nothing.

Got it.

Then you would add that 10 or 15 bps for the SACCR potentially, just on top of that.

Yes, but the SACCR again early days on the SACCR, I'm glad you adopted the SACCR acronym already.

Early days on studying the SACCR.

That's why I didn't mention it earlier, but obviously I am happy to give you a range on it.

But the $9 billion that comes out, that comes out.

Got it.

SACCR is obviously a tail wind, too.

Yes.

Okay.

I just wanted to make sure that we put them all in one place, and that is was clear that they are all on the same basis.

That would give you 4.8% or 4.85%, if you will.

That's real helpful.

Moving back to FICC I know you don't usually disaggregate.

It would be helpful this time around, because we have seen diversity of results among some the different players, if you can give us color on a year-over-year basis on the divergence that you saw between macro businesses like rates and FX versus credit and commodities?

The more numbers you can help us with the better.

The take away from the FICC business is, really, given the market backdrop we had where sentiment was fluctuating, we had concerns about Asia growth and then political events, I think it really reinforces that if you are going to be in these businesses, you really need the diversification.

And so, as we mentioned, the quarter was helped by commodities, because we have a strong commodities business.

You saw in certain segments really unusually strong volatility.

We had opportunities to work with our clients.

We don't look at it on a quarter-to-quarter basis.

We look at it on a multi-quarter basis.

In this particular quarter, you saw us outperform.

Just a follow-up question on the commodities, was that mostly within the energy complex where you saw the greatest strength?

Yes.

That's where the primarily volatility was.

Got it.

Okay.

That's all very helpful.

I appreciate you taking my questions.

Thank you.

Your next question comes from the line of Chris Kotowski with Oppenheimer.

You flagged in the release, the investment banking pipeline was -- backlog was down, which is the first time I remember anyone doing that in a long time.

I'm curious, is that because of the underwriting calendar, or do you sense that M&A is also out of peak and backing off?

So, it was down.

That shouldn't be a surprise.

You may remember, Chris, that backlog has hit a post [gratis] high in the third quarter then it hit another post gratis high in the fourth quarter.

And obviously the fourth quarter tends to be more of the build quarter.

And then coming off a relatively strong quarter.

And it wasn't down significantly toward year end.

I think more importantly, I would make two observations, one that is explicitly about the backlog, which I mentioned.

It's up significantly versus the first quarter of last year.

But I think the take away on M&A is an important one.

We have now seen a couple of quarters with higher M&A notional volumes.

These things can all change quite quickly.

But right now it does feel like it's an environment where we are far enough away from the epicenter of the crisis where CEO confidence is at a point where strategic transactions are occurring.

And there is an important take away about the nature of the transactions, which is some of them are very large.

And when you have a large transaction environment -- I refer to the 31 transactions that we did in excess of $1 billion in the quarter.

Large transactions can have, they won't always, but they can have a catalytic effect on the industry, or they create subsequent transactions themselves.

So, again, it could all change on a dime.

But right now the trajectory for merger activity feels pretty good.

And obviously over time that feeds a lot of other activity.

I guess that is what I was getting at.

Everybody is looking for an M&A cycle, and in your view it's alive and well.

That's not the reason for a decline in the backlog?

No, the level of engagement in conversation is quite good.

And, then again, look, I referred to my crystal ball not being great, but right now it feels pretty good.

Switching gears, the easiest line of your income statement to predict the last couple of years has been the investment management business, because the AUM was always $850 billion, and there's always $1 billion dollar base management fees, I think, going all the way back to 2008.

And all of a sudden we're seeing a significant amount of inflows, and AUM are up nicely two quarters in a row.

What is happening there, and what should we expect, and what is different?

So, we have articulated this in the past.

Obviously, this has been a strategic growth area for us.

It really has been about -- it's a bit old-fashioned but it's been focused on performance, delivering for our clients and having differentiated performance.

And when you look at our historical multi-year numbers, they look quite strong.

And so you are really starting to see the inflows.

Okay.

Nothing beyond that?

There has been some very small bolt on acquisitions which were disclosed.

But this is really the core driver's performance, particularly in fixed income this quarter.

Okay.

That's it for me.

Your next question comes from the line of Steven Chubak with Nomura.

Please go ahead.

Good morning.

Good morning, Steve.

Harvey, you made a very interesting point regarding the SLR tail wind from the sale of Volcker assets.

Looking at the metrics and where they stand today, assuming that SLR will remain binding, the elimination of the disallowed assets will provide a meaningful boost to the numerator, which will help both your risk and SLR ratios.

However, the capital relief from any additional shrinkage in I&L I presume will impact the denominator exclusively.

Which, if SLR is binding, actually incentivizes you to engage in more risk intensive activities.

So should we expect you to boost your permissible I&L investments as you optimize the ROE opportunity that you currently see, based on the capital constraints as they stand today?

I think we should be clear on this.

In no way shape or form are we going to let the regulatory guidelines or ratios or constraints encourage us to change our risk taking philosophy or how we deploy our capital.

I can't underscore that more strongly.

We often makes mistakes, and we are far from perfect, but as a firm, our risk culture, focused on mark to market and our philosophy has served us well.

And we are certainly as I said, not going to be influenced by metrics that would maybe encourage risk taking.

Quite frankly, we would always rather deploy this capital into our franchise businesses, and we will do that as opportunities present themselves.

Okay.

Fair enough.

Thanks.

And just one more from me.

The Fed in an AMPR published earlier this year suggested that it would consider tougher restrictions on merchant banking activities, whether via more punitive capital requirements, restrictions on holding periods, what have you.

I recognize this is really in the very early stages, but can you help us think about how your business or the merchant banking operation could adapt if tougher restrictions are imposed, and what level of I&L assets would be classified as merchant banking ex those which are disallowed under Volcker?

Really just trying to identify what could potentially be exposed.

It's very early in that process.

So, I have no discrete insights for you.

We will obviously participate and have participated in the Federal Reserve's AMPR.

It will be an evolving process.

Again, I think the fundamental take away for you to consider, and the way we approach these things is, if needed, if you had an outcome that restricted our abilities, we would weigh that outcome in our ability to drive value for that capital.

And if we felt we couldn't drive value for that capital, we would look to return it to the shareholders.

It's that simple.

You have seen us do it before on things like our insurance business in Europe and our reinsurance business in the United States, and that's the lens that we will evaluate all of our capital opportunities.

But obviously we will discuss this as we get more clarity.

Okay.

That's extremely helpful.

Thank you for taking my questions.

Thanks, Steve.

Your next question is from the line of Brennan Hawken with UBS.

Please go ahead.

Good morning, Harvey.

Good morning, Brennan.

Coming back to the commodities, solid results this quarter certainly encouraging.

Maybe can you talk about your commitment to the physical side of the business and whether or not you think that a regulatory surcharge on that business could make it still economically viable for you all?

So, it all depends, obviously, on the outcome.

We don't have any visibility into the outcome.

But again, it will depend on whether the regulatory constraint is too high a bar.

I think more importantly today, as you know, we have a long history in the commodity business providing our clients, corporate treasurers, and asset managers around the globe with hedging solutions and access to the marketplace and liquidity, not unlike we do in the corporate bond market.

And, separately, we feel we provide value in providing debt and equity capital to the investing side of the business.

But it will evolve over time.

We will adjust accordingly.

It's a bit of a wait and see.

Have you seen any impact in that market as some high profile editors have announced plans to exit or sell or what have you?

This is important business to us, because it's important to our clients.

I don't want to read through too much of this, because it's only one quarter.

I think it's hard to extrapolate anything from a quarter.

But certainly in commodities this quarter in certain sectors, the feedback we are getting from clients is that there may be, and again I have limited visibility into our competitor's businesses, but there may be some benefit to those market participants that stay strong in commodities like us by those that are deemphasizing or exiting, particularly when the market is volatile.

Okay.

That's helpful color.

Can you speak to trends of MD and partner head count the last few years maybe across the firm and by division.

So, obviously, as I mentioned earlier, we have been very focused on costs.

We continue to drive efficiencies throughout the organization in terms of non-comp expenses and obviously also in people.

But I don't really have any specific color for you in terms of by division, et cetera.

Obviously, we are managing those resources in the context of the business activity that the businesses are seeing.

Sure, sure.

I was trying to get a sense of the shift to a more pyramid structure that you guys have referenced.

Sorry.

Sorry.

This is the partner year for us.

It has been two years since we made partners.

Obviously we will be grinding the entire organization through that process this year.

Okay.

And then the last one, in reference to this $9 billion that you've chatted -- we discussed a bunch here and the dollar for dollar capital hit in I&L, does your experience this year in needing to use Mulligan, which I recognize as a positive in trying to shrink the equity base, but does that make you a bit nervous about potential friction in returning that capital and the possibility of trapped capital for a while here as I&L shrinks?

It doesn't.

This year, again, there was a difference in outcome between our results and the Federal Reserve's results.

We obviously thought we submitted a severe test, and their outcome was more severe.

Again, I think this process of giving firms the opportunity to adjust, I think it's a good one.

It provides us in the marketplace all the flexibility.

So, again, I have to believe -- again, my opinion only, so discount it as you will.

I have to believe that we will be able to return excess capital over time, for the exact reason that excess capital on a sustained basis for any industry I don't think is a healthy thing.

But, again, that's just my opinion.

Sounds good.

Thanks for the color, Harvey.

Thanks.

Your next question is from the line of Matt Burnell with Wells Fargo Securities.

Please go ahead.

Good morning, Matt.

Harvey.

Thanks for taking my questions.

A couple of -- just two quick ones.

You obviously spent time today talking about the ratio at the Holding Company.

Just curious if you could update us on the SLR ratio at the bank level if that materially changed from -- materially different from what you were talking about maybe a quarter ago?

So, again, I think what we should do just for the purpose of this conversation is ignore the last quarter and I will just focus on the supplementary proposal that's out there, because I think the proposal is probably more relevant for your work.

That number in the bank would be 5.6%.

Okay.

Are there any other mitigating actions you can take within the bank relative to what you've talked about in the Holding Company?

I haven't focused on it.

Obviously, there are lots of things that go into the supplementary leverage ratio.

It's not a primary concern.

Fair enough.

You mentioned, and I'm sorry if I missed it, but you mentioned in the equities tradings side of things the particular strength in cash in the first quarter.

I'm curious if you can give us some color in terms of the trends in the equities derivatives and PB businesses?

So, I can't really read anything, I don't think, into one individual quarter, but I think that this quarter in particular was probably in some respects tougher for our client base than the headline indices would read, just in terms of their ability to drive performance.

But again, the equity business, to be a leading player, you really have to be strong in all facets of it, which means the prime brokerage business, you have to have a strong research footprint, you have to be able to drive IPOs and secondaries and obviously you have to be able to commit capital.

That's clearly important.

And obviously you have to have a huge commitment in technology.

So, right now we feel quite good about things.

Okay.

But in terms of the client activity levels or risk appetite, it sounded like that was a little bit lower than maybe the headlines would have suggested across your equity -- non-cash equities businesses?

If you look at our commissions and fees line, you can see it's up year-over-year and sequentially.

But, you know, I would say, again, for certain segments of the client, client-based asset managers in particular and certainly hedge funds, I think it was a tougher quarter, but I haven't studied all the full results.

That's what I would expect to see.

Okay.

Thank you for taking my questions.

Thanks.

At this time there are no further questions.

Please continue with closing remarks.

Since there are no more questions, on behalf of the team, 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 you in the coming months.

If there are any additional questions, please don't hesitate to reach out to Dane or the team.

Otherwise, please enjoy the rest of your day.

Look forward to talking to you soon.

Take care.

Ladies and gentlemen, thank you for joining today's Goldman Sachs First Quarter 2014 earnings conference call.

You may now disconnect.