高盛 (GS) 2015 Q1 法說會逐字稿

Good morning, my name is Dennis, and I will be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs first-quarter 2015 earnings conference call.

This call is being recorded today, April 16, 2015.

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 2014.

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, global core liquid assets, and supplementary leverage ratio.

And you should also read the information on the calculation of non-GAAP financial measures that's posted on the investor relations portion of our website at www.gs.com.

This audiocast is copyrighted material of the 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'll walk you through the first-quarter results, then I'm happy to answer any questions.

Net revenues were $10.6 billion; net earnings, $2.8 billion.

Earnings per diluted share were $5.94, and our annualized return on common equity was 14.7%.

The first quarter was dominated by one primary theme: Central Bank policies.

In the United States, the market heavily debated whether 2015 would be the year that the Federal Reserve raises rates.

On the other hand, the European Central Bank announced the creation of a EUR1.1-trillion quantitative easing program that kicked off in March.

The prospect of two of the world's largest economies implementing divergent monetary policies had a significant impact.

Market participants reassessed the implications for both global economic growth and, as a consequence, the performance of various financial assets.

Regarding the economic outlook, on one hand, low rates were viewed as providing an important economic stimulus to the United States.

On the other hand, a return to normalized rates would be consistent with a strong underlying economy.

Looking at the bigger picture, the degree of conviction around a slow but stable US recovery continued to gain support for most of the quarter.

The weaker recent jobs report in the US has sparked some debate around the timing and magnitude of potential rate hikes.

However, the long-term expectation of slow but steady growth and higher rates remains intact.

Across the Atlantic, the announcement of quantitative easing in Europe provided some stability, and the basis for greater economic growth in the region.

The launch of a EUR60-billion-per-month purchasing program provided greater confidence to market participants on the Eurozone outlook.

The impact was immediately felt across European financial markets.

If you take the European government bond market, for example, more than a quarter of the bonds are trading with negative yields today.

The equity markets in Europe rallied, as demonstrated by the 18% increase in the Euro Stoxx 50 index during the quarter.

And the euro reached its lowest level versus the dollar in 12 years.

As a result, there was greater activity, as clients responded to heightened market volatility.

Given the scope, complexity and significance of these two different monetary policies, it isn't surprising that there continues to be a robust discussion around the potential impacts.

For our Firm, the focus continues to be on our clients and serving their needs.

Our clients are placing a greater premium on both intellectual and financial capital, given market dynamics and an evolving competitive landscape.

We are committed to providing our clients with superior advice, investment performance, content, market liquidity, and certainty of execution.

We believe that our extensive capabilities favorably position us to meet a variety of client needs in what is certainly a dynamic market environment.

Now I'll discuss each of our businesses.

Investment banking produced first-quarter revenues of $1.9 billion, up 32% from the fourth quarter.

Our investment banking backlog decreased since the end of the year, but is still up significantly relative to a year ago.

Breaking down the components of investment banking in the first quarter, advisory revenues were $961 million, the highest since 2007.

The 39% increase relative to the fourth quarter reflects both the increase in completed M&A, and the strength of our leading global franchise.

In the quarter, Goldman Sachs ranked first in worldwide announced and completed M&A.

We advised on a number of significant transactions that closed during the first quarter, including Allergan's $71-billion sale to Actavis.

RWE's EUR5.1-billion sale of RW Dea to LetterOne Group, and Dai-ichi Life Insurance Company's $5.7-billion acquisition of Protective Life Corporation.

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

These include MeadWestvaco's merger with RockTenn for a combined enterprise value of $20 billion; Charter Communications' $10.4-billion acquisition of Bright House Networks; and Dow Chemicals' $5-billion separation of its chlor-alkali and downstream businesses to Olin Corporation.

Moving to underwriting, revenues were $944 million in the first quarter, up 26% sequentially, as equity issuance improved.

During the quarter, we ranked first in global equity and equity-related and common stock offerings.

Equity underwriting revenues of $533 million rose 56% compared to the fourth quarter, largely due to an increase in secondary offerings.

Debt underwriting revenues were essentially unchanged at $411 million.

During the first quarter, we actively supported our clients' financing needs, leading Santander's EUR7.5-billion follow-on equity offering; Chevron's AUD4.7-billion sale of its stake in Caltex Australia; and Berkshire Hathaway's EUR3-billion investment-grade issuance.

Turning to institutional client services, which comprises both our FICC and equities businesses, net revenues were $5.5 billion in the first quarter, up significantly compared to the fourth quarter.

FICC client execution net revenues were $3.1 billion in the first quarter, and included $32 million of DVA losses.

Net revenues were up more than 2.5 times sequentially, as client activity increased in a number of our businesses in response to higher volatility and improved market conditions.

Interest rates and currencies were both significantly higher sequentially, as client activity improved and diverging -- amid diverging Central Bank policies.

Credit increased significantly from a more challenging fourth quarter, as credit spreads generally tightened during the first quarter.

Mortgages also rose versus the fourth quarter, although volatility and client activity remain generally low.

Given continued trends in the energy markets, commodities improved sequentially, with higher levels of client activity.

In equities, which includes equities client execution, commissions and fees and security services, net revenues for the first quarter were $2.3 billion, up 20% sequentially, and included $12 million in DVA losses.

Equities client execution net revenues increased 50% sequentially to $1.1 billion due to a favorable market-making backdrop with higher levels of client activity, particularly in derivatives.

Commissions and fees were $808 million, down 3% relative to the fourth quarter.

Security services generated net revenues of $393 million, up 12% sequentially, reflecting higher customer balances.

Turning to [risk], average daily VAR in the first quarter was $81 million, up from $63 million in the fourth quarter.

The move up was primarily due to increased market volatility across all categories.

Moving on to our investing and lending activities, collectively these businesses produced net revenues of $1.7 billion in the first quarter.

Following the sale of our investment in Metro International in the fourth quarter, we made a decision that the remaining revenue related to consolidated investments within the other line was not significant in the context of the I&L segment.

As a result, we're now reporting the other I&L revenues within the equity and debt lines.

Equity securities generated net revenues of $1.2 billion, primarily reflecting strong corporate performance and company-specific events in private equity, as well as net gains in public equities.

Net revenues from debt securities and loans were $509 million, with roughly $200 million in net interest income, and the balance coming from net gains.

In investment management, we reported first-quarter net revenues of $1.6 billion, essentially unchanged versus the fourth quarter.

Management and other fees were down 3% sequentially to $1.2 billion.

Assets under supervision remained flat at $1.18 trillion.

$7 billion of long-term net inflows, driven by fixed income and equity products, and net market appreciation of $6 billion, were offset by net outflows of $14 billion in liquidity products.

Moving to performance: Across the global platform, 82% of our client mutual fund assets were in funds ranked in the top two quartiles on a three-year basis, and 73% in funds ranked in the top two quartiles on a five-year basis.

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 42%.

This is the lowest first-quarter accrual in our public history, and 100 basis points lower than the accrual in the first quarter of 2014.

Our lower accrual rate reflects our strong 14% year-over-year net revenue growth, and the positive operating leverage embedded in our Firm.

First-quarter non-compensation expenses were $2.2 billion, 12% lower than the fourth quarter, and slightly lower than the first quarter of 2014.

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

Now I'd like to take you through a few key statistics for the first quarter.

Total staff was approximately 34,400, up 1% from year-end 2014.

Our effective tax rate for the first quarter was 27.7%; that is down from the 2014 rate, primarily due to changes in geographic earnings mix.

Our global core liquid assets ended at $175 billion.

Our common equity tier 1 ratio was 11.4% using the standardized approach; it was 12.6% under the advanced approach.

Starting this quarter, the lower of these two ratios is our binding regulatory constraints.

Our supplementary leverage ratio finished at 5.3%, 30 basis points above the minimum requirement that begins in 2018.

And finally, we repurchased 6.8 million shares of common stock for $1.25 billion in the first quarter.

These repurchases reflected the completion of our 2014 capital plan.

As previously announced, the Federal Reserve Board did not object to our revised 2015 capital plan, which includes share repurchases, dividends, and other capital actions.

In terms of this year's CCAR test, we announced an increase in our quarterly dividend to $0.65 per share beginning in the second quarter.

As it relates to our share repurchase capacity, one point I want to highlight is that any potential share repurchases over the next five quarters will be heavily back-end weighted.

As you all know, we do not publicly disclose the approved size of our repurchase capacity.

Again, we take this approach for a very specific and practical reason.

We don't want our shareholders to view the approved buyback amount as a commitment to return that capital.

For us, capital allocation is a dynamic process.

If we see opportunities to deploy the capital attractively to support client activity, we want the flexibility to do it.

And conversely, if our clients are less active, we will certainly look to return it.

Our track record on this front is well established.

Now, before I take your questions, let me offer some closing thoughts.

The first quarter has served as a strong start to 2015.

The year-over-year increase in net revenues reflects not only the strength of our Franchise, but also our ability to provide high-quality advice and certainty of execution for our clients.

Our performance this quarter, while just a quarter, reflects numerous efforts over the last several years to adjust our Business.

We sold several businesses due to regulatory capital implications.

We transformed our financial profile, significantly improving our risk base capital.

We revamped our capital allocation processes, improving our decision making and efficiency.

We took a hard look at our operating costs, fundamentally changing our expense structure by eliminating costs, reallocating resources, and leveraging technology.

We made all these changes while, at the same time, continuing to invest in our global client franchise.

We know that our success, in many ways, begins and ends with our clients.

It's the trust they place in us, and our ability to execute on their behalf, that drives our Franchise.

And we believe that our steady commitment, particularly through these more difficult years, has been critical to creating stronger client relationships.

There's one important thing that we didn't change -- our focus on creating shareholder value.

Our efforts are ultimately a reflection of our commitment to you, our owners.

We understand that, to create shareholder value, we need to have strong financial footings, be an efficient allocator of capital, and have a world-class client franchise.

Ultimately, our efforts over the past several years have meant that a 14% increase in year-over-year revenues can contribute to a 40% increase in net earnings, a 48% increase in earnings per share, a 380-basis-point improvement in ROE, and finally, 9% growth in book value per share over the past year.

Thank you again for dialing in, and I'm happy to answer your questions.

(Operator Instructions)

Glenn Schorr, Evercore.

Let's start with Investing and Lending was pretty darn good.

I'm curious on the equity side how much of it was actually realized in [assets] because it was a pretty active quarter?

And then maybe related to that, if you could give the portfolio breakdown in terms of equity, debt and lending assets?

So let's just start with the balance sheet.

You know that the balance sheet at the end of the quarter for the fourth quarter was [$79.5 billion].

And in terms of debt, that's basically north of $50 billion of that is in the debt line.

So that's the bulk of the balance sheet.

In terms of equity, as you know we had $4 billion of public equity and $18 billion of private equity.

Now in terms of the performance in the equity line in terms of the quarter, we don't think of it as much as asset sales.

Because when we make asset sales often there's a period we're restricted, that's why we're careful to give you the public equity numbers.

But basically, when you break it down, give or take 40% of the performance came from those assets that are already public.

40% came from basically Company improvements.

And the balance would come from things like pending IPOs and things like that.

That's how I'd break it down for you.

And what's the disallowed portion?

Or what's the best way to ask how much Goldman still has in the funds that you would need to eventually liquidate?

So I think I want to make sure, I'm going to rephrase your question and make sure I understand it.

I think you were saying that in terms of under regulatory guidelines, under the vocal compliance, that number is approximately $8 billion.

And so it's a bit of a high class problem.

As we've been harvesting that number obviously it's been going up because there's been good performance.

Now remember of course one of the reasons we were focusing on that with you over the last couple of years is because the original deadline in that was July of this year.

Of course the regulators have granted an industry-wide extension on that to 2017.

So we continue to focus on it.

Great.

Last one is on FICC, the macro products were great but credit and mortgage wasn't so, not exactly hitting on all cylinders as a whole.

But it certainly seems like maybe some of the reduced capacity in the industry is helping you and so your long-term strategy that we all beat you up for, for the last five years might be working.

Could you talk towards what you're seeing in terms of capacity, and now that you've seen a pick up in volatility what it means?

So on FICC, I think you're right to say that one of the things we have benefited from certainly is the diversity of the businesses.

That's not just FICC, it's across equities as well.

Because as you said, even in a quarter like this where you're seeing improved FICC performance sequentially and year over year, you're really seeing it in the macro side of the business and as you said, not all cylinders are firing.

Look, in terms of us, through this part of the cycle, while you were beating us up, we were spending a lot time focused on the clients and staying very, very committed to the businesses.

And we're seeing it translate through.

I don't have perfect visibility into our competitors, obviously, but you've seen the announcements.

Some things more stark, like commodities.

But certainly we're hearing it from clients.

And now we're starting to see a bit of it, I would say geographically, certainly in Europe.

I know you asked about FICC, maybe take the equity business for example.

We've seen a trend in derivatives and then certainly in a quarter like this, it was pretty significant.

Okay, thank you very much.

Christian Bolu, Credit Suisse.

So to start on maybe CCAR, some has proven very adaptable to managing the regulatory environment.

As you think about obviously your CCAR results, I'm just curious as to what levers you have yet to improve your relative positioning?

Sorry, I didn't hear the very beginning of your question, I apologize Christian.

Could you just repeat it?

Yes, so my question basically is on your CCAR ratios, I'm curious what levers you have to improve your positioning?

Right, okay, I understand.

So as you know we get very little transparency by design in terms of how the regulators have constructed CCAR going into the test.

One thing of course is we get transparency on our results coming out of the test.

And so last year, you saw us digest that information among other regulatory constraints, and we took very immediate action around the balance sheet.

And as you saw in the second quarter, reduced the balance sheet by $50 billion.

Every year's test, you know a little bit more in terms of the results.

This year's test in terms of the constraints, again this is all public, had to deal with total capital.

And so we're again digesting the results and we'll look at that in terms of how we think about deploying our balance sheet, our capacity and our capital structure and again we'll go through a process.

I'm not saying the process will yield the same results in terms of last year's balance sheet actions.

But we're going through that same diagnostic process now with our teams in the businesses.

Okay.

And have you mentioned your clients are placing a greater premium on financial capital and certainty of execution, curious to how you -- how this has been expressed.

Are you seeing a wider [bidder] spreads in the market, are they giving you more of their business or something else?

So as I mentioned we're seeing in certain parts, I guess one of the areas I'd point to is if you just look at the capital we committed to block transactions during the course of the quarter, obviously there were some significant capital commitments we made to clients during the course of the quarter, the largest block transactions that were done.

And so we felt very well positioned to connect those sellers or issuers of equity with buyers on the other side.

Acting more broadly, the process of repricing has been maybe slower than folks would have expected.

We're certainly seeing in parts of the business and when you start to see it is when the market picks up.

So again, I highlight the derivatives activity, which was a solid driver in our equities client execution line this quarter.

But we've also talked about it in commodities, for example.

So in the com markets you don't see it as much, but when activity picks up, you start to see it.

Great, very helpful.

Thank you.

Matt O'Connor, Deutsche Bank.

Any more color you can give us in terms of the strength within equity derivatives from a regional point of view?

Should we assume that it was in Europe from QE and some of the movement in prices there?

Trying to piece that line item together a little bit more.

Yes so within equities, the performance was really broad based in what we saw this quarter.

We talked for a long time with you about to really be a significant player in this, you need to have scale and you need to for example be in all the business lines, whether it is prime brokerage, derivatives, the ability to commit capital which I spoke about.

You need to have strong electronic capabilities and you need to be geographically diverse.

And this was a quarter where we really saw a strong contribution across the entire business.

And I highlight derivatives in Europe because it was a driver and we hadn't seen it recently.

But that's really the sum of it.

But it was really broad based and it really leaned into the strength of our business.

Again also of course, we had a weaker Q1 last year, but it was a solid performance.

Okay and then just separately, in terms of the comp to revenue ratio coming down, I feel like symbolically it's important that the ratio came down the first quarter, which it hasn't for several years.

How are you thinking about what the target is in terms of operating leverage?

You said a focus on generating positive operating leverage but I think it was more than 2 times to 1, so you had a lot of margin there to say, play with.

So the 42% at this stage is our best estimate.

We did reduce the compensation expense last year from 44% to 43% and then this is 42%.

And again we've always talked about the fact that the compensation is going to be driven by performance.

And this year, with the 14% year-over-year increase in revenues, that's our best estimate.

Now in terms of the operating leverage, this has been years of hard work in terms of managing expenses.

Really thinking about how to most efficiently use the resources.

And so when you have that in place and you get the revenue uptick, obviously it's much -- you can more easily translate that into the bottom line.

And that's what you're seeing this quarter.

Okay.

Thank you very much.

Michael Carrier, Bank of America.

To follow up on the equity strength.

So it sounds like you mentioned the derivatives, you mentioned blocks.

I just wanted to make sure on the block side was there anything that was way outsized when we look at whether it's maybe quarter over quarter, because year over year you had a weak comp?

No as I said prime brokerage balances were up.

There were a number of drivers, volume and activity.

But it was really client driven.

So there were index rebounds, transactions that we do this quarter, we were able to facilitate large volumes for clients.

It came together nicely.

Okay.

And then I think it was the last quarter, but you guys gave some of the repositioning that has taken place over the past couple of years in the revenues that were lost.

And then you guys have also mentioned a lot of the investment that you're making on the technology side to position for a lot of these new roles.

When you think about what is expected of the industry at this point going forward, do you feel like most of that's in place?

And I guess what I'm trying to get at is, if you're already positioned for that, then from the client or the market share standpoint, maybe that's one of the things that's driving it as a lot of other firms are still trying to figure things out.

So wanted to get a sense of where you guys think you are given all these conflicting regulations and how well you can manage them at this point, given what you know?

So let me start with technology.

Because obviously technology has been a critical driver and part of our operating infrastructures are firm for as long as you've been covering us and well before.

And that investment is not something obviously you can do in a short period of time.

So this reflects decades of investment in technology platform.

As you know we have talked about this in the past, Mike, we have one risk management platform (inaudible), which certainly gives us some efficiencies in scale.

Because as we adapt, if we need to build things for our equity business or if we need to build things in different parts of the world, it's obviously goes without saying you can be more efficient as you replicate those things.

So that constant reinvesting in the business that gives us that flexibility.

But that's not new.

The regulatory component obviously as we get into the finalization of rules and the implementation of rules, that will continue to be an ongoing process.

When we think about technology, away from the narrow subset of regulatory compliance, which it plays obviously a mentally critical role, the other way we think about it is really how do we deliver to clients?

And that again we continue to invest in.

And then other than being efficient are there ways we can grow revenues through technology?

And so we're constantly monitoring that.

Okay, that's helpful.

Thanks.

Mike Mayo, CLSA.

I'm going to ask a real basic question.

How sustainable were your results in each of the four business lines?

You already said the Investment Banking backlog is a little bit less than at year end.

So as you look at it compared to the prior quarter, should we expect this higher level performance?

Or is this just the usual first quarter bump and then we're going back down to a lower level?

So let's just take Investment Banking, Mike.

So you remember at the end of last year we talked about the fact that we had $1 trillion in announced transactions and there was a $200 billion gap between us and the next closest competitor.

And so in the first quarter obviously you would expect to see certain of those transactions coming through.

I would point out that the backlog is up significantly from last year.

And so in terms of the backlog in the quarter, it was down a little bit in Investment Banking and then it was up across equity underwriting and it was up across debt underwriting.

(Inaudible) about the backlog in the way that you described it.

But for example, if you ask the question slightly different, you said listen the trend in banking, does it feel like it's still in place?

The short answer to that is yes.

When we talk to CEOs and Boards, CEO and Board confidence continues to be high.

And you've even seen in the last couple of weeks in announced transactions there's a fair amount of activity out there and we feel very well placed for it.

And on the trading side?

So on the trading side I'd say the same thing in terms of trends.

This discussion around diverging monetary policies, which is a catalyst, that trend feels like it's in place and the client dialogue and in terms of our communication, we're very focused.

But in terms of you extrapolating that in terms of the quarter, it's very early in the quarter.

And so all these things are going to be driven by the environment and ultimately, how our clients respond to that.

And then one follow-up question.

The PSUs are new with an 11% hurdle for ROE, and this quarter you would a 14.7% ROE.

So is that PSU hurdle high enough?

How did you come to that?

Do you consider that a target for the Firm?

I'm glad you asked that question because we've had this discussion around target.

And as we said before, a call wouldn't be complete unless we talked about something about a target with you, Mike.

So really important, the PSUs as you mentioned which I'm sure you saw in the proxy, that is not a target for the Firm.

And that's an important distinction for everyone to understand.

The reason we don't have a published ROE target is because it's just not how we manage the firm.

If you recall all the time we spent in the fourth quarter talking about our ROE framework in terms of how we think about capital management, that's a much better way to understand how the Firm thinks about most efficiently deploying its capital.

So in terms of the PSUs, as per the proxy, our boarding gates with shareholders actively as they always do and they took that feedback in along with other constituents and they felt like adding those metrics to certain Executives in the Firm made sense from a shareholder perspective.

All right, thank you.

Mike, the only other thing, Mike, I'd say on are we targeted?

It's interesting, if we had had an ROE target out there, and again because you might have gone through this so many times, if we had had a target out there we had an 11.2% return last year.

We had a target out there of 13% and we had our 14.7%, I don't know how you would digest that.

We really view 14.7%, it's a good, solid performance for the quarter.

It's close, we're really in mid teens territory now.

But our aspirations to deliver for our shareholders are higher.

And so again that's why we don't have a specific target.

We really think about how to drive value over the long run.

Al right, thank you.

Betsy Graseck, Morgan Stanley.

A couple of questions.

One is on the fundamental review of the trading book that Basel is currently engaged in and wanted to get your thoughts on how you see that going and if it goes into place as it's currently outlined, how you deal with that?

So we've obviously been actively involved with the regulators as has the industry broadly on the trading book review.

I think it's too early to extrapolate anything from the QIS in terms of any final rule.

Our discussion and what we think is important, it's really about calibration in terms of how folks want to actually think about the next round of a rule set.

But as you've seen us do in the past whenever we get a final rule, we'll work within that rule set.

I think that as we think about these rules, that impact businesses we require to have inventory, again we got to think about calibration because we need to think about market liquidity and our -- and the industry's ability to provide that.

So that's been the discussion for us.

Right, got it.

Just because it feels like the hedging is a little bit clunky, not really treating risk as you would want to manage it.

Yes I would say, let's give regulators time on this.

I don't want to prejudge anything.

There's still a lot of work to do.

Okay.

And then separately maybe you could speak a little bit to how you're thinking about the commodities business?

We have had some recent headlines from some of the regulators on that and I know that you are very committed to a client-oriented business.

But could you identify how much of what your commodities business generates today is client facing?

So the driver, I mean our commodity business is all about the clients.

As you know, we've sold certain assets and that's really the driver.

And when we talk about commodities within our fixed income business, that's what it is.

I think look, it's an interesting time to be having this discussion around commodities and regulation.

Because as we've seen really since the first quarter of last year when we started to see volatile natural gas markets then followed by this huge decline in the energy markets over the last six plus months, I think it really reinforces the need for firms like Goldman Sachs to be in a position to provide our clients with liquidity, with financing capacity.

And so for us as you know we've been in the commodity business forever, we know how valuable it is to our clients, we're hugely committed to it.

In terms of regulation, we'll see how the regulation evolve and again we'll stay in active dialogue with the regulators.

But I think at this stage everybody sees how critical it is and how important it is to clients.

Yes, that's what I would say.

Thank you.

Guy Mozkowski, Autonomous Research.

First of all on the buy back comment you made and the idea of backend loading.

And I was wondering in the context of the last couple of years where it's tended to be more consistent, what prompted the rethink?

Is it something to do with CCAR reinvestment opportunities that you're seeing?

Just a little color on that would be helpful.

Yes so as you know, year to year the CCAR test changes.

Obviously I can't speak to anything that supervisory level detail, but there were aspects nuances of this year's test that to the extent to which we use our capacity, that we would use our capacity later in the year.

Now this is public, of course.

The Federal Reserve gives you capacity on a quarter-by-quarter basis.

And so I was just letting you know that due to nuances in this year's test, largely driven by the fact that we're a mark-to-market Firm, we mark-to-market our balance sheet, that to the extent to which we use it, it'll be more back end weighted.

Okay so it has more to do with that than the idea that with business levels picking up you're seeing more opportunities to deploy capital in the business?

No I was specifically speaking in a CCAR context with respect to capacity.

Of course -- as you know when you look at our long history as a Firm, for the vast majority of our history we've reinvested capital into the business.

And so to the extent to which we continue to see growth and client demand, obviously that's our preference.

Got it.

Let me ask you a litigation question.

You satisfied $190 million in the quarter, can you give us a sense for how much of that is a reverse build versus just incurred costs?

So we don't break it down specifically at that level.

What I will tell you, it's the same process.

We continue to evaluate any outstanding litigation in the course of the quarter and we accrue accordingly.

And how should we think about the fact that in the most recent quarter, one of your major competitors said that they were in negotiation with the Department of Justice on private label mortgage securitizations?

And really at this point, if we assume that they do what they are in negotiations to do, the only major US dealer that won't have done one of those settlements is Goldmans.

Should we be thinking that there's probably going to be something coming down the line in the next few quarters?

Are you in negotiations?

So again to the extent to which on any specific cases, we're not going to comment.

I'm sure you understand that.

I would really encourage you to look at the most recent 10-K and our Q disclosure where we're very explicit about all these matters.

Okay, fair enough.

And then the final question I have for you is on the tax rate, you talked about geography and obviously we've seen tax rates similar to that, that you had this quarter in the past.

Would it be appropriate for us to factor that in together with the norm for the first quarter together with the normal low 30s and be thinking in terms of something along the lines of 30% for the full year?

Or would you expect this tax rate to continue?

So it's a good question.

So for everyone who may have not have had a chance to dig through or heard the beginning of the call, effective tax rate for last year was 31.4% and for the quarter was 27.7%.

And as you pointed out, Guy, that was mostly driven by geographic earnings mix.

What I would say is, all factors being equal in terms of the full year rate and the way you should think about it, given that we're starting from such a low level, I think it's reasonable to assume that we'd come in below last year's rate.

But we'll see how the year evolves.

Okay, that's really helpful.

Thank you, Harvey.

Jim Mitchell, Buckingham Research.

Maybe circling back to FICC, FX and rates were very strong which obviously you highlighted as did everybody else, our credit and mortgages being weak year over year.

But we had an environment where if you look at trace volumes being up, credit spreads were pretty stable.

What's really hurting that business?

Is it just simply there wasn't enough volatility or it's just absolute low rates are hurting spreads?

Or is it, and clearly inventory levels are down, or is it a combination of all those things?

Just trying to think what is a better environment, do we just need to see higher rates?

No I think this last quarter was really a case of investors evaluating, clients really evaluating where they stood with respect to their portfolios.

There was obviously less refinancing activity during this quarter versus a year ago.

But I would say the key driver is the debate over rates, and how people are thinking about their portfolios.

I think if we saw a path towards normalized rates, over time, I think you could see a pick up.

Okay so we just need to wait to see rates get more conviction around rates and predictability?

Okay, and maybe a bigger picture question on the banking cycle and M&A clearly we've seen a nice pick up and continued in the first quarter.

Where do you, in terms of conversations with clients, do you still think there's a lot of juice left?

And then if you look at past cycles, there would imply we still have quite a bit of room to go.

Just want to hear your thoughts on it if you --

You're right in terms of -- if you want to use the benchmark past cycles, certainly there's room for increased M&A activity.

In terms of our discussions with CEOs and Boards, I would say that the momentum feels still quite good.

There's large transactions within industries tend to be a catalyst for other transactions.

Strategics are very well positioned in terms of driving synergies, the financing markets remain attractive.

Again, so there's room here.

And our recent dialogue is quite good and as you point out, there's room versus historical benchmarks.

Okay, great, that's helpful.

Thanks.

Chris Kotowski, Oppenheimer.

Wanted to circle back to the equity client execution because the result is so discontinuous with the -- it's roughly double the last say eight quarter moving average.

Can you say, was it just a unique opportunity set?

Was it a couple of big transactions?

Was it related to the block transactions that you were talking about earlier?

Or is this more like the new normal?

Look we'll see how subsequent quarter goes.

I would say that look if you looked at last year's first quarter, it was definitely a more challenging [marketing] environment.

Again this is really just one where geographically, from a derivatives perspective, the ability to connect capital things just really lined up nicely for our franchise.

And again it was broad-based, so the environment was good everywhere.

Doesn't mean it can't get better and it doesn't mean it can't decline, but it was good everywhere this quarter.

Okay and then on a global macro view back in 2011, I guess the prospect of a Greek default set the eurozone in crisis and we seem closer to it than ever.

Is it now in your view a non event if and when it happens that everyone has had enough time and preparation to get ready for it?

So it's a complicated question.

I would say first of all, Greece has been in view for a long time for folks, so people have had an opportunity to digest it.

I think that on the plus side, the environment in Europe versus 2011 is dramatically different in terms of if you think about the discussion around other peripheral countries relative to 2011.

And so I think those are all things for the plus side.

We're obviously monitoring it very carefully.

I would say on the concerning side, look it's an experiment that hasn't been run.

And so we'll have to see what to it has for market, but it's certainly if you compare this to 2011, you'd have to assume that the risk is much more contained given people have had years to focus on this.

Okay, thank you.

Brennan Hawken, UBS.

Quick one on thinking about equities here coming into Q2 typically strong given dividend season in Europe, how much do you think that QE on the continent is going to play into that this quarter?

Well clearly was a big driver in terms of increased confidence in Europe and you saw that immediately -- that translated immediately into big up tick in European equity markets.

We'll see how much pull through that has during the course of the quarter, but clearly it's been in focus for our clients now.

And so we'll see how much stamina it has.

But obviously the commitment to QEs substantial.

Sure.

And then, sorry about bringing it back to equities here, but one more.

Can you speak to what impact Asia had on the quarter particularly given some of the market structure changes we saw in the region?

So certainly it was a contributor.

If I ranked it for you, it was -- Europe was a more significant contributor.

But the trend in Asia has been much better, obviously.

And as those markets continue to liberalize, I think the dynamic nature of capital flows will continue to increase.

Of course, it was helpful in Asia, but again this was broad based across our equity business.

Longer term we're pretty optimistic about the opportunities there though.

Terrific, thanks a lot.

Steven Chubak, Nomura Securities.

So I had a question on CCAR and your preferred issuance plans.

With total capital, under CCAR specifically now the binding constraint for the Firm, even though you're already operating at that 150 basis point preferred target, is it fair to expect that you'll look to close the gap or improve your CCAR position by issuing more preferreds or more qualifying debt?

So you may have seen or you may not have seen, Steven, but we're actually -- we announced this morning we're out in the market with the preferred.

So that transaction is out in the market now, and we'll be closing later this afternoon.

In terms of how we think about this, this is a great question, because as I said before, a lot of this is about how you digest the CCAR results and how you think about, again, things like how you price the balance sheet, how you deploy your capital and the optimal capital structure.

So you should assume we're going to look at everything in terms of how we position the Firm going forward as it relates to the capital structure, make sure we do -- we construct it in a way that's most efficient for our clients and most efficient for our shareholders.

Thanks, that's really helpful, Harvey.

And actually in that same vein, since you mentioned about capital allocations under CCAR, it might be helpful if you could clarify regarding how you allocate the capital under your attributable equity framework.

Under a CCAR lens do you use your stressed end of period or your minimum ratio for determining the level of required capital for assessing the adequacy of the ROEs for various trades?

Right, so some of this obviously we consider proprietary in terms of how we think about the dynamic nature of capital management.

But for folks who haven't studied, and obviously Steven is a very thoughtful consumer of the information.

In terms of our return on attributed equity framework what we have discussed with the marketplace is basically all those factors that contribute to regulatory capital constraints, Basel III advance, standardized, supplementary leverage ratio, elements of CCAR, we attach weightings to those given their significance.

And we basically have constructed an algorithm that helps guide us, both in executing certain transactions and obviously how we evaluate businesses over the long run.

But we haven't discussed the specifics of how we incorporate those variables.

Okay well that's it for me, Harvey.

Thank you for taking my questions.

Matt Burnell, Wells Fargo Securities.

A question for you in terms of what's going on in the capital markets with your businesses, specifically on the energy side of things.

We've heard from a number of more commercially-oriented banks so far this earnings season about what's going on with their borrowing and capital markets activity within that sector specifically.

I'm curious given what's happened in the last two to three quarters in the oil markets, have you seen a meaningful increase in those companies coming to market or has that been much more status quo?

So I can't comment specifically in terms of the (inaudible) -- what I will say is obviously, given our role in commodities and our role with the energy companies and industrial companies broadly, the activity level for the past several quarters has been extremely high.

Often what you'll see is given the really very steep decline in the oil price, is those things won't translate immediately.

But over time, obviously the industry adjusts that and then you begin to see things like merger transactions and capital actions.

And so the activity level, the dialogue is quite high but I can't point you to any specific transactions I would highlight.

Okay and then switching to Investment Management, you mentioned that there was an outflow on liquidity products.

It seemed a little bit larger than what we've seen from a couple of other peers.

Guess I'm curious if you can give us a little more color on that and does what's happened over the last couple of quarters with the flows presume a somewhat higher, normalized pretax margin in that business relative to the high teens that you typically put up?

So in terms of the flows, as we said there was $13 billion of combined net inflows and market appreciation offset by $14 billion in liquidity uplift.

Those flows can move around as clients reallocate assets and move back and forward.

I think if you look at the historical movement around those predominantly mutual fund assets you'll see flows like this historically.

So I wouldn't point to it as any meaningful indicator.

In terms of the margin of the business, obviously this business remains strategically a very high priority for us.

We've been investing in it for years and we continue to see progress.

And over time, we expect that you'll see margin expansion.

Okay and then finally from me, are there -- was there any material change this quarter versus the fourth quarter in the benefit to your Basel III ratios from the significant financial institution deduction that you said was about $5 billion last quarter?

Yes that's not the key driver in this quarter, it really is the growth in equity.

It's the numerator that's driving it this quarter.

Okay, thanks very much.

Brian Kleinhanzl, KBW.

A quick question on the capital ratios.

Can you give us what the fully phased in capital ratios are with the RWA?

Sure, so fully phased in is 11.8% and 10.6%.

Now again, we just got a question on the significant financial institution deduction, and so when you look at that, that between the transitional, I would say the best way to think about it on an apples-to-apples basis assuming all their feathers being equal you should assume that the fully phased in versus transitional would roughly be around the midpoint of that.

Because we get the benefit of the significant financial institutions deduction as we move money out of funds.

In terms of RWAs on the quarter, the -- for advanced $565 billion and standardized $626 billion.

Okay.

Now toward the SLR, now that you're at 5.3% and the constraining ratio for CCAR has moved out the total capital, do you have a sense of what the buffer is that you would run the SLR at now?

Could you get away with a 50 basis point buffer since total seems to be constraining?

We haven't finalized a buffer in terms of how we're thinking about that and so we'll have to see how that's evolves in terms of how we want to think about it.

But obviously there's been significant progress and we're above the 2018 minimum requirement.

Great, all right, thank you.

Eric Wasserstrom, Guggenheim Securities.

One of the dominant themes from Goldman last year was the very significant reduction in its balance sheet size.

And so I'm wondering how -- if we should be thinking about that differently at all at this stage given what you're talking about with respect to client interest and demands, but relative to the capital constraints that were highlighted under this year's CCAR and I'm assuming were the genesis for today's preferred offering.

How should we think about all of those dynamics with respect to balance sheet size?

So the balance sheet reduction we went through last year, it's a great -- I'm glad you brought it up.

That was about repricing the balance sheet and all about this framework we talked about in terms of how we deploy our marginal capital.

And so if you think again about last year's tests, you could grow equity, you could grow capital, but the reality is, obviously you have to want to do that in a way that delivers marginal returns.

And so that was all about repricing.

And so as we went through that exercise last year, that was repricing our side.

If we -- again our preferred operating position would be to grow the capital base, grow the balance sheet, accretively and deploy that capital to clients, but obviously we're going to be very sensitive to returns on that and how that marginal balance sheet gets priced.

But it sounds like from your repricing commentary, you do see that at least on the margin occurring?

Right well we certainly have seen some in terms of pricing and then last year we felt the discipline of the processes we went through went quite well.

As we talked about, there was very little disruptions to client activity.

Great, thanks very much.

Devin Ryan, JMP Securities.

So on the ROE outlook and the drivers obviously your margin is a big one and the pretax margin for all last year was 36%.

It was 37% this quarter which I thought was impressive.

So when you just look at the businesses at more of a granular level, are there areas where you feel like you're getting to about as good as it will be and then where do you see the biggest areas for additional leverage to the margin?

So the discussion around how we manage the businesses and where we think about driving additional leverage, that's a continual conversation at Goldman Sachs that's going to happen all the time because we are always reviewing the businesses and making sure we're driving them to the optimum outcome.

Now the operating leverage you're seeing, that's Firm wide and really is the result of again the years of investment we've made in technology, how we scaled the resources, the cost cutting program that we announced several years ago that was raised to several billion dollars.

And so you're now just starting to see all that translate through.

But we're constantly evaluating the businesses for opportunities, both to grow and to hold.

Okay, thanks.

And then coming back to Europe one last time here, the stability that's helping client activity, is there any way you can just help size that for us relative to the recent past?

How much stronger was it this quarter?

We talked about derivatives, but where else is that pick up and any perspective around how much bigger it was this quarter relative to the recent past?

So I highlighted it to give you some sense of the underpinnings of the activity that's driving it.

But again in equities, it really was broad-based client activity, geographic and across the business and within individual product lines.

Okay, thank you.

Kian Abouhossein, JPMorgan.

Coming back to equity derivative, I was wondering if you could give a little bit more flavor in terms of products, if it's -- if the strength on the execution side came maybe more from the flow side, or was it more from the delta one side or structuring side or dividend swaps?

Can you talk a little bit through the products in order for us to get a better understanding of what we should think about going forward trends in some of these areas, because clearly some of them are a bit more bulky than others, if I may?

So really, Kian, it's truly client activity across each of the businesses.

And so I wouldn't highlight any particular product line within the derivative businesses.

Obviously, when you have a big up move in European equity markets like you did with QE, obviously that's an opportunity to clients to get involved.

And there's lots of things they look at both from a plain vanilla perspective and a more structured perspective.

I don't know, I think if you're trying to ask a question around things like were people more interested in derivatives that had maybe multi variables?

Sure, but again it was broad based, it wasn't any one particular driver.

And there's no real distinction between structuring versus flow in terms of your mix, not much has significantly changed?

Look, I won't talk to our mix.

As a Firm obviously we have the intellectual capital and the systems and the capacity to deploy that capital for clients.

And so I think we're always well positioned for those parts of the cycles in the market.

But again it was broad based in equities.

Yes, and in respect to fixed income, we've had some things giving us a bit of a feel of how the revenues break down between macro and credit.

And I was wondering, could you give us a bit of a feeler as well?

Is it half, half at this point in the first quarter or should we think about it differently?

We don't provide the detail by macro versus credit.

What I would say is that, look we have an investment in all these business and again, we benefited from the diversity.

At times, credit is going to be particularly active and at times macro is going to be particularly active.

But we don't provide disclosure in terms of that split.

Okay and lastly on commodities, clearly commodities had an uptick in volatility, but at the same time you highlight volatility as a business which year on year was down.

I'm wondering if you could you just explain a little bit to me why commodities was relatively weak on a year-on-year basis?

So you may recall that last year, now we're going back to the first quarter 2014, commodities had a very strong quarter.

A lot of that as we discussed at the time was due to the extraordinary volatility of natural gas and it drove a lot of client activity in the sector.

And that was really the first time you and I started talking about the fact that we were really seeing the absence of competitors on the field and a huge uptick in client dialogue.

And so you're just coming off a very strong 2014 first quarter.

But commodities remains a very active space for us on and our dialogue with clients is quite strong.

Okay, that explains it.

Thank you very much.

Marty Mosby, Vining Sparks.

I wanted to ask you one thing that you highlighted in the press release was the largest ever -- largest increase in five years in tangible book value.

With the increasing returns and still some constraints on capital deployment, isn't that really a fundamental accelerator as you look forward over the next couple of years?

So look, again the environment is going to ultimately something that we participate in.

But I would say that the thing we've focused on over the last several years, which has been making sure that we continue to invest in our client franchise and at the same time build operating leverage, that's why you're seeing that.

You're seeing the 14% year-over-year growth in quarterly revenues and it's just translating to the bottom line with a lot of operating leverage.

And then when you look at the comp ratio at 42%, which you made some improvement with what you've done in the past, but when you look at it on the average for the year, you've recently highlighted the 38% number in that you would look for the year being closer to what you've done in the past couple of years.

When you see that you almost have $0.50, $0.60 of earnings per share that basically push forward as you review performance and your compensation plans over the rest of the year.

So it's our best estimate today, Mosby, and look we'll evaluate the year as we go through.

And obviously again as we discussed in the past, the culture of paper performance at Goldman Sachs we'll evaluate it continuously as we go through and it'll be driven by performance.

Thanks.

At this time there are no further questions, please continue with any closing remarks.

Since there are no more questions, I want to take a moment to thank all of you for joining the call.

Hopefully I'll be able to and other members of Senior Management will see many of you in the coming months.

If you have any additional questions, please don't hesitate to reach out to Dane.

Otherwise enjoy the rest of your day and look forward to speaking with you on our second-quarter call.

Take care now.