高盛 (GS) 2015 Q3 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 third quarter 2015 earnings conference call.

This call is being recorded today, October 15, 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 third 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 will walk you through the third quarter and year-to-date results and I'm happy to answer any questions.

Net revenues were $6.9 billion, net earnings $1.4 billion, earnings per diluted share $2.90.

And our annualized return on common equity was 7%.

For the year-to-date net revenues were $26.5 billion, net earnings $5.3 billion.

Earnings per diluted share $10.84 and our annualized return on common equity was 8.8%.

Book value per share is up 5% relative to year end 2014 despite recording net provisions for litigation and regulatory matters of $2.1 billion for the year-to-date.

These provisions, largely from legacy issues, reduced our annualized return on common equity for the first nine months of the year by approximately 3 percentage points.

Moving to the third quarter, parts of our franchise performed quite well while others operated against a more challenging backdrop.

Our M&A franchise continued to deliver robust results and our outlook remains positive.

We continue to see net inflows in our Investment Management business.

Of course, there are the usual seasonal drivers due to the summer slow down, but in addition the third quarter also had more than its fair share of significant macroeconomic developments.

Both the Chinese economy and the country's monetary policy came into focus.

Our clients evaluated the potential implications of a slowing Chinese economy, the decision by the People's Bank of China to devalue its currency, and the resulting volatility in global markets.

As it relates to the US economy, our clients remain focused on the Federal Reserve's interest rate policy.

Over the course of the third quarter, clients' expectations for an interest rate hike began to shift.

Mixed economic indicators drove uncertainty about the pace of US economic growth.

Ultimately, there was doubt about the timing and magnitude of a future rate increase.

Another significant macroeconomic theme in the third quarter, commodities, prices fell across a number of different products.

WTI was down 24%, copper and natural gas were both down approximately 10%.

The price slump led the market to focus on the credit risk of commodity producers, trading houses and those economies with significant commodity exports.

These concerns drove an increase in credit spreads, particularly across the energy sector.

The sum impact of these various events led to lower levels of client activity and a significant repricing of the equity and credit markets.

The S&P was down nearly 7%, the MSCI World was down almost 10%, and the Shanghai Composite was down close to 30%.

In the credit markets, European high yield spreads were 107 basis points wider and US high yield spreads were 153 basis points wider.

Not surprisingly, we produced lower quarterly revenues across many of our businesses given both declining asset prices and reduced levels of client activity.

Now I will discuss each of our businesses.

Investment Banking produced third quarter revenues of $1.6 billion, 23% lower than a strong second quarter as underwriting slowed.

Although issuance declined during the quarter, our Investment Banking backlog remains strong, and was up compared to the second quarter and the end of 2014.

Breaking down the components of Investment Banking in the quarter, advisory revenues were $809 million, roughly consistent with the second quarter.

Year-to-date, Goldman Sachs ranked first in worldwide announced and completed M&A.

During this period, we served as an advisor on nearly $900 billion of completed transactions.

This is roughly $350 billion more than our next closest competitor.

We advised on a number of significant transactions that closed during the third quarter including DirectTV's $67.1 billion sale to AT&T, eBay's $46.8 billion spin-off of PayPal, and Baxter's $20.3 billion spin-off of Baxalta.

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

These include Energy Transfer Equity's $37.7 billion acquisition of the Williams Companies, Humana's $37 billion sale to Aetna, and Proctor & Gamble's $12.5 billion merger of its beauty business into Coty.

Moving to underwriting, revenues were $747 million in the third quarter, down 38% sequentially primarily due to a significant decline in equity issuance.

Although global activity was weaker, our franchise remains strong with the number one ranking in global equity and equity related and common stock offerings for the year-to-date.

Equity underwriting revenues were $190 million.

This was down substantially compared to the second quarter due to a decrease of industry-wide IPOs and secondary offerings as higher volatility and a decline in prices reduced activity.

Debt underwriting revenues of $557 million were down 8% quarter-over-quarter.

A decrease of an industry-wide issuance volumes was partially offset by acquisition-related financings.

During the third quarter, we actively supported our clients' financing needs leading HP Enterprises $14.6 billion debt offering related to its spin-off from HP, Biogen's $6 billion debt offering, and [Simporno's] $1.4 billion rights offering.

Turning to Institutional Client Services, which comprises both our FICC and equity businesses, net revenues were $3.2 billion in the third quarter, down 11% compared to the second quarter.

Within a number of our businesses, the macro concerns I've already talked about impacted both client conviction and activity.

FICC client execution net revenues were $1.5 billion in the third quarter and included $147 million of DVA gains.

Net revenues were down 9% from the second quarter and market-making conditions continued to be challenging.

Currencies improved sequentially, as the devaluation in the Chinese yuan sparked significant client activity within our emerging markets franchise.

Commodities increased relative to a more challenging second quarter as declining commodity prices and higher volatility benefited results.

Interest rates were significantly lower as uncertainty related to the direction of US interest rates impacted activity.

Credit decreased as client activity remained generally low amid continued spread widening.

Mortgages was significantly lower as conditions remained challenged with limited client activity.

In Equities, which includes equities client executions, commissions and fees and security services, net revenues for the third quarter were $1.8 billion, down 12% quarter-over-quarter and included $35 million in DVA gains.

Equities' client execution net revenues decreased 29% sequentially to $555 million.

Broadly speaking, client activity declined versus the second quarter as higher volatility and global equity market weakness impacted investor conviction and risk appetite.

However, as is often the case in more volatile markets, we did see activity pick up in our lower touch electronic channels.

As a result, commissions and fees were up 7% quarter-over-quarter to $818 million.

Security Services generated net revenues of $379 million, down 14% compared to the seasonally stronger second quarter.

Turning to risk, despite an increase in volatility, average daily bar in the third quarter was down $3 million sequentially to $74 million.

Moving on to our Investing & Lending activities, collectively, these businesses produced net revenues of $670 million in the third quarter.

Equity Securities generated net revenues of $370 million.

The declining global equity markets negatively impacted net revenues in public equities during the quarter.

Net revenues from debt securities and loans were $300 million with the majority coming from net interest income.

Investment Management reported third quarter net revenues of $1.4 billion, down 14 -- excuse me, 14% from the second quarter as incentive fees declined.

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

Assets under supervision reached a record $1.19 trillion, as long-term net inflows more than offset market depreciation.

With respect to long-term flows, organic net inflows were strong at $23 billion.

We also closed the Pacific Global Advisors acquisition during the quarter which added $18 billion of assets.

This represents our seventh acquisition since the beginning of 2012.

Over that timeframe, total long-term net inflows were $195 billion, $71 billion of these net flows came from acquisitions.

Moving to performance, across the global platform, 72% of our client mutual fund assets were in funds ranked in the top two quartiles on a three-year basis, and 70% 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 40% for the year-to-date.

This is 200 basis points lower than the firm's accrual in the first half of this year and consistent with the year-to-date compensation ratio at the end of the third quarter of 2014.

Third quarter non-compensation expenses were 30% lower than the second quarter.

Substantially all of the decrease was driven by the larger litigation charge taken in the second quarter.

In the third quarter, net provisions for litigation and regulatory expenses were $416 million.

Now I would like to take you through a few key statistics for the third quarter.

Total staff increased by 2,000 to approximately 36,900, which was up 6% quarter-over-quarter.

Roughly half of the new staff was from the Federation, largely technology and operations.

The other half was primarily spread across Investment Banking and Investment Management.

The increase was dominated by campus hires and reflects both the activity levels in certain businesses and our continued investment in regulatory compliance.

Our effective tax rate for the year-to-date was 31%.

Our global core liquid assets averaged $193 billion during the quarter.

Our common equity tier 1 ratio was 12.4% using the standardized approach, it was12.7% under the Basel III Advanced approach.

Our supplementary leverage ratio finished at 5.8%.

And finally, we repurchased 5.4 million shares of common stock for $1.1 billion in the third quarter.

As we have discussed, related to our share repurchase capacity, any potential share repurchases over the next three quarters will be more back end weighted compared to the last two quarters.

Before we turn to Q&A, I will share some thoughts around the market and industry broadly.

The third quarter served as a reminder of the fragility and sensitivity of markets, investor sentiment, and the path to strong global economic growth.

As you know, over the last several years, the financial services industry has faced a series of headwinds.

These pressures have forced many within the industry to rethink their footprint or their level of commitment to a variety of businesses, particularly within the more capital intensive businesses of fixed income, currencies and commodities.

At Goldman Sachs, our strategy remains intact, to be the leading advisor, underwriter, liquidity provider, financier and investment manager.

To that end, we are always looking for ways to deliver more differentiated value to our clients.

We are keenly aware of the challenges facing the industry.

While some of our businesses are experiencing year-to-date growth, for example, Investment Banking and Investment Management, other parts of the business are in a more difficult part of the cycle.

However, we are hardly complacent.

For example, within FICC, we have proactively responded to industry-wide challenges including asset sales, expense initiatives and balance sheet reductions.

The goal of these various efforts is to maintain margins, improve returns, prudently manage risk, and protect the global client franchise.

We will always look for additional opportunities to improve our FICC operations, however, we will also never lose sight of the tremendous value that we can bring to our FICC clients over the long term.

In closing, we believe that our long-term prospects are quite favorable.

Our global pipe franchise, it's as strong as ever.

Our lead table rankings and track record of superior returns are a byproduct of that strength.

In addition, we have the people, the risk culture, the embedded operating leverage and clarity of purpose to deliver superior value to you, our shareholders, particularly as the environment improves.

Thank you again for dialing in.

And I am happy to answer your questions.

(Operator Instructions)

Your first question comes from the line of Glenn Schorr with Evercore ISI.

Hi, thanks very much.

Good morning, Glenn.

Good morning.

Harvey, maybe we pick up where you left off on the whole cyclical versus structural debate in FICC.

And I heard everything you said, and I think you are right, and I think you are who you say you are for your clients.

But I look at the backdrop, and I say, the Europeans are actually starting to need to adjust their balance sheets and shrink parts of the business and so the thought of Goldman maintaining its optionality all these years, this would seem like the payoff.

And yet, a pick up in volatility in several asset classes, it feels like actually the world that was coming your way, but yet the revenue reduction for Goldman relative to peers, and I'm not just talking this quarter, the last couple of quarters, is more pronounced.

So I am trying to do the smell test of why is that?

Because I actually do think that things are lining up that you would be more important to your clients, not less, and there would be more opportunities, not less.

So, well, first of all, completely agree with that thesis.

Maybe, let's back up a little bit, and I think it's worth having a discussion because I think the easy way to have it is to sort of break it down into three parts.

Let's just talk about the quarter for a minute.

Obviously, a tough quarter for us in fixed income.

But if you think about how we are running the business, I think that is the more important two parts.

If you look back over the last several years at the expense initiatives we have taken where we have reduced head count of fixed income by more than 10%, we shrunk the balance sheet by 20%, and if you actually look at it on an RWA basis since we switched over to Basel III, we've really very thoughtfully managed the capital deployment.

So in this part of the cycle, we have been very disciplined about how we manage those resources.

Now, of course, your thesis is our thesis, which is we are in a deep and somewhat long cyclical part of the FICC cycle.

But when you think of the forward, our construction simplified is twofold.

Our level of engagement with our clients tells us clients still need the services.

It's like M&A, Glenn.

M&A, the services weren't active in 2009 and 2010, people questioned whether or not M&A would come back, but our dialogue told us that client engagement and the services we provided as liquidity provider were important.

When we think about the forward and we hear the announcements and we are in this part of the cycle, but it will take a while for that to transition through because I think so far it's been more about announcements than a retrenchment.

And you won't really see (inaudible) in all the steps we have taken until you see a pick up in client activity and the competitive environment continue to shift.

That may take a while.

But in the meantime, look, we will benefit as a firm because we are diversified.

And so, you saw a pick up in a certain part of equities, you've seen the strength in banking, but certainly a tougher quarter for us in fixed income this quarter.

Maybe just the last follow-up on the FICC conversation.

How, if any, does the new Volker reporting requirements change how you manage the business, how you report it?

I'm just curious because we can't see any of that.

No change as we manage the business.

Any steps in terms of Volker adoption happened a number of years ago where we shut down certain business, and all of the US firms are subject to the same rule set in Volker, so not an issue.

I really think it's a question of client environment.

In the third quarter, the environment, for all the factors I mentioned, was very challenging.

It was hard for us.

And if you go back to the first quarter, the first quarter environment was one with more activity and better performance on our part, but we don't want to over react to a particular quarter.

Okay, I appreciate that.

Thank you.

Thanks, Glenn.

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

Please go ahead.

Thanks, Harvey.

Hey, Michael.

Hi.

Just, first, you mentioned some of your comments on the commodity, I guess pressures in the quarter.

I just wanted to get kind of an update.

When you guys look at commodities and -- whatever you want to call it, asset class -- just how do you view your exposure to that part of the market, or the economy?

And, then, when you look at it from a client base, what has been happening, meaning are the clients in those areas less active, more active, and are you seeing that spread to any other areas of the economy?

So in terms of the exposure, we are not -- we are not a big lender to the energy space.

I think the best way to characterize it for you is just to take a look at two parts of that.

First, any of our funded exposure to non-investment grade parts of the sector is a bit over $1.5 billion, $1.6 billion.

And the other sector, which, obviously, came into focus in the quarter is the trading houses.

They were less than $200 million in exposure to those trading houses.

As I said, we are not a big lender, not an important part of our business.

In terms of the aggregate impact in terms of client activity, things have been moving so quickly that sometimes that is advantageous to client activity and it tends to be when things are more trending.

I think the whole world is adjusting to basically a longer-term consideration of commodity prices being lower in the intermediate term, and ultimately, that will be a catalyst for activity as clients consider hedging strategies, as they think about financing alternatives, as clients and companies struggle for refinancing.

So lower for longer in commodity prices, while very good for the consumer and the global consumer and the broader economy, results a tailwind, certainly should be a catalyst for client activity also.

Okay, thanks.

And then just as a follow-up, maybe on capital, in the ratios, if you have the CET1, maybe like the fully-phased inverse of the transitional, and then just given the decent buffers, any outlook in terms of where you think you would run that?

And the buy back pace just seemed like it ramped up.

I know you guys have been saying it's backward weighted, but it just seemed like this quarter was probably a bit sooner than expected.

So I just wanted to understand, is that because of the movement in the stock or is it just the plan with the CCAR process being pretty normal from what you guys expected?

On the capital ratio, with the G-SIB buffer finalized at -- puts us at 10% and, obviously, we have a lot of capacity above that.

Our target zone would be 50 to 100 basis points above that, if you were just looking at that set of metrics.

And, obviously, our supplementary leverage ratios in very good shape at 5.8%, but CCARs are binding constraints, at least it has been.

In terms of the share repurchase capacity and what we will do, obviously, as you know, we don't disclose that.

We don't disclose it for the very simple fact that we don't want our shareholders to think of share repurchase as dividends, and we also reserve, and really look forward to actually deploying the capital back into the business.

Now in terms of the mechanics of what is possible, part of the profile that you saw over the last two quarters, certainly dictated by the specifics of the test.

But to the extent to which we used the capacity over the next three quarters, as I said in my early remarks, you should expect it to be more back end weighted than you have seen in the prior two, if that is helpful.

Yes.

The CET1 at the end of the fully phased.

I think you guys gave the transitional?

So on Standardized or are you talking about Advanced?

If you have them both, but Advanced would probably be more helpful.

On a transitional Advanced 12.7%, fully phased in, 11.9%.

On Standardized,12.4% and fully phased 11.7%.

So as I said, a lot of capacity over our 10% minimum and our operating range of 10.5% to 11%.

Got it.

Thanks a lot.

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

Please go ahead.

Hey, Christian, good morning.

Christian, check your phone to see if your line was on mute, sir.

Hello, good morning, can you hear me now?

Yes, sure.

Sorry about that.

I will ask the FICC question another way as the focus of investors this morning.

I guess three of the last four quarters performances lagged peers.

How do you rationalize this?

Is it a business mix or a customer mix issue?

And then looking forward, is this just a bear market backdrop or are there any proactive steps you can take to improve performance?

Well, there is always things we could do better.

We are not perfect.

We always look at them.

Christian, we don't see as much value in comparing revenues -- certainly revenues quarter-to-quarter movements.

We certainly study them and we look for any valuable insights, but I think if you really look to the quarter-to-quarter noise, you run the risk of over steering the business.

For example, in the first quarter, we didn't glean huge value out of that in terms of comparing to competitors.

I don't know how much value we will get out of it this quarter.

We don't have a lot of visibility into their businesses.

Our focus has to be on a handful of things, most importantly, our client engagement.

And then our profit margins, the risk management and the ultimate returns.

And so that is really what we will focus on in FICC.

Now it's interesting because you brought up the issue of volatility of revenues.

I make a couple of important points.

If you look over the years, revenues don't really tell a great story.

As a shareholder, you own a collection of businesses.

If you actually look at our performance, consistency of ROE, and returns and earnings, we are the most stable.

And so it really is about firm-wide earnings not revenues.

Anyway, I don't know if that helps you or not?

No, that helps.

Thanks for the clarifications.

Maybe just a broader question on pricing power in the business.

I guess what lessons have you learned from the price increases implemented in the prime brokerage business?

From what we can see, revenue generation has not suffered at all for any of the top players.

Does that tell you that the industry has more leverage in pricing and maybe can we expect this in other business to maybe offset some of the weaker activity trends?

I think there is two things.

Driving your first is a question of really strength of franchise, and we've had a long, long history of being a dominant player in the prime brokerage business.

I think it really is the value proposition that we offer our clients globally that is the differentiator in that business.

I think the capital rules as they have come into play and the balance sheet impact of those capital rules and the cost has forced a very natural repricing in terms of how much balance sheet we and the industry can provide the clients, and clients are being very judicious about that, but they are also then making a differentiated judgment about who the best value providers are, and we are certainly one of those.

So we are seeing pricing power.

Any other businesses you think you can exert that pricing power?

Certainly, as we have talked about in the past, from time to time when activity has picked up, I don't know necessarily that I would call it pricing power as much as I would call it an absence of competition.

But certainly in the commodity space, several quarters ago, there was a lot of activity where certainly competition, which if you want to call that pricing power -- I think of it a little bit differently -- but certainly clients were willing to engage us differently.

And then, in the derivative business globally, as you are seeing firms exit parts of the CDS business and other parts of the equity derivative businesses, I think it's early days, but certainly you are seeing a reduction in competition and that translates into pricing power, or maybe better said, better returns.

Great, that's helpful.

Thank you, Harvey.

Thanks, Christian.

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

Please go ahead.

Hey, Matt.

Actually, first, just a quick follow-up to that very last comment you made about some repricing in parts of equity derivatives.

I haven't heard that before.

Maybe I haven't been paying attention.

But what areas there?

It's really two parts.

We have seen some of it in Europe where competition used to be more significant.

But also given the requirements around collateral rules and things like that, where you may have at times had marginal participants, actually pricing at levels where we would have thought the risk return didn't make sense, now you are seeing more rational and improved pricing.

I would say that is a general trend.

Okay.

And then just separately, can you give us an update on the bank deposit and lending strategy?

You, obviously, announced a deal to acquire some deposits and had a key hire in the lending side, I think, in the second quarter.

So just give us an update on what you are thinking there, and will we see this business grow to be meaningful at some point?

Sure.

Great question.

And the way -- the first thing I'm going to emphasize on that question is really the separation between a liability strategy and a potential asset strategy.

So these two things are completely separate, but I think it's natural that people would link them.

The online deposit strategy where we have requested approval for the deposit platform, that really is all about funding diversification.

We have spent some time contemplating building our own platform.

This platform became available.

It seemed attractive and timely for us and for GE.

But we would do that independently of any asset driven strategy.

Now in terms of a digitally-led lending strategy, which you talked about, there is not a lot to update you on since we last talked.

We are thrilled to have Harit on board as our partner.

He brings a wealth of acknowledge.

We feel like there is a handful of reasons why we may be able to have an impact on the space here.

One, our real core competencies in risk management and technology, and we feel like we may be able to provide a differentiated product that is accretive to the firm's current returns, but it will be slow going.

Obviously, we've built lots of businesses at Goldman Sachs, this is a new business.

Again, it's great to have Harit here because he brings all the expertise, and when we have more to talk about, we will certainly update you.

But it will be very deliberate in terms of its development.

I guess just a quick follow-up, on the funding side, as we think about the deposits growing over time, is that something that will benefit you in downturns, or is it also something that will benefit the earnings incrementally from lower funding costs?

I think it's twofold.

We have always been very conservative about our liquidity profile and a part of being conservative is being diversified.

So we are always looking for diversification and we're always looking for cost effectiveness.

But when we think about liability management, again, it's really about making sure we have the strongest financial footings at any given point in time.

Okay, thanks for taking all my questions.

Thank you.

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

Please go ahead.

Hi, good morning.

Hey, Betsy.

How are you?

Good.

So just a question about how you think about your market share.

As you indicated, revenues are a tough way to measure things because people have different positions and marks, et cetera.

I'm interested in understanding how you think about how you are doing on market share, really from a transaction side?

I know you talked about client engagement.

So I'm thinking that from the transaction perspective, ignoring the P&L impact, where do you feel you stand in your various businesses?

I know you are asking the question narrowly, but in terms of running those businesses, and particularly FICC, it really is multi-part.

So our client engagement in the businesses that we are focused on feels quite good.

So, for example, we are not the biggest emerging markets firm, as you know, because we don't have offices in hundreds of countries.

And it has never been the biggest part of our footprint.

There are certainly always things that we are focused on, and if you think about our client base, we are more skewed, I think, because we are not the biggest lender in the globe.

We are more skewed to professional money managers and investors.

And you can see their activity moves around.

But we feel good about our client engagement and our market shares.

But the reason I said it's a multi-part question is, it's not just about clients, although they are the most important part.

In running these businesses, it really is about margins, returns over the long term.

Okay, and then, separately on the I&L space last quarter, you gave a very helpful dissection of a third, a third, a third in terms of revenue flows that were a function of public marks versus not so public versus private.

Do you have any kind of breakdown on how the quarter was impacted by that?

Sure.

So let's maybe step back.

At the end of the second quarter, the I&L balance sheet was $89 billion and roughly 75% of that is debt related.

So the balance, really equity related and then it breaks out.

The breakout I gave you last time really was public equities, which were down.

And they trafficked, more or less, in line with global markets, and they started at $4 billion in the quarter.

So, certainly, there was just the pass to mark-to-market.

And then in private equity, the vast majority of the performance that offset the public portfolio was event related.

By event related, I mean sales, pending sales, IPOs, and we really benefited from the idiosyncratic nature of the portfolio.

We are not large, for example, in some of the hardest hit sectors like energy and that kind of stuff.

Okay.

Thanks very much.

Thank you.

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

Please go ahead.

Hi.

Good morning, Mike.

Questions on trading, both equities and fixed income.

What percent is electronic or automated and how does that compare to five years ago?

And then the second question is what percent of the business would you say pricing is more rational than it has been in the past?

So on the second part, I would say the trend is improving in terms of rational pricing, but it's in a market where client engagement from quarter-to-quarter has been very different, right.

So we saw it in the first quarter.

We saw less in the second quarter.

I think -- I would answer the electronic trading question as sort of long term.

The secular trend, which has been in place long before the crisis, that just continues and to some extent is aided by the creation of SEPs and things.

This quarter, what we've seen in the past and what we saw in this quarter, where when volatility is quite severe, particularly in the equity markets, clients really look to derisk or add risk and they tend to trade electronically.

It's a trend, but I don't have the specific numbers for you, Mike, in terms of the quarter contribution of electronic versus cash.

But we can certainly get you that stuff.

Can you just give even a ballpark?

Is electronic 5%, 10%, 20%, 50%, just any sort of ballpark figure?

I don't want to guess at a ballpark.

Certainly, in the third quarter there was a meaningful pick up in electronic activity relative to cash in the equities business.

I don't want to guess at a number for you, Mike.

We are happy to get you one.

Sure.

And then just a follow-up on the pricing, what areas in particular are you seeing the best pricing improvement in trading?

I would say balance sheet, intensive businesses broadly, and that really is as firms globally around the world digest capital requirements and have to be more thoughtful about the marginal deployment of balance sheet.

And then other things that are potentially balance sheet, consumers like longer-needed derivative swaps, and certainly when commodities has picked up, we have seen circumstances where -- and this is, obviously, augmented by the fact that the trading houses have gone through some pretty significant pressure now -- we are seeing reduced competition.

But, again, it's harder to see it certainly translate through unless the client activity levels are high.

I think that's why we are seeing this big back and forth swing between a quarter like the first quarter where we had a 14.7% ROE and then this quarter we have a much tougher quarter.

All right, thank you.

Thanks, Mike.

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

Please go ahead.

Good morning.

Good morning.

I just wanted to follow-up a little bit, first, on the composition of the change in revenues in equities and FICC from the second to the third quarter.

In FICC, you alluded, I think, to rates first off as having contributed significantly, and then you mentioned credit and mortgages.

Was that the ordering of the degree to which they impacted the revenue move?

Mortgages was a bigger driver if you are doing year-over-year comparables.

Right.

But I mean for the second quarter to third quarter shift?

Mortgages remain challenged.

The biggest driver was interest rates and then followed by mortgages.

Okay.

So the widening of credit spreads that was actually pretty significant in the quarter didn't really have -- it wasn't as impactful overall on FICC as just what was going on in rates and mortgages?

Yes, no, we saw it more in those two businesses, but it was still challenging, obviously, for credit markets.

And then, really, to the same question for equities.

You talked in the release on a year-over-year basis about cash versus derivatives.

But can you talk about, as you move from second to third quarter, what was driving the change in client execution?

So it's pretty straightforward.

Obviously, lots of volatility in Asia which had an impact on the entire market structure in terms of global markets responded.

But basically there [instead] of the shift that I talked about earlier, tougher market conditions in Asia, and then a shift to electronic activity which boosted commissions and fees.

Got it.

And then, just a final question, which I think is going to relate to I&L.

In the release, you allude to a pretty hefty decline in level 3 assets linked quarter, about 15%.

Is that largely driven by I&L, and if so, can you give us a sense for how much of the reduction is due to actual run off of planned portfolio sales versus just the impact of negative marks?

A pretty meaningful driver was actually monetizations and harvesting, that was really the driver.

So actually, underlying the negative mark-to-market on the public portfolio, it really does sound like there was very significant positive activity in terms of just being able to reduce positions?

Yes, in terms of reduced positions, you mean in terms of harvesting?

Yes, monetization, I really should have said it that way.

Yes, no, the portfolio did well.

As I said, the vast majority of the driver of the performance in the portfolio came from event-driven things like IPOs, asset sales.

Obviously, the public portfolio suffered with public markets.

But in terms of -- just to follow-up on exactly that comment, would it be as straight forward as just saying the public portfolio was $4 billion in equities, the MSCI, as you alluded to, was down about 10%, that the mark there would be about that, or is it more complex than that?

It can be different from quarter-to-quarter, but I would say that is pretty reasonable.

Okay.

Thanks, Harvey.

Thanks, so much.

Your next question is from the line of Fiona Swaffield with RBC.

Please go ahead.

Hey, Fiona.

Hi.

Just two things.

One is the difference between the CET1 ratios, mostly the difference between Advanced and Standardized has gone down quite a lot, and it seems to be something to do -- I just wondered -- is it operational risk, RWAs?

I don't know if you could talk through the differences in those numbers?

And the second is just a geographic question.

You have alluded to Asia a few times, but could you kind of give us a feel for year-on-year geographic revenues or trends, EMEA versus Asia, and whether there is any big change versus Q2?

Thanks.

Yes, so in terms of the ratios, in Advanced, and there was a pick up in operational which impacted operational, but the real driver in the improvement of the ratios was fund harvesting and general risk reduction.

You are seeing it more in Standardized because, obviously, there are things that are not risk centric which impact that, more like things like clearing and other things, and notionals.

And so that's why you are seeing the compression.

In terms of the (inaudible) geography, it's been pretty much 55% in the US and then the balance is really two-thirds EMEA and one-third Asia.

At what time period would that be?

Is that Q3?

That is this quarter.

Great, thank you.

Thanks.

Your next question is from the line of Jim Mitchell with Buckingham Research.

Please go ahead.

Good morning.

Hey, good morning.

Just a quick question on the M&A outlook.

I think there has been some concern with the disruptions in the market and US hitting a record level, that the M&A cycle might be peaking.

I just wanted to get your thoughts on that.

It seems like a number of deals haven't really moved, international volumes still remain very low.

So maybe some thoughts on how you guys think about where we are in the M&A cycle given some of the concerns out there?

The two factors that, obviously, we rely on most is the backlog and the pipeline is good.

And as I said, it was up at the end of the third quarter.

And then really the most significant information component for us is the level of dialogue that Boards, CEOs are having and the dialogue feels quite good.

I think it's always natural for folks to question when the market has been robust whether there is information content and the actual activity level as peaking.

And maybe that's a factor, but when you look at past cycles, they have been more significantly driven by LBO activity where certainly you can get some market capacity and how much debt can be borrowed.

It's 100% accurate to note that certainly the cost of financing is a contributor to the transactions that are happening today, but they are much more strategic and a reflection of slower global growth and how competency [ohs] are at this stage.

Now that could always get disrupted.

You could have a market event.

But I don't know necessarily that the aggregate activity levels to date are the best indicators that they would slow down.

If anything, some of these large transactions very naturally have spin-offs and foster other activity across industries.

So I don't know that would be -- that wouldn't be the most significant factor we would look at.

So you would think of the large deals as maybe potentially a leading indicator?

Because a lot of the smaller deals, the number of deals have been lagging?

That is correct.

If you get large deals in a sector, it can have a knock-on effect and then you get spin-offs.

That can be a leading activity for more activity.

But I think in short, our indicators tell us that if the current environment continues the level of activity will be high.

Again, that could always change.

Lots of things in the world can shift.

Sure, okay.

And maybe just a follow-up on the balance sheet.

I think if I look at your disclosures, you guys' balance sheet was up to a level we haven't seen in, I think, over a year.

I think the balance sheet was up $20 billion-plus, quarter-over-quarter.

Yet it was a volatile environment.

You looked like you pulled back on risk, at least in the VaR.

Can you help me think through that?

You didn't close on the deposit franchise acquisition this quarter, third quarter, did you?

No, no, no.

That is subject to regulatory approval.

Right, right.

No, the balance sheet growth, when you cut through it, is really all driven by prime brokerage activity.

And so it was all client driven in terms of client assets that came in during the course of the quarter.

Just sort of interesting, putting on leverage or --

No, actually, you get some of these effects when people delever.

You can get cash that comes in and actually comes into the balance sheet so client assets can grow.

Partial driver.

Okay, thanks a lot.

No problem.

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

Please go ahead.

Yes, hi.

Your comp ratio on a full year basis has been trending down ever so slightly the last couple years.

And you were able to keep the year-to-date comp ratio flat at 40% with revenues being down 1%.

Going into the fourth quarter, how should we think about the full year comp ratio in terms of -- that there would be upward pressure on it if the full year revenues miss a bit more from here, or continued downward pressure if the fourth quarter ends up being better and driving you above where you were last year?

So no change to the compensation philosophy.

The 40% at this point of year is our best estimate.

We'll have to see.

I can't predict the outcome for you in terms of where the year will end.

Obviously, we have spent a number of years really building in pretty significant operating leverage.

But we'll have to see how the year plays out.

But we will go through our normal bottoms up, top down process.

Okay, all right.

Thank you.

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

Please go ahead.

Good morning, Harvey.

Good morning.

You made a point in the press release about the IB backlog building.

I was just kind of curious whether or not in your view that is a function of improving business outlook or just deals getting held up due to market volatility and some of the trends that we saw impact the equity underwriting line?

All parts of the backlog were up.

The biggest part of the backlog that was up was equity underwriting.

And part of that is the markets being more challenged in part of the season.

But I think the more important take away is less about market influence over the quarter and more about activity levels, client confidence, which certainly at times for CEOs would have been tested as we came during the quarter, but the transactions that they are contemplating are very long term and strategic.

And so I think it speaks more to corporate confidence than anything else.

Okay.

All right.

Thanks for that color.

And then, thinking about that point and then connecting it to I&L and the commentary around monetization events and such, can you help us understand when the exit strategy or ability to use the IPOs or equity markets is weaker, how you guys were able to have an uptick in monetization and episodic events in I&L?

I'm just trying to connect those two dots, please.

So, again, it is just basically the idiosyncratic nature of the portfolio.

It won't always necessarily be this way in a quarter.

But there will be opportunities for us to sell assets, and in taking companies public and those kind of things, those are usually on a schedule, they usually don't happen instantaneously.

They can certainly get delayed by market activity.

But I can't answer the question any better for you than it's the nature of the portfolio.

Okay.

And did you rely on M&A in addition to the IPO, it's not like you were purely relying on the IPO market, right?

There is IPOs, private sales.

They can come in a number of different forms.

There are certainly transactions that you wouldn't see the public eye -- parts of the portfolio are in real estate, not really heavy in financials or anything like that.

Not heavy in energy.

So that gives you some of the background of why maybe the portfolio on its surface would have performed better than you might have expected.

Great, thanks for the color, Harvey.

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

Please go ahead.

Hi, good morning.

Good morning, Steven.

Harvey, I appreciated all your comments on [quarter] fixed strategy, how you are staying committed to the business, but at the same time aren't going to be complacent.

And just looking at some of the capital metrics, it feels as though the RWAs have been flat to maybe, honest, to a slightly downward trajectory, but we haven't seen any meaningful change in terms of capital and risk allocations.

I just want to get a sense as to, in trying to -- at least making a concerted effort to not to simply be complacent, whether you are going to look to shrink risk in any meaningful way within that business if the pressures persist on the revenue sides?

So the risk reduction, again, (inaudible) the risk reduction is pretty significant, right.

RWAs are down a third across [IPS] which is mostly FICC.

I think the risk reduction efforts, the balance sheet reduction, and the cost reduction exercises have been pretty significant.

I don't think we can be accused of being complacent around the cycle.

Again, this is about finding that right balance.

If the cycle continues and it's tough, we will continue to evaluate the business.

That is an ongoing process that never stops.

If the cycle picks up then we will, obviously, participate in that because we feel good about the competitive environment and our client engagement.

Now away from FICC, obviously, we are doing lots of other things.

So I talked about the fact that we made a number of acquisitions in asset management and that fee-based business continues to grow and be a bigger part of the firm.

Obviously, full engagement in IBD and all the merger activity and their performance, I think, has been stellar.

So there is a lot going on under the hood in terms of reallocating resources, but we are being disciplined about the FICC business during this part of the cycle, as you would expect us to be.

Great.

Thanks for that, Harvey.

And as a fair point on the RWAs, I was talking more in the near-term context over the last few quarters, but certainly since we have been monitoring all the Basel III measures you've made pretty substantial progress.

And I also think, look, I think if you look at our capital management and the capital we've been able to return over the last several years, we have been as judicious as we can given the capital rules and managing the firm in a way to make sure that the financial footings are perfectly solid.

And since you mentioned the capital rules, just one quick follow-up, did you say the buffers have all been published by the Fed?

It looks like you guys fell into the 3% bucket.

And just wanted a sense as to whether you see any opportunities to optimize or shrink into that lower buffer of 2.5% or given that CCAR is your binding constraint, at least for the moment, there's maybe not such a pressing need to do that?

So I think the big picture, the first thing we will do, obviously, and any opportunity that we think we can reduce our systemic footprint, now that the rule is finalized, obviously, we would look to do that.

I think that is just good practice.

I think the trade off, obviously, is whether or not in making those reductions does that really impact your ability to deliver to clients.

Now that the rules are finalized, there are certainly things we can do.

As you said, we are not bound currently by our stated capital ratios.

CCAR is our constraint.

We'll have to see how CCAR evolves over time.

That certainly could be an influence because it could ultimately reprice the cost of that capital relative to the services we provide.

But I think it's a bit early for that, at least for us.

All right.

Thanks for taking my questions, Harvey.

Thank you.

Your next question is from the line of Eric Wasserstrom with Guggenheim Securities.

Please go ahead.

Thanks.

Hi, how are you?

Just to follow-up on the I&L discussion, can you give us a sense of how we should think about the quarter-to-quarter risk management practices within that unit given how market volatility can have such a profound effect on revenue recognition in any given period?

Well, again, I think one of the things to point out is if you think about the transformation of the I&L balance sheet over the last several years, it has changed pretty significantly.

The composition today, as I said earlier, is really 75% debt and roughly two-thirds of that is HFI accounting, which is just good old-fashioned bank accounting.

The balance is equities.

And if you compare that to, for example, go back to 2011, in 2011, I think the whole portfolio was north of 50% equities.

And so the composition of the portfolio has changed significantly.

Now if you are going to have a $4 billion public equity portfolio which is the result of us monetizing assets out of the portfolio, and we're in a sell down process, if the markets move around a lot, that is going to move around a lot.

And ultimately, if the markets decline for extended periods of time or increase for extended periods, obviously, that drives value of underlying assets and it drives activity for all businesses and all industries.

But the portfolio composition has changed pretty dramatically over the last several years.

But I know when you talk about the volatility, I can't help but remind you that over long periods of time, I&L has been a pretty big driver of book value.

No, certainly.

I guess I am trying to make sure I fully understand given that so much of the, at least, equity opportunity does come from seed investments that have then hit their liquidation strategy, sort of how that shifts the risk management discussion when you move from an illiquid to a liquid asset whose risk parameters are somewhat different.

Yes, so we obviously consider that.

I think the most important risk component of the discussion is about the point of actually establishing the investment.

That's a long-term process of being disciplined.

That has to be the philosophy.

So, look, if we see a number of quarters of back-to-back declining in markets, that might be the right time to actually put capital to work, which is why we run with excess capital and we run with excess liquidity because we want to be there for those opportunities and we want be there for our clients.

We size the risk of the investments at the point of making it.

Once you have it, you can certainly do things, but prudent risk management really is at the point of the initial decision.

Got it.

No, that makes a lot of sense.

And if I can just sneak in one quick follow-up on the RWA discussion within the trading businesses, was there any real change in RWA over the course of the quarter?

There was.

In Advanced, we finished the quarter at 5.78%, down a little bit.

In Standardized, we finished at 5.82%, which you would expect to be down given the move I gave you in the ratios earlier.

And presumably mostly out of FICC or somewhere else?

Sorry, what was that?

I was just saying was that mostly because of changes in FICC composition or something else?

Well, the big mover was really in market, which in Advanced went from 1.36% down to 1.19%, and Standardized went from 1.37% down to 1.20%.

That really is about derisking.

Great.

Thanks very much.

Thank you.

Your next question is from the line of Marty Mosby with Vining Sparks.

Please go ahead.

Thanks.

Good morning, Harvey.

Good morning, Marty.

I wanted to give you a chance to stop the drum beat I've had on leveling out this comp ratio through the year when you mentioned earlier that some consistency of returns for the whole Company and not the volatility of revenues.

I just wanted to see whether or not you think coincidentally, the way that this lines up as you go through the calendar year, revenues are typically stronger in the first half, and you get the comp ratio benefit in the second half, and somehow coincidentally that kind of hedges each other.

I just wanted to get your thoughts on that?

We don't do it that way.

That's not the way we think about it.

There is some seasonality to the business which historically has been the case for the entire industry.

As it relates to the compensation ratio from quarter-to-quarter, we just make our best estimate of where we think the performance of the firm is and what the compensation ratio should be.

In the fourth quarter, we will go through our normal process which, again, will be firm performance driven, then to the businesses, and then to the individuals, and it will be top down and bottoms up.

We will just have to see where things turn out for the fourth quarter.

That's why I was mentioning coincidentally.

I know you don't tie them together like that but it works out in the favor of stabilizing as you go through the year.

The second thing I was going to ask you was, you mentioned the acquisitions in the asset managers.

What we used to do is look at certain businesses where you could really leverage your economic capital while not impacting your regulatory capital.

I thought this is probably a business that might fit in that category.

I just thought is that how you look at it?

And also, are there other businesses that you might be able to take advantage of that in?

We are always looking really at the core.

We are always looking at ways where we can enhance the client experience.

So all the acquisitions that I mentioned, they really break out into three large buckets.

Secular growth opportunities, like advisory and that, is referenced in the Pacific Global Advisors acquisition.

And there are things like new product capabilities where we certainly develop new products internally, but there are times bolting them on is better for us.

An example would be Westpeak and Active Beta.

And then there are times when we just want to scale existing products, like money markets.

And you have seen us do acquisitions in that space.

But it really is all about thinking about how we can differentiate with our clients.

Now from a regulatory capital perspective, we don't necessarily think about that as much as we think about what is the best way to deploy our capital.

Obviously, we have to manage our regulatory capital, but this isn't a result of regulatory requirements or anything like that.

We will always look at acquisitions or ways to grow or deploy capital that are long term accretive for the firm.

[All of this is] to grow, obviously.

Those that consume more regulatory capital and those that consume less.

And those that have a little less are a little more efficient in the use of the capital that you have.

But thanks, and I appreciate your comments.

Thank you.

Your next question is from the line of Brian Kleinhanzl with KBW.

Please go ahead.

Okay, thanks.

Say, I just had a quick question on the deposit strategy.

You mentioned it was all about the funding diversification.

So if you look at the second quarter, deposits were about 12% of total liabilities.

What percentage does that need to get to for you to consider that to reach your diversification levels that you want?

So it's not so much that we are targeting a specific level.

We tend not to target specific levels around things like that because it's as much about the asset footings as it is about liabilities.

In our liability structure, we just like that having a diversified geographic client base, source of liabilities.

We just think that's prudent risk management.

When you think about it, it's all really about where various investors want to provide capital to the firm.

That's how we think about it.

We haven't set a target.

The reason we don't set targets on things like that is, we always are concerned about building up too much of a warehouse of liquidity.

We, obviously, hold a very significant liquidity cushion at $193 billion.

But you don't want to feel yourself getting pressed into deploying those liabilities.

You don't want the liabilities to drive your asset strategy.

You want your liabilities to inform it and you want to have diversified safe funding.

Do you anticipate that there will be some benefit on interest expense over time as you probably take off maybe short-term borrowings?

It could be over time.

I don't think in terms of -- in terms of the online deposits, I don't see a huge [clustered] advantage there.

Again, it's all going to be about how can we deploy that funding into the asset opportunities.

Okay.

Great.

Those are all my questions.

Thanks.

Your next question is from the line of Kian Abouhossein with JPMorgan.

Please go ahead.

Hi.

First question relates to commodities.

You mentioned -- you talked about the lending exposure.

But, frankly, I am not really interested in that.

I am more interested in how you manage your counter party exposure.

And if you can talk a little bit about how you think about these trading entities that you deal with, how you are managing counter party exposure considering rating downgrades that we have seen but also concerns about some of these entities.

And if you can just run us a little bit through how you manage counter party risk on your off-balance sheet exposure?

Yes, hey, Kian, I'm sorry, you must have missed it.

What I was saying before was, our exposure, whether it's lending or through any derivatives or counter party exposure to the trading entities is less than $200 million today.

So that's your net exposure off-balance sheet and on-balance sheet?

Yes, correct.

That's to the trading houses.

Again, they often tend to position themselves more as competitors than clients.

Yes.

So that's our current credit exposure.

And just in that context, clearly, you must adjust due to rating downgrades, as well as your own view around some of the counter parties, your margins or collateral calls, et cetera.

Can you just explain a little bit to us how you do that?

Is there an adjustment happening besides a credit rating that will drive it?

We have a long history, obviously, of managing counter party exposure which has been tested through pretty volatile markets and, again, the most important decision made at any point in time is when you establish the credit line.

It's really no different than lending, but, obviously, the dynamics are different.

We have a very diligent marking policy and we monitor collateral calls very vigilantly, as you would imagine.

And, obviously, as sectors are weaker you are very thoughtful about it, but we make these decisions over a long term.

We have a lot of experience doing it.

Okay.

And in respect to -- just coming back to your fixed income business, the way I, at least to myself, explain the weakness, and please correct me if I'm incorrect, is the fact that your weaker in macro and weaker in corporate, which is probably correlated, and you are strong in credit and hedge fund business.

And first of all, is that an incorrect assumption relative to your peers I mean, especially some of your money-centered peers?

And, secondly, if I am correct, what are you doing -- do you think about diversifying more as a business into, and particularly as a macro business, and what are you doing to adjust that mix?

So, again, I don't have great visibility into the competitors.

I would say I do think there are two obvious things, which I had talked about before, we are not as big in emerging markets.

Again, we don't have a footprint in hundreds of offices and we are not as big a lender to corporates.

Our competitors are much greater lenders than we are.

So that certainly can influence your client base.

In terms of macro, I think you are wrong about that.

And certainly in commodities we have had a long history of being in commodities.

And it feels now like we are bigger in commodities as a number of competitors have pulled away from the business.

Those are the insights I would give you in terms of what I can see.

In terms of things we are trying to do, we feel pretty good about the diversified business.

If you think about the course of the year, to be sitting here basically nearly flat revenues with our fee-based businesses picking up activity, which is compensating for parts of -- capital intensive parts of the firm which you would expect to be more challenged in this kind of market environment.

Look, at the end of the day when you adjust for legacy costs we are at nearly 12% ROE, the business feels pretty diversified.

So you don't see this argument valid of (inaudible) credits geared rather than macro in certain periods [parse] the environment, depending on the environment we will just perform slightly differently from some of our peers, you don't see that against your money-centered peers?

I think a lot of the peers have different footings.

Some are more domestic.

Some are more emerging market based.

I think the comparables are harder.

Look, take a look at the first quarter.

In the first quarter, the way you look at it, we would have outperformed all the peers.

That is information for us, but we're not going to steer the business in a different direction because of that and we're not going to over steer it to where on the surface would be greater than ours.

We are always going to look for ways to improve the business.

That you should just incorporate by reference.

Okay.

Very helpful.

Thank you.

Thanks, Kian.

At this time, there are no further questions.

Please continue with any closing remarks.

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

Hopefully, I and other members of senior management will see many of you in the coming months.

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

Otherwise, enjoy the rest of your day and look forward to speaking to you on our fourth quarter earnings call in January.

Take care, everyone.

Ladies and gentlemen, this does conclude the Goldman Sachs third quarter 2015 earnings conference call.

Thank you for your participation.

You may now disconnect.