高盛 (GS) 2015 Q4 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 fourth-quarter 2015 earnings conference call.

This call is being recorded today, January 20, 2016.

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 fourth-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.

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 to Goldman Sachs Group, Inc., and may not be duplicated, reproduced or rebroadcast without our consent.

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

Harvey?

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

I'll walk you through the fourth-quarter and full-year results, and I'm happy to answer any questions.

Before outlining our results, I would like to discuss the previously announced settlement for legacy mortgage activities.

As you know, we took a total net provision for litigation and regulatory matters in the fourth quarter of $1.95 billion.

The RMBS Working Group matter was the most significant outstanding piece of litigation facing the Firm.

As you would expect, following the settlement, there has been a significant decline in our reasonably possible loss number.

We are currently estimating a more than 60% decline compared to third-quarter levels of $5.3 billion.

Now turning to the fourth quarter, net revenues were $7.3 billion.

Net earnings were $765 million, and earnings per diluted share were $1.27.

With respect to our annual results, we had Firm-wide net revenues of $33.8 billion, net earnings of $6.1 billion, earnings per diluted share of $12.14, and a return on common equity of 7.4%.

Revenues were down slightly compared with last year, and expenses were significantly higher due to approximately $4 billion of net provisions for litigation and regulatory matters.

Despite these headwinds, we grew book value per share by 5%.

The growth, combined with our risk-reduction efforts, strengthened all of our regulatory capital ratios.

Excluding the litigation charges related to the RMBS Working Group, our 2015 return on common equity would have been 380 basis points higher.

2015 presented both challenges and opportunities.

The challenges were more acutely felt in the back half of the year, as concerns about global growth intensified.

This was reflected in public equity markets, with the MSCI World down 5.7% over the last six months of the year.

Credit markets also reflected these concerns, particularly within the non-investment-grade space, and most acutely within the commodity sector.

For example, US high-yield spreads were 157 basis points wider in the second half of 2015.

At the end of 2015, the trailing 12-month default rate for US non-investment-grade bonds more than doubled year over year, climbing to 4.3%.

These factors negatively impacted the broader opportunity set for our clients, and as a consequence, for the Firm.

To varying degrees, the Firm faced headwinds within certain of our FICC businesses, underwriting within investment banking, and our investing and lending activities.

However, these significant headwinds were largely offset by client activity in other businesses.

Many of our clients decided to pursue M&A as the best means for creating shareholder value.

Announced M&A volumes for the industry increased by 47% in 2015.

The Firm's volumes increased by 81%, a significant expansion of our market share.

Our global equities franchise also posted strong results for the year.

Clients continue to place significant value on the integration of our various services -- electronic, cash, derivatives, and prime brokerage -- as well as our global footprint.

Our performance in 2015 highlighted these strengths.

In addition, the combination of continued strong performance for our clients, and a diversified set of offerings, drove a record year for our investment management business.

We ended the year with record assets under supervision of $1.25 trillion, and robust net in-flows, which total $94 billion.

Ultimately, 2015 reinforced a long-standing operating principal, that there is tremendous value to having a diversified set of global businesses.

More importantly, it is the value of being a leader in these businesses that really counts.

Now let's discuss the individual businesses in greater detail.

As it relates to the quarter, investment banking produced net revenues of $1.5 billion, slightly lower than the third quarter.

A pick-up in M&A was offset by a decline in underwriting activity.

For the full year, Investment Banking net revenues were $7 billion, up 9% from 2014, on the back of a 40% increase in Financial Advisory revenues.

This was partially offset by lower equity and debt underwriting revenues.

Our Franchise remains very strong.

2015 was our second-highest annual revenues for Investment Banking.

We ended the year ranked first in global and announced and completed M&A.

Our completed M&A volumes were approximately $350 billion higher than our next-closest competitor, a record gap since we've been a public company.

We were also ranked first in global equity, and equity-related and common-stock offerings, for 2015.

Breaking down the components of Investment Banking in the fourth quarter, advisory revenues were $879 million.

The 9% improvement relative to the third quarter reflects an increase in the number of completed M&A transactions.

We advised on a number of significant transactions that closed during the fourth quarter, including SunGard's $9.1 billion sale to Fidelity National Information Services; General Electric Capital Corporation's $9 billion sale of its transportation finance business to BMO Financial Group; and HCC Insurance Holdings' $7.5 billion sale to Tokio Marine Holdings.

We also advised on a number of important transactions that were announced during the fourth quarter, including DuPont's combination with Dow Chemical in a $130 billion merger of equals; Newell Rubbermaid's $20 billion acquisition of Jarden Corporation; and SanDisk's approximately $19 billion sale to Western Digital.

Moving to Underwriting, net revenues were $668 million in the fourth quarter, down 11% sequentially, as debt issuance slowed.

Equity underwriting revenues of $228 million were up 20% compared to the third quarter, as IPOs increased from very low levels last quarter.

Debt underwriting revenues decreased 21% to $440 million, due to a decline in leverage finance activity.

During the fourth quarter, we actively supported our clients' financing needs, participating in Visa's $16 billion investment-grade offering to support its purchase of Visa Europe; McDonalds' $6 billion investment-grade offering; and Worldpay Group's $3.8 billion IPO.

Our Investment Banking backlog improved from third-quarter levels, and finished at its second-highest level.

Turning to Institutional Client Services, which comprises both our FICC and Equities businesses, net revenues were $2.9 billion in the fourth quarter, down 10% compared to the third quarter.

For the full year, $15.2 billion of net revenues were roughly consistent with 2014.

FICC Client Execution net revenues were $1.1 billion in the fourth quarter, down 23% sequentially, and included $54 million of DVA losses.

Excluding DVA, revenues were down 10% quarter over quarter, as many businesses were impacted by either lower client activity or more difficult market-making conditions.

Credit decreased significantly, as the market was characterized by widening high-yield spreads in the US, and low levels of liquidity.

Interest rate and currencies were lower sequentially, as client activity declined.

Mortgages continue to be challenged, as spreads widen, and the prospect for higher rates and client activity remain generally low.

Commodities was essentially unchanged, as client activity was muted, and energy prices remained under pressure.

For the full year, FICC Client Execution net revenues were $7.3 billion, down 13% year over year.

More challenging market conditions and lower levels of client activity in our micro businesses, credit and mortgages, offset stronger client activity and a favorable backdrop for our macro businesses, particularly rates and currencies.

In Equities, which includes equities client execution, commissions and fees, and security services, net revenues for the fourth quarter were $1.8 billion, flat sequentially, and included $14 million in DVA losses.

Equities client execution revenues were roughly consistent sequentially, at $562 million.

Commissions and fees were $763 million, down 7% relative to the third quarter, as global client volumes declined.

Security services generated net revenues of $430 million, up 13% sequentially.

For the full year, Equities produced net revenues of $7.8 billion, up 16% year over year.

In 2015, we benefited from several factors, a better market backdrop and a more favorable environment for security services.

Turning to risk, average daily VaR in the fourth quarter was $71 million, down from $74 million in the third quarter.

Moving on to our Investing & Lending activities, collectively these businesses produced net revenues of $1.3 billion in the fourth quarter.

Equity securities generated net revenues of $1 billion, primarily reflecting company-specific events, including financings, sales, and gains in public equity investments.

Net revenues from debt securities and loans were $299 million, which was largely driven by net interest income.

For the full year, Investing & Lending generated net revenues of $5.4 billion, driven by $3.78 billion in gains from equity securities, and $1.66 billion of net revenues from debt securities and loans.

In Investment Management, we reported fourth-quarter net revenues of $1.6 billion.

This was up 9% from the third quarter, primarily as a result of $190 million in incentive fees, largely from alternative asset products.

Management and other fees were up 2% sequentially to $1.24 billion.

For the full year, Investment Management net revenues were a record $6.2 billion, up 3% from 2014, on record management and other fees, and higher transaction revenues.

During the fourth quarter, assets under supervision increased $64 billion to a record $1.25 trillion, primarily due to net in-flows into liquidity products.

On a full-year basis, we had long-term fixed income in-flows of $41 billion, equity in-flows of $23 billion, and alternative in-flows of $7 billion.

Moving to our performance, 73% of our client mutual fund assets ranked in the top two quartiles on a three-year and 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, remained roughly flat at $12.7 billion for 2015, and translated into a compensation-to-net-revenues ratio of 37.5%.

Fourth-quarter non-compensation expenses were $4.1 billion, and incorporated $1.95 billion in litigation and regulatory expenses.

The quarter also included a $123 million donation to Goldman Sachs Gives, our donor-advised charitable fund.

For the full year, non-compensation expenses were up 30%, due to $4 billion in provisions for litigation and regulatory matters.

Excluding litigation provisions, non-compensation expenses would have been down 4% year over year.

Now I'd like to take you through a few key statistics for the end of the year.

Total staff at year end was approximately 36,800, up 8% from year-end 2014.

This is a significant increase, so let's break down the drivers.

Of the 2,800 in incremental staff, a little more than half was due to our continued investment in regulatory compliance and other federation initiatives, largely in technology and operations.

The remainder was focused on business growth initiatives, particularly within Investment Management.

Our effective tax rate was 30.7% for 2015.

Our global core liquid assets ended the year at $199 billion.

While our balance sheet was roughly flat year over year, level 3 assets declined by 33% to $24 billion.

Our common equity tier 1 ratio was 12.4% under the Basel III advanced approach.

It was 13.6% using the standardized approach.

Our supplementary leverage ratio finished at 5.9%.

With respect to our Method 2 GSIB surcharge, we currently estimate that we are at or near the lower bucket, given a decline in level 3 assets and derivative notionals over the course of the year.

Finally, we repurchased 8.9 million shares of common stock for $1.65 billion in the quarter.

For the full year, we repurchased $4.2 billion.

Year over year, our average fully diluted share count declined by approximately 15 million.

In addition, we increased our quarterly dividend to $0.65 per share in the second quarter, and paid out approximately $1.2 billion of common dividends during the year.

In total, we returned $5.4 billion of capital to shareholders in 2015.

Before taking questions, a few closing thoughts: Clearly, it has been a challenging environment for the entire industry.

2015 marks the fourth consecutive year that we have posted revenues of approximately $34 billion.

Excluding the litigation charges related to the RMBS Working Group, it is also the fourth consecutive year that we have produced strong relative results, and returns that exceeded our cost of capital.

We have been able to post consistent, strong relative results despite the difficult operating environment, which is a statement to the strength of our global client franchise, the caliber of our people, and our culture of teamwork and adaptability.

Over the past four years, we've also grown book value per share by 7% per annum, returned nearly $25 billion in capital to our shareholders, and reduced our basic share count by 75 million shares, or 14%.

Most importantly, we have been able to accomplish these things while maintaining leading positions across all of our businesses, transforming our financial profile, prudently managing our risks, adapting to regulatory change, continuing to invest in our future, and positioning the Firm to provide significant operating leverage when the environment improves.

There's no doubt that the second half of 2015 had its fair share of challenges, which significantly impacted market sentiment and client activity.

It's quite natural for all of us to be influenced by recent events, and we maintain a healthy respect for them.

We certainly don't control the opportunity set.

However, we do control several things: how we build our client relationships; how we invest in our people; how we adapt to change; how we allocate our capital, manage our risks, and control our costs; and finally, how we invest in the future.

We believe our Firm's commitment to excellence in these areas has been, and will continue to be, what drives outperformance over the long term.

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

Ladies and gentlemen, we will now take a moment to compile the Q&A roster.

(Operator Instructions)

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

Hi, thanks very much.

Hi, good morning, Glenn.

Good morning.

I guess you're in a better position than most to ask this impossible question, but from your vantage point, everything you see, are we on the cusp of a tougher credit cycle, balance-sheet recession?

Are we looking at the wrong things -- meaning, I'm about to ask you your energy exposure.

I should be asking you your sovereign exposure to Italian sovereigns or Italian banks.

I'm just curious your thoughts on where we are, besides the market going down?

Look, obviously the first couple of weeks of the year have been difficult from a market perspective.

The last half of the year, and continuing the dramatic decline in commodity prices broadly, has been disruptive to the market.

I think if you talk to our folks, obviously that sector if prices remain where they are is going to be under stress, that's an inevitability.

But it does feel at this stage where perhaps the market is discounting some of the benefits of the decline in commodity prices.

We'll have to see how the market evolves.

Look, these things are never going to be a straight line.

It's not surprising to some extent that the market's responding to China reduced activity, volatility, and markets this way.

In terms of our exposures to that sector, they haven't moved materially since earlier calls across the entire oil and gas sector, Glenn.

Funded and unfunded, we had just north of $10 billion of exposure.

But to really dial it in for you, funded exposure to non-investment-grade entities in that sector was $1.5 billion as we finished the quarter.

From our perspective, we feel well positioned.

In this kind of market environment, it's the type of market environment where your clients really want you to stay close to them, and that's what we're doing.

A glass-half-full question of this increase of volatility across some of the asset classes -- usually never good when clients are losing money.

But is there any case to be made that FICC revenue pie can bottom and actually grow a little bit over the next say two years, given the changing monetary landscape, things like that, monetary policy landscape?

Well, we don't generally run the businesses -- as you know us pretty well -- we don't run the businesses for the bull case.

But there certainly is a bull case in terms of fixed-income activity.

The stable to improving global growth -- and we're seeing that in the US and we're seeing that across Europe -- certainly could be a tail wind.

Diverging monetary policy could be a tail wind.

Look, as we go through the parts of the credit cycle, it's very natural for spreads to widen after having a period of such strength and contraction.

But even right now you're seeing the market, which has been under stress, be thoughtfully selective about those transactions.

There's been a lot of appetite for certain parts of the market.

I think we look forward over the next couple years, when you start adding in things like the competitive environment, all the potential activity around hedging and other activities, I think you could construct a pretty aggressive bull case for fixed income.

Again, it's not the way we generally run the businesses.

We'll react to that as we see it.

But there certainly is an upside case.

Okay, I appreciate that.

Last one, it takes two seconds, is did you say that you're at or near the 250 bucket?

Was that your comment about the GSIB at or near the lower bucket?

Is that what you meant by that?

Yes, that's correct.

That's our estimation.

That's obviously not confirmed by the regulators, but that's where we believe we sit at the end of the year.

Got it.

Okay, thank you very much.

Thank you, Glenn.

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

Please go ahead.

Good morning, Harvey.

Good morning.

On investing and lending, could you remind us how much of the equity portfolio you need to divest before the 2017 Volcker deadline?

Given the current choppy markets, what's your level of confidence that the firm can divest those assets by 2017?

Also, remind us what the process for getting an extension from the Fed is, if you can't meet the 2017 deadline?

Thank you.

Thanks.

Roughly now, we're under $5 billion of capital that is sitting in funds alongside our clients.

These are obviously legacy funds.

The exact number is roughly right around $4.7 billion.

Look, our expectation, given these are legacy funds, is that we'll continue to monetize those assets, and we'll see how that progresses.

There's a lot of runway between here and the compliance date in 2017.

We haven't at this stage contemplated seeking any additional extensions, and I don't believe the industry has at this stage.

Okay, thanks.

Maybe some thoughts on the incremental operating leverage in the model.

The firm has been very disciplined in expenses, despite effectively four years of no top-line growth.

Just curious how much more you can pull the expense lever to drive margin expansion?

Do you need some revenue growth here going forward?

Obviously we've done a lot of work on expenses.

We were very early to expense-reduction initiatives.

As you know, we started several years ago.

Those have continued for those businesses that have faced head winds and we've been investing in those businesses that we feel we've had tail wind.

As I pointed out, head count's up 8% this year, and compensation and benefits were flat.

I think we've done a pretty good job at this stage.

We'll continue to monitor it, but at this particular -- given all of the work we've done, we will always look to be more efficient, but I think we've chopped a lot of wood here.

Now, we have really, we believe, well-positioned the firm for an up-tick in revenues.

Even though it feels like a long time ago now, you saw that in the first quarter of last year, where on a modest up-beat in revenues year over year, we produced nearly a 15% ROE, so we feel very comfortable about the up side leverage.

Okay, thank you.

Thank you.

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

Thanks for taking the question.

Hi, Michael.

Hi.

Just on the GSIB surcharge, I think you mentioned part of that was exiting some level-three assets.

I don't know if there's any granularity or clarity on what that was, or what you got out of, but just curious on any color around that?

Generally speaking, you remember during the course of the year there was a change to the FASB accounting, which was a driver in terms of the NAV and the look through to funds.

The other driver, obviously, links back to Christian's question, which is as we monetize things, they become public equities.

As you know, the public equity has been hovering between $3.5 billion and $4 billion also, and that's part of the monetization process.

Obviously, once it's a public equity, you have complete transparency on pricing.

Okay, got it.

Then just on the expenses, I think you guys as you mentioned, have done a pretty good job of balancing the investing versus the environment.

But just want to get your sense, when you think about what you're focused on, on the regulatory, the IP side that you need to invest, versus areas where if we are in weaker markets and activity starts to dry up, where can you pull back on the cost front -- whether it's on the non-comp side, although seems like that's running pretty low ex the legal stuff, or on the comp side?

Yes.

I think, from a compensation perspective, compensation is always driven by performance -- most importantly at the firm-wide level, then obviously bottoms-up from individuals to businesses and through divisions.

That's where I think you'll see it related to specific performance.

We will always continue to look to be efficient.

At this stage, obviously we're making a very significant investment in regulatory compliance.

We think it's critically important.

We actually think it's a competitive advantage to be best in class.

You'll see us continually invest in tech and businesses.

Over the long term, we think it's a contributor of out-performance.

Okay, all right.

Last one on I&L, given that portfolio, and given maybe the market back drop, if you can just remind us of what portion -- I guess mostly on the equity side -- would be public, that you're going to see more like marked-to-market versus the portion that might be on the private side that might be more driven by models or economic growth that's not going to swing around as much?

Coming into the end of the year, the public portion -- public equity portion of the I&L balance sheet was $4 billion of no show.

Okay.

Thanks a lot.

Sure, thank you.

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

Good morning.

Hi Mike, how are you?

It's actually Matt, thanks.

I'm sorry, Matt.

That's okay.

We used to work together, so no worries.

If you look at the size of the balance sheet came down probably about $20 billion versus the end of the third quarter, just thinking going forward, how do you think the size of the balance sheet trends, and then also with respect to SLR exposure?

Obviously, all of our capital ratios give us a great deal of flexibility to respond to client demand.

We feel like we're well positioned.

Now we've talked about this a lot in the past.

We went through a pretty significant early shift in shrinking the balance sheet.

That was really about a re-pricing effort.

We're going to be very sensitive to marginal deployment of capital, ensuring that it's accretive in the long run.

You're going to be pretty sensitive to balance sheet growth, but obviously given the strength of our capital ratios, we have a lot of capacity.

I guess following up on the SLR exposure, specifically, you're obviously in excess of the 5% needed pre-CCAR.

But for CCAR if you needed more, is there the ability to bring down some of the SLR exposure with only a modest impact to revenue?

It's interesting the way you ask the question.

I think you're basically saying listen, could we re-price the balance sheet in an accretive way?

If we could we should, so we're doing that work today.

I think if the world became more constrained, then by definition re-pricing would be necessary.

A lot of it will be driven by constraints, but if we found ourselves constrained in any particular category, we would make a long-term decision about how we wanted to address that.

For us, as you know, CCAR -- the stress test had been the constraints.

You saw us react to that a bit ago when we shrunk the balance sheets automatically.

All right, thank you.

Thank you.

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

Hi good morning.

Good morning, Betsy.

A couple questions, one on I&L again.

In the past, sometimes you've given us some color on how much has been either realized or marked-to-market, and I get the $4 billion on equity component.

Just wondering if you can give us some color on how much of the split between FICC and equity was on a realized base versus a marked base?

Yes.

As you know, Betsy, we talk about it in the context of event-driven and non-event-driven.

That's what I talked about in the conference in the fourth quarter.

Yes.

Looking at I&L, as I said during the quarter, net interest income was really the bulk of the driver of the debt line.

In terms of I&L relating to event and non-event driven, most of the activity was really event-driven or public marks -- things like refinancings, companies going public, and then the subsequent public marks.

Okay.

Then on a question regarding the stress test, a lot of people thinking out loud about what potential scenarios the Fed could throw at us.

I'm just wondering on prior stress tests, are you given full credit for the hedges that you have on in the various asset classes that you're trading in?

We have no transparency into that level of detail with respect to the Federal Reserve, but they are pretty comprehensive in their analysis, so one would assume everyone gets credit for their hedges.

Right.

In your own analysis that you're running obviously, you give yourself credit for hedges?

Well yes.

In a stressed scenario they will perform, so we give ourselves credit for them, yes.

Right, of course.

You're talking about something like the bank holding company scenario, or on our own submissions?

Correct, and both.

Yes, of course.

Just like we would model the firm under any stress scenario.

When we're thinking about the commodity business that you've got, maybe you could talk through a little bit on how you're positioned for the trend that we've been seeing here year to date?

As you know, we've been very committed to the commodities franchise.

Obviously, we have a very strong banking franchise.

Look, this is a part of the cycle.

I would say broadly across commodities, where clients are going to be in need of advice.

They're going to need capital market solutions.

They're going to need potential hedging solutions, depending on where they fit in the cost structure of scheme of things.

I think in a lot of respects, when you marry those two strengths together with our research and our analytic tools, I think we feel very well positioned to provide our clients with advice and value and solutions.

Do you see yourself taking share in this environment?

In commodities -- let's just talk commodities in a fixed-income context.

As I said in my prepared remarks, it's pretty obvious we took share in investment banking over the course of the year.

As soon as you saw the big up-tick in M&A, you saw a big out-performance by our team.

In terms of the FICC activity, it's harder to see it when activity is low; but certainly when we've gone through periods in commodities where activity has been high, feels to us we've picked up significant share.

That's probably not surprising given how much people have pulled resources out of their commodity businesses, or at least they said they have over the last couple years globally.

Yes.

Okay, thanks.

Thank you, Betsy.

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

Good morning, Mike.

Hi.

I guess I'll go to energy.

How big a deal is this oil price decline to you guys?

You mentioned you only have $1.5 billion in funded non-investment-grade exposure, but your total exposure is over $10 billion.

Where could you potentially otherwise get hurt from the decline in oil prices, other than that funded non-investment grade exposure?

Where could the industry otherwise get hurt, where you might have to pay attention to some of the counter-parties that you have?

From a counter-party exposure, our counter-party risk we feel good about right now.

I think I mentioned on an earlier call, if you take for example the commodity trade houses, our exposure to those is less than $200 million as we sit here today.

When I talk about the $10.6 billion that I brought out earlier, $6.4 billion of that -- again, this is funded and unfunded, it's not funded -- $6.4 billion of that is investment grade, so the maximum potential exposure we could get in non-investment grade companies would be $4.2 billion, and that's absolute exposure.

That's not recoveries or anything like that, Mike.

In terms of our capital position, I think we're relatively well positioned.

I haven't dug through all the peer banks like you have.

Look, for us, while we're very focused about it, and we're certainly not being complacent about it, we feel pretty front-footed.

Even on a relative basis, we have smaller exposures.

What sort of reserves --?

I think Mike for us, if this translates into somehow -- which we don't see today, but you never discount any possibility -- if this somehow translates into a real drag on a long-term economic activity, or economic growth -- As I said before when I was asked the question, and it's just an opinion.

Lots of folks will be on either side of this discussion.

When we talked to our people internally, it feels like the degree to which the market is focused on energy exposure has managed to discount the long-term tail wind to the consumer and a reduction in cost across the globe.

But that's how the market is reacting to it now.

There may be information content in that, too.

What sort of reserves do you have against that $10 billion exposure?

I guess some of it's marked to market, but some of it's not?

Of the $10 billion, obviously we're being thoughtful about our exposures.

I can tell you, for example, the non-investment grade side -- those reserves run in high-single-digit percentages for that part of the portfolio.

Okay.

Lastly, are you able to hedge some of that exposure?

Are you helping your clients to hedge, or are you getting additional business activity due to this?

If you could just elaborate on the benefit to consumers, because certainly people aren't paying much attention to that, if that's there?

Yes.

I can't quantify the benefit of consumers to you; but obviously over time this translates into more purchasing power.

Because obviously it's a good thing that people are paying less in the pump.

The obvious offset to that, and it may be more acute in the US, is obviously there's a lot of pain in the sector, and that will lead to increased unemployment specifically in the sector, and it has an infrastructure spend impact.

In terms of hedging, we can hedge on a case-by-case basis, really.

It really depends specifically on the underlying.

Where we can and we think we should, obviously we do.

As it relates to client activity, one of the things about this move, because it came down so quickly, is it really did not give a lot of our clients the opportunity to hedge to the down side.

Obviously, in these low-price levels across commodities, you would expect to see a pick-up in the consumer side of hedging activity, and we expect to start seeing that.

But these moves have been pretty dramatic.

Usually what happens when they're this sudden is there's a bit of stepping back.

But certainly we're well positioned to provide hedges across the broad commodity space.

Thank you.

Thanks, Mike.

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

Good morning.

Hi, Guy.

Hi.

I wanted to broaden out the market share of activity question that came up before with respect to commodities.

More broadly with respect to FICC globally, we've seen so much retrenchment, including a big domestic player recently.

Any signs yet that the retrenchment of competitors in the area is helping market share or helping pricing?

To what extent is what you're seeing there, or the expectation of what you'll see there, really driving some of that invest in the business that you're talking about?

Well, we've certainly seen it across parts of the businesses.

It's been somewhat episodic.

Obviously, we've talked about it before.

We've seen it in security services and prime brokerage, a bit of a retrenchment.

I think that was more regulatory-driven as people began to focus on balance sheet and capital related to that business.

We've seen it in parts of equity derivatives during the course of really now the last year, year and a half.

Then in fixed income, one of the things that shouldn't get lost about the fixed-income discussion in 2015 for our firm is that while it was a difficult market for the micro products for credit and mortgages, it was actually an improved year for interest rates, for currencies.

While commodities wasn't improved, it came off a very strong year prior.

I think that we're seeing it when activity picks up.

Now in terms of the announcements and the retrenchment from competitors, one of these things is it's not surprising that you need to have a couple of, or several tough years, and that announcements will generally lag.

I think we may see this over the next couple of years, now that we've been in this period of a tough couple years in FICC, and where the vast majority of the industry has had multiple years of performing below their cost of capital.

All these things, all these constraints, are now really starting to come into the fray, particularly as we get into the 2018-2019 compliance periods.

Fair enough, so --

Sorry it was a long answer.

It was a big question, but it was a long answer.

No, it's a helpful answer.

It sounds like you are -- you've lost none of your confidence in the opportunity there.

It just takes a while?

Well, in terms of the competitive set, I think that's our read today.

Look, in terms of monitoring the businesses, we're always monitoring the businesses.

I think one of the things that we haven't talked a lot about, or we haven't talked directly about, is our philosophy and how we manage cyclical businesses.

Everyone has to acknowledge that financial services is a cyclical industry.

One of the things we've been very thoughtful about is not over-investing at the top of the market.

You didn't see us do that in 2009 when FICC had a record year, and making sure we don't over-shoot in the bottom part of the cycle.

Now, we were early to the cost-cutting because we felt the activity levels declining after 2009.

That's how we manage through the cycle.

You've seen us do this in the equity businesses, and sometimes these cycles are long.

We cut thousands of people in our equity franchise in the early 2000s.

But right now, given all the work we've done on the cost side, we don't feel like we need to catch up.

We'll see how the year goes.

If the trends in fixed income continue, we'll be continuing to manage the business as efficiently as possible.

Okay, that's real helpful.

Then just the follow-up question.

Since no one's asked it, I'll ask.

I know we're only a few weeks into the year, and the market backdrop has been god-awful, but how would you characterize activity levels since the beginning of 2016?

It's only two weeks, so I'm not going to really extrapolate it.

We generally don't root for the S&P 500 to be down 8% in the first two weeks of the year, though.

Yes, fair enough.

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

Hi, good morning.

Maybe we could just talk a little bit about M&A with the volatility that we've seen in the market.

I think some have been concerned, I guess, about the impact on M&A, both in the near term and what it means for the cycle.

Maybe just your broad thoughts on where we are in that cycle, and what you're seeing in the conversation levels today?

Again, obviously we had a pretty significant pick up in activity over the last year, and I think Goldman Sachs' market share grew dramatically with that.

I think you have to take a step back, and you have to ask yourself what are the factors that drove the M&A environment -- call it over the past 18 months -- and are they still in place?

Those core factors are really limited organic growth, companies were struggling to find top-line growth.

You had positive but modest economic growth in major economies, and companies had done quite a bit of work both on cost and refinancing going into that cycle, and there was high level of CEO and Board confidence.

Those were the factors that drove the big pick up in activity.

As we sit here today, after a couple weeks of volatile markets, we wouldn't say that those factors are significantly diminished.

We saw a very volatile August, yet in the fourth quarter, M&A activity continued, and we finished our backlog higher than last year.

I think that we'll have to see obviously if markets stay under stress and you get into questions about financability and other head winds, and then it leads to a loss in confidence.

But we wouldn't say that two weeks of volatile markets would stop a pretty powerful M&A trend.

But we'll see how these markets keep going.

Okay, fair enough.

Maybe just to follow up on -- in asset management you had $48 billion of flows in liquidity products in the fourth quarter.

That seemed pretty high.

Can you -- what were the drivers there?

Is it sort of a seasonal thing, or are you seeing some market share gains there, and as profitability improves with higher rates do you see that as an opportunity?

When you look across multiple quarters in asset management for us, and you look at the flows, and you look at them versus the competitors, I think you would say we're gaining share.

Obviously it's been a strategic focus for us to grow that business.

In that quarter in particular, I think it was a combination of volatile markets and increasing rates, which brought money.

Obviously, we're a leader in the money market business, and so it was a catalyst for in-flows.

Okay, fair enough.

Thanks.

Thank you.

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

Good morning, Harvey.

Good morning.

Just a quick question on energy follow-up here.

I think you said $10 billion of total exposure, roughly 2/3 in investment grade.

Is it right for us then to apply that sort of 2 to 1 investment grade, below investment grade, to your funded book as well, and back in to about $3 billion funded IG exposure?

Why don't I just give you the -- I'll give you the numbers so you have all the detail.

$10.6 billion is what I'd call total potential exposure.

Funded is $1.8 billion, unfunded is $8.8 billion.

Of the funded non-investment grades, $1.5 billion, and you could get an incremental $2.7 billion funded on that side.

But that's the total exposure.

Terrific.

Thanks for that.

You can fill in the rest of the grid on the investment grade stuff.

Yes, we can back in to the rest.

Thanks very much.

Thank you.

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

Hi, good morning, Harvey.

Hi, good morning, Steven.

Basel published the updated guidance for the market risk calculations last week.

I recognize the documents and some of the calculations are pretty -- the document's dense, calculations are involved, but didn't know if you had done any preliminary analysis on the impact this might have on your pro forma market risked assets?

Yes, you're talking about the fundamental review of the trading book that came out last week?

Yes, precisely.

As you said, it's a pretty big document.

I think it was over 90 pages.

We've had the team going through it.

I don't have any specific quantification for you.

I think it would be too early for me to put that out there, and we still haven't even seen an NPR from the Federal Reserve, so we'll have to see how this evolves.

I would say the high-level read is from the early documents and the early discussion, it seems like the regulators and the industry made continual progress in terms of trying to find the right balance.

But at this stage, for us, I don't see it being a significant impact, but we'll give you more detail.

I suppose over the last few quarters it does look like the market risk assets have been steadily declining.

I didn't know if that reduction was in anticipation of what might be tougher rules.

Are there other factors that are really driving that decline?

No, definitely -- certainly not anticipation of this.

Just to be clear, we'll approach this rule like we've approached all the other rules.

We don't want to try adjust our business, potentially have a negative impact to our clients.

The one good thing -- regulators have been very thoughtful about the runway-to-rule adoption.

This is something that we have until 2019, so the industry is going to have time to make adjustments.

I think that's in everyone's best interest, because it actually will be less disruptive to markets, the extent to which a rule is significant.

We've seen that in all the rules.

You'll see us approach this rule the way we've approached all the other rules.

But we haven't even seen, as I said, a Fed NPR, so we'll see how that goes.

But any reduction in market risk assets was really a reflection of client activity.

Got it, okay.

Just one quick follow-up.

I did see that the advanced core Tier 1 did in fact decline quarter on quarter.

I assume that's a function of the increase in operational risk tied to the settlement, but didn't know if it was attributable to something else?

No, that's correct.

The settlement added $21 billion to operational risk assets, and had a corresponding decline in the ratio of roughly 40 basis points.

Okay, great.

Appreciate you taking my questions.

Thank you.

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

Good morning, Harvey.

Good morning, Matt.

How are you?

I'm good, thank you.

Just a couple questions, starting on M&A.

We've heard across both you and to a lesser extent some of your competitors about the potential for market share gains as some non-US participants back away; but I think that's mostly focused -- those comments are mostly focused on the trading side of things.

Given your market share gains in M&A this year, do you get the sense that's also true with investment banking and specifically M&A transactions?

No, I haven't had a chance to dig through all the league tables, but -- and I may not have this perfectly accurate -- but the last time I spoke to our team about this, I think it was really there's a segment of banks which lost share to some of the boutiques, then there's firms like ourselves which obviously gained market share broadly across the board, and we took share from everyone else.

Okay.

Then just on FICC and trading, you've given us some helpful commentary.

I realize it's early days in the year and the quarter, but I guess I'm curious what the level of rate positioning within your client base has been?

Did that change dramatically late in the fourth quarter with the Fed's action, and has it changed much so far this year?

Not a significant factor, and really nothing to comment on that.

Obviously the Federal Reserve did a very good job of communicating to the market place the first rate increase in December.

I think to a great extent it ended up being a non-event, which is a good thing.

Early in the quarter it was influencing client activity, but by the time the event occurred, obviously it wasn't significant.

Finally for me, I don't think you've given these.

Can you provide us the fully phased-in capital ratios at the end of the year?

Sure.

Under the advanced, we were 11.7, and under standardized, 12.9.

Remember that on an apples-to-apples basis that's a little bit conservative, just given the way some of the items actually transition to fully phased in; but that's where we stood.

Sure, thank you very much.

Thank you.

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

Thanks very much.

Hi, how are you Harvey?

In the -- I've obviously heard everything you've said this morning, and I recognize of course that you don't run the business to any particular metric or ratio, but to the extent that revenue conditions stay as they've been over the past few years, and call it around that $34-billion level, is there a path to generate incremental positive operating leverage for you?

It's an interesting question.

I'm going to modify it a little bit, because it's the way I heard it.

Maybe I'm not modifying it, because this is the way I heard it.

The -- I think you're saying if I knew over the next couple of years -- let's say we had a crystal ball and with certainty I knew the firm is going to produce $34 billion over the next couple years.

Well, I guess what you're saying is the things that we've elected to invest in, we shouldn't be investing in.

I think we wouldn't invest for growth, because you're telling me it wouldn't be there.

But that's not our expectation.

We see growth in parts of our businesses.

Where we see growth, and where we think we can take share, we're going to invest.

Again, we run the firm for multiple years.

That's the way I would think about answering the question, but we see opportunities.

And what conditions would arise, or what would be the signals to you that in fact it is appropriate to re-trench on some of the growth opportunities?

Well, we always evaluate -- at the end of the day it's really about the dialogue with the client.

The dialogue with the client -- let's take M&A.

We just talked about -- these things are interesting, because now the current concern is that M&A may slow down.

Five years ago, you'll remember the dialogue was M&A's never coming back.

Last year, we had dominant market share and tremendous activity levels across the industry.

In 2009, our client dialogue told us they were factors that were influencing decisions, that were delaying decisions; but it certainly didn't tell us that no one would ever do mergers again.

When we see -- when we listen to the client -- and we know, for example, that our clients in fixed income still value the services, there just may be lower volumes.

That's how we'll inform our strategy over the long run.

But obviously we're not being complacent.

You've seen all the things we've done.

We've returned significant capital, we've cut costs.

We were early to all those things.

We've reduced risk, improved our ratio.

We're certainly not sitting still here.

Revenues might be $34 billion for a couple years, but there's a lot going on.

It sounds as if then the indication is at this stage there is no change in client dialogue or demands or expectations?

Certainly not after the first couple weeks of the year, no.

Great.

Thanks very much.

Thank you.

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

Thanks for taking my questions.

Good morning.

Harvey, building on what you were just talking about, what are the things as the pipeline keeps building quarter to quarter, year to year, that the customers are saying are delaying?

What factors do you need to see to see some of that pent-up demand begin to get released and accelerate some of the activities that you've seen even at the levels last year?

I think -- look, again at its core, we're correlated to long-term economic growth.

What we're really seeing in the markets in the second half of the year was really general concerns about economic growth.

They might be isolated to specific markets, but really that's what was driving activity levels.

I think more than anything else, client conviction -- I mean that in all spaces, whether we're managing a client's money -- their conviction, their confidence; whether we're advising on a merger transaction; the CEO and the Board and the CFOs, their confidence levels.

This same thing exists in the capital markets businesses in fixed income and equities.

Now what leads to that -- confidence in economic growth, reduced uncertainty.

Those are the factors that fuel activity.

I'll ask you even I think a more esoteric kind of question, but I think it has kind of pertinence to what's going on.

Given the rules that limited you all's ability and all the market makers' ability to take on any risk, turning you basically into a conduit of transactions, when we see these types of disruptions in the market place, what are your traders saying in a sense of how activities and clearing levels and new equilibriums get reached, when there isn't really any buffer still left in the market?

We're seeing some of the ramifications of Volcker now in distressed markets, which can have I think some very unfavorable effects just on trading levels to get to a new clearing equilibrium?

Look, I don't know if you and I are going to solve that heated debate on a lot of different sides around the benefits of regulation, which are obviously numerous, versus some of the unintended consequences potentially around liquidity.

I would say listen, we feel like we have more than adequate capital and liquidity to be there for our clients, and that's how we're positioning ourselves.

I guess I was just -- do you feel like the answers at certain times get to be overblown one way or another because of that unintended consequence?

I think that there's a very complicated question, which is very difficult for anyone to answer, which is there's -- my own view, there's not a rule that has had a big impact on market liquidity, or lending across industries.

I think something that's very difficult for anyone to quantify is what is the economic impact of the collection of rules that have been put in place since the financial crisis that impact capital, liquidity, derivatives -- all sorts of things.

I think that it's very hard to anticipate the combined effect of all that.

But for us, we're just focused on the clients, Marty.

Then do you think the market's evolving to adapt to all of that, and how far along that process are we?

That's the last piece of that question, thanks.

I think firms are in different places.

We've obviously invested tremendously in risk-reduction change, technology, tools, educating our people, so I think we feel pretty far along the curve.

You've seen in our capital ratios, and in the firm's balance sheet and how much it's changed over the last couple years.

I think it varies across the industry, and so I really can't speak to everybody else.

All right, thanks.

Thank you.

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

Hi, thanks.

Just a quick question on investment management.

You've benefited from a couple acquisitions there over the last year.

Do you actually budget for growth from acquisitions as you look forward, and what's the investment in that area expected to be?

You've seen us do a number of bolt-on acquisitions.

The one I think you're referring to this year was Pacific Global Advisors, which was $18 billion in assets, and they're focused on the pension and retirement space.

We don't budget for acquisitions at all.

We do it on a case-by-case basis.

Acquisitions generally -- I'll oversimplify it.

They either give us a capability that we don't have today, and we think it's better for us to bolt it on versus build it organically, or they actually fit a current strength where we can add scale.

That's the extreme end of the spectrum, in terms of how we think about them, but it's 100% case-by-case.

Okay.

Just a follow-up question on the Basel III.

I'm sorry if I missed it, but did you give the RWA for the fully phased-in ratios?

No, I didn't.

For the -- you want the fully phased in?

Correct, yes.

Yes.

For fully phased in, we are at -- sorry, [$430 billion of credit risk and $104 billion of market risk] (corrected by company after the call).

Sorry about that.

I was looking at -- that's standardized.

Under advanced, [$587 billion.

That's $131 billion in operational, $353 billion in credit risk, and $103 billion market risk] (corrected by company after the call).

Sorry about that.

That's okay.

Great, thank you.

Your next question is a follow-up from the line of Steven Chubak with Nomura.

Thanks.

Harvey, just on that same topic, it looks like your standardized RWAs sequentially came down 10%.

I just wanted to know first, what's the driving force behind that, given the magnitude of decline?

Just to clarify, that's the number that matters for the CCAR submission, if I remember correctly.

Is that right?

That's correct.

The standardized is the ratio using CCAR, and the driver -- the bulk of the driver was really in derivative notionals.

Excellent, appreciate you accommodating the follow-up.

No problem.

At this time there are no further questions.

Please continue with any closing remarks.

Everyone, thanks for dialing in today.

Myself and the rest of the team, we look forward to seeing you during the course of the year.

If you have any follow-up questions, please reach out to Dane and the team.

Take care and have a great day.

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

Thank you for your participation.

You may now disconnect.