高盛 (GS) 2016 Q2 法說會逐字稿

I would like to welcome everyone to the Goldman Sachs second quarter 2016 earnings conference call.

This call is being recorded today, July 19, 2016.

Thank you.

Mr. Holmes, you may being your conference.

Good morning.

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

Welcome to our second 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, 2015.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment picking 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 will walk you through the second quarter results, and then I'm happy to answer any questions.

Net revenues, $7.9 billion.

Net earnings, $1.8 billion.

Earnings per diluted share, $3.72.

Our annualized return on common equity was 8.7%.

As you all remember, the first quarter of 2016 was dominated by renewed uncertainty regarding the global economic outlook.

This impacted prices across various asset classes and drove macro headwinds in each of our businesses.

Many of the concerns that existed in the first quarter moderated as we started the second quarter.

This was a better environment for our clients and our performance.

This was also reflected in equity markets.

For example, the S&P 500 was relatively unchanged for most of April and May.

In addition, we saw sequential improvements in global investment banking volumes.

Activity for the first two months of the quarter was on pace to be up over 20% for equity offerings, and nearly 15% for announced M&A.

However as we approach June, the market became increasingly focused on Brexit.

The focus was on both the economic uncertainty surrounding the potential outcome and the potential economic implications of leaving the EU.

These concerns negatively impacted client sentiment, risk appetite, and activity levels heading into the vote.

In response to the leave vote on June 23, market volatility spiked and global equity markets declined significantly, with the MSCI World down roughly 7% in two days.

While equity markets largely reversed those losses in the last three days of the quarter, clients and the broader marketplace continue to wrestle with the Brexit vote and related uncertainty.

With that as the backdrop, let's now discuss individual business performance in greater detail.

Investment banking produced second-quarter net revenues of $1.8 billion, 22% higher than the first quarter, as we saw increased client activity across equity and debt underwriting.

Our investment banking backlog decreased relative to the end of the first quarter and a year ago.

Breaking down the components of investment banking in the second quarter, advisory revenues were $794 million, up 3% from the first quarter.

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

We advised on a number of important transactions that were announced during the second quarter, including NorthStar Asset Management's $16.9 billion tri-party merger with Colony Capital and NorthStar Realty Finance.

Great Plains Energy's $12.2 billion acquisition of Westar Energy.

And Hewlett Packard's Enterprise's $8.5 billion spin-off and merger of its enterprise services business with Computer Sciences Corporation.

We also advised on a number of significant transactions that closed during the second quarter, including Charter Communication's $78.7 billion acquisition of Time Warner Cable and $10.4 billion acquisition of Bright House Networks.

Visa Inc's EUR18.7 billion acquisition of Visa Europe, and Airgas Inc's $13.4 billion sale to Air Liquide.

Moving to underwriting.

Net revenues were $993 million in the second quarter, up 43% sequentially, as capital markets activity picked up from the first quarter.

Equity underwriting revenues were $269 million.

This was up significantly compared to weak activity in the first quarter due to an increase in IPOs.

Debt underwriting revenues were up 42% to $724 million and benefited from asset-backed issuance and strong leveraged finance activity.

During the second quarter we actively supported our clients financing needs, participating in Mylan's $6.5 billion investment grade offering to support its acquisition of Meda AB, US Foods $1.2 billion IPO, and the approximately EUR850 million IPO of Philips Lighting.

Turning to Institutional Client Services, which comprises both our FICC and equities business.

Net revenues were $3.7 billion in the second quarter, up 7% compared to the first quarter.

FICC client execution net revenues were $1.9 billion in the second quarter, up 16% sequentially, as market-making conditions improved in many businesses from the first quarter.

Credit and mortgages increased, as the backdrop for providing liquidity was more normalized compared to the first quarter.

Rates was also higher sequentially, given better market-making conditions.

Currencies declined relative to solid client activity levels in the first quarter, and commodities declined slightly during the quarter.

In equities, which includes equities client execution, commissions and fees, and security services, net revenues for the second quarter were $1.8 billion, down slightly quarter over quarter.

Equities client execution net revenues of $587 million were up 25% sequentially.

Better market-making conditions for most of the quarter and select corporate activity drove improved performance.

Commissions and fees were $745 million, down 15% quarter over quarter, as client activity decreased following heightened volumes in the first quarter.

Security services generated net revenues of $422 million, down 2% relative to the first quarter, as seasonally stronger client activity was offset by slightly lower customer balances and spreads.

Turning to risk, average daily VaR in the second quarter was $62 million, down from $72 million in the first quarter.

Moving on to our investing and lending activities.

Collectively, these businesses produced net revenues of $1.1 billion in the second quarter.

Equity securities generated net revenues of $626 million, primarily reflecting company specific events, sales, and gains in public equity investments.

Net revenues from debt securities and loans were $485 million, and included more than $250 million of net interest income.

In investment management, we reported second-quarter net revenues of $1.4 billion, consistent with the first quarter.

During the quarter, management and other fees were roughly flat sequentially at $1.2 billion.

Assets under supervision increased $23 billion sequentially to a record $1.31 trillion.

The $23 billion increase was substantially driven by $19 billion of net market appreciation.

We also had $4 billion of net inflows, with $3 billion from liquidity products and the remainder from long-term fee-based products.

Now let me turn to expenses.

Compensation and benefits expense for the year-to-date, which includes salaries, bonuses, amortization of prior year equity awards and other items such as benefits, was accrued at a compensation-to-net-revenues ratio of 42%, consistent with the first half of last year.

To respond to the more challenging backdrop, we completed an expense initiative during the first and second quarter.

The run rate expense savings will be roughly $700 million.

In 2016 these expected savings will be partially offset by severance and other related costs.

Second-quarter non-compensation expenses were $2.1 billion, up slightly compared to the first quarter.

Now I'd like to take you through a few key statistics.

Total staff was approximately 34,800, down 5% from the first quarter.

Our effective tax rate for the year-to-date was 26.8%.

Our global core liquid assets ended the second quarter at $211 billion, and our balance sheet was $897 billion.

Our common equity tier 1 ratio was 12.2% under the Basel III advanced approach.

It was 13.7% using the standardized approach.

Our supplementary leverage ratio finished at 6.1%.

All of our capital ratios are well in excess of regulatory requirements.

This reflects our multi-year effort to derisk the firm and strengthen our financial profile.

Given robust capital ratios, the firm is well positioned to return excess capital to shareholders.

In the quarter we repurchased 11.1 million shares of common stock for $1.7 billion.

For the 5 quarter CCAR cycle for 2015, we provided shareholders with $6.2 billion in share buybacks, and $1.5 billion in common stock dividends.

In terms of this year CCAR test, we announced that the Federal Reserve Board did not object to our plan.

In conclusion, the first half of 2016 has certainly presented it's fair share of challenges and concerns.

At the core of these concerns is the outlook for the global economy.

As you have heard us state many times before, confidence in economic growth is the most important long-term driver of our business.

Confidence incentivizes client activity, which increases demand for our advice, our content, and our execution capabilities.

While, like the rest of the world, we would welcome more robust economic growth, ultimately we have to manage the firm for both the current environment and potential future opportunities.

How we have navigated the difficult environment in the first half of 2016 demonstrates both the strength and resilience of our culture.

We remain vigilant regarding our cost structure, our capital usage, and our risk profile.

And at the same time, we maintain the necessary commitment to ensure that we can meet our clients needs as they grow.

Being in the position to deliver for our clients and our shareholders requires ongoing investment and a long-term perspective.

While we continue to invest in our existing set of businesses, we are also looking for new opportunities.

One example is our digital consumer lending platform.

While still in its early stages, we expect to begin the initial phase of engaging consumers this Fall.

As we have discussed with you in the past, we are taking a very deliberate and methodical approach to this effort.

We're looking to build a durable business, so it will take time.

Similar to our other businesses, creating a valuable and differentiated service for our clients is core to our strategy.

In summary our ability to both react to the current world and simultaneously invest in the future will position the firm to deliver superior value to our clients and our shareholders in the years ahead.

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

Ladies and gentlemen.

(Operator Instructions)

Glenn Schorr, Evercore ISI

Hi, thanks a lot.

Good morning, Glenn.

Good morning.

Question on comp.

Always a little touchy, but if you look on the year-to-date basis, the ratio is flat with last year but the dollars are down 28%, six months year-on-year.

So I'm just curious.

I know you have been remixing a little bit in the employee base.

How much of that can help that ratio when you look at it on a full year, and then just how do you balance between a higher ratio versus the 37% you've had the last couple of years, three years, and then just having it be a little bit more belt-tightening?

Obviously, 42%, at this stage, is our best estimate, but incorporated in that it is all the steps that we are taking.

So, as I communicated, year-to-date, the cost efforts themselves, on a run rate basis, translate into $700 million of run rate savings.

Now after severance, that number is going to be more like $350 million this year, but obviously we are staying very focused on this, and I think you see that.

Look, performance has been down, and with that compensation and benefit expense is down 28% year-to-date.

And just so I understand your run rate savings comments, $700 million, $350 million ex-severance, is that in this quarter's number and therefore just that's a lower bar as we roll through the rest of the year?

I just want to make sure what we're looking at versus what's on the card?

The way I would think about it is -- it's in 2016, and it gives us operating flexibility.

But that's executed.

The $700 million is done.

Again, that's run rate, [not] severance costs and other things.

Okay.

And then your comment on the -- investment banking pipeline's down.

I'm just curious how much of that is off of great numbers, and as you execute, including the debt underwriting that you talked about?

And then versus how much does Brexit play a role in just slowing things down on deals that might have been happening across Europe?

So when you look at the backlog, I think one way to look at it is the year-over-year.

So if you are actually standing here, at the end of June, last year obviously the second quarter and first half of last year were very dynamic.

If you look at the backlog in aggregate, it's sort of down mid-single digit and so that's the trajectory of the backlog.

I don't think it's surprising coming off of high levels.

It is where it is.

Obviously our market shares have been very significant.

In terms of Brexit, where we sit today, given I think that the base case expectation is that the dynamic is going to play out over a long period of time, and in some respects it may contribute to some of the same factors that contributed to a very active M&A environment.

Other than maybe very specific transactions that are geographic in nature, that are really driven by geography, which is generally few, when we talk to our bankers, if we continue in this low growth environment, they don't feel sitting here, today, that Brexit's going to be a headwind but obviously is going to be a dynamic situation.

Okay.

I appreciate it.

Thanks, Harvey.

Thank you.

Christian Bolu, Credit Suisse.

Good morning, Harvey.

Good morning, Christian.

How are you?

Good.

Thanks for the update on expenses.

My first question is just to try to understand the knock-on impact of Brexit on your cost base.

Do you have a sense, a rough sense, of what percentage of your revenues and expenses are denominated in Pounds Sterling?

I presume you have significantly more cost in Sterling than revenues.

So curious if the decline in the pound could be a further tailwind to expenses in 2016?

No, it's not the case necessarily that we have significantly more expenses denominated in Sterling.

There is a whole host of processes through which we go through, in terms of how employees elect to get compensated, et cetera.

That's an issue obviously we monitor very closely, in terms of our foreign currency risk broadly, across the globe, managing a global business, but I wouldn't point to that as a significant consideration, although it's a consideration of the many things we look at.

In terms of Brexit, the way I would frame it for you is -- I'd say there is sort of the near-term observations I can give you and then sort of a longer-term perspective.

The near term ones would be just sort of going through the process.

Now obviously we were preparing for Brexit well in advance, even though we all expected it to be a very, very unlikely outcome, but we were significantly prepared for that.

And it really left us in a position, we feel, to be very front-footed for clients.

Going into Brexit, client activity tapered off, but at the point of Brexit and shortly thereafter, in a number of our businesses we either hit near-peak volumes or peak volumes or new peaks.

So that was quite good to see.

In terms of the longer-term perspective on Brexit, as I said before, this looks like this process is going to take a while.

And look, we are hopeful, along with everyone else, that the parties that are engaged in these negotiations will be prudent and thoughtful, because obviously -- look, for all of us, a thoughtful negotiation outcome would just be good for economic growth.

As it relates to our business, we have been in Europe and the UK for a very long period of time, and we're completely committed to our clients in the region, and regardless of how these negotiations go, we are going to make sure that we are there for them.

That would be my broad comments on Brexit.

Thanks for the detailed response.

On debt underwriting, very, very strong numbers.

Well in excess of what we can see in the kind-of public [league] tables.

So just curious, maybe, if you can just detail some of the growth initiatives around the debt underwriting business, and particularly any color on businesses that we would not typically be able to see in the public league tables?

One of the drivers in this quarter, as I referenced, was an asset backed related activity, and there was one significant transaction where -- earlier on, we had committed capital to purchase a portfolio, which ultimately translated through in the debt underwriting line.

That would not be included in a league table, so it would be difficult for you to see.

Okay.

Thank you very much.

Thanks Christian.

Michael Carrier, Bank of America.

Hi.

Thanks, Harvey.

How are you?

Good.

First, just on the [GSIB] surcharge.

Just wanted to get an update, where you stand?

And probably more importantly, when you think of wanting to, say, reduce debt versus taking advantage of opportunities to take a market share, just given some of the exits that we have seen throughout the industry -- just want to get a sense on where you are at, and the pullback versus the growth, given some of the dislocations out there with some of the competitors?

You are right to.

I would summarize it, because I think you framed it well, it's a bit of a balance.

At this stage, we are at 2.5% on the surcharge.

Obviously, we are very focused on reducing our systemic footprint.

We believe us and all firms obviously should make that a priority, but you are right to say that, as the competitive environment is shifting, a number of our competitors have stated restructuring plans.

We want to make sure that in all of our efforts, whether it's managing our capital, that we are focused on costs, that we remain full-service across all of our businesses, and we are there for our clients, and we believe at this stage we have found that balance.

For shareholders, it gives them a lot of operating leverage.

Okay.

Got it.

And as a follow-up, I guess two things on the regulatory side.

With CCAR, I know you guys don't disclose what you are going to do but, just from a quarter, as we kind of go through the third quarter through 2017, can we expect the same type of ramp that we saw last year?

Just in terms of the lighter upfront and then the heavier buybacks as that plays out?

And then I guess just any update on your guys' capital in funds that would have to be liquidated in 2017?

When you think about those investments, any way for us to gauge where those are marked or where the potential gains could be, as those are exited over time?

So respect to the CCAR and the CCAR process, obviously you saw the 11.1 million shares this quarter and the $1.7 billion plus in dollar buyback.

Last year's test had some idiosyncrasies in it, which led to this profile where to the extent to which -- and we ended up using capacity that we're repurchasing, that we were more constrained in the early quarters versus later quarters.

And even though we don't disclose the buyback capacity, and you know we don't want shareholders to conflate that with dividends, and that's why we don't.

The profile that you would expect this year doesn't have those idiosyncratic elements to it, so the extent to which we repurchase -- it won't necessarily follow that profile.

In terms of the -- I think what you are asking, the question is really relates to the harvesting in the funds?

Is that what you are asking?

Yes.

Okay.

I've walked you through that, for lack of a better language, that waterfall.

So why don't I just do that.

Right now, dollars that are invested predominantly alongside our clients, where we act as a fiduciary, is $7.3 billion.

There's $900 million that you would categorize as permitted under the [vocal] rule.

That leaves us with $6.4 billion.

Of the $6.4 billion, $2.1 billion is public.

That leaves us with $4.3 billion that is still private sitting alongside those funds.

Okay.

Oh, actually I think you asked a question -- did you ask a question about -- I tried to write them all down.

Did you ask a question about how we marked them?

Just because these would be relatively seasoned, I was just trying to get a sense on, based on the investment versus where it is today, is it running at 1.5 times the cost when you invested?

Just trying to get a sense of where things are marked, in terms of what the potential gain could be?

I understand.

We mark everything to fair value.

So we are marking it quarter to quarter.

Whatever gains or losses that are occurring in those investments, you are seeing those translate through every quarter.

Got it.

Okay.

But we don't have a cost base versus the fair value?

It's across multiple funds, and I don't have an aggregate number for you on that.

Okay.

All right.

Thanks a lot.

The funds have obviously performed well.

You have seen that translate through the performance over the last couple of years.

Matt O'Connor, Deutsche Bank.

Good morning.

Hey, Matt.

How are you?

Good, thank you.

Can you talk a little bit more about investment management, in terms of why the fees were so weak there, say, versus a year ago?

I realize a lot of it is the incentive fees, which tend to be lumpy, but even the other, call it, more annuity-like fees were sluggish.

Is there something on the timing of when you collect, say, versus equity prices and the volatility there, or is there something else going on?

The biggest driver in the quarter, when you look year-over-year is obviously the incentive fees, and that's reflective of environment and incentive fees from time to time, [are] going to be lumpy.

With respect to the management and other fees, it really is just about mix and the average fee coming down, although offset in part by the fact that obviously the asset pool has grown pretty significantly year-over-year.

Okay, and I guess what exactly is the negative mix shift?

Obviously liquidity under supervision has increased, but it seems like the overall balances for equity and fixed income, nearly across-the-board, it seems like the balances have increased.

So when you talk about the mix shift, what exactly is that?

As you know, in the business obviously we have a number of different client segments, so what's full-service across a number of different lines.

One of those lines is large advisory institutional mandates.

Those mandates, given their size, tend to come with a lower fee base.

So, that's really the mix shift.

So, it's basically away from classic mutual funds and into those types of mandates.

You can see -- I think we break it out for you in the 10-Q.

You can see all that.

Okay, and then just separately on the bank initiative, you did mention about rolling out the digital consumer lending platform in the fall.

But just more broadly speaking, maybe give us an update on where you are on the lending thought process, overall?

And then on the deposit side as well, I think you did the brand conversion of the deposit acquisition this past quarter.

I view those as separate things, because one's really about liability and management.

Are you talking about the GE Deposit acquisition?

Is that what you're asking about in terms of the brand acquisition?

Is that what you are talking about?

Correct.

Okay.

Why don't I start there and I'll take your question in reverse.

We view those obviously as separate in terms of -- obviously, we view asset-liability management as an integrated exercise, but those two efforts are separate.

But having said that, the acquisition went quite well.

Added in excess of $15 billion of deposits to the firm.

And it's great for us because it diversifies our sources of funding, because we're always looking to do.

Since the acquisition date, it's been well received by consumers.

We've had in excess of 20,000 consumers open up new accounts for us, so it's had very significant growth in a short period of time.

It really speaks to the brand strength, which has been very nice to see.

In terms of the longer-term objectives, maybe I'll just take an opportunity to level-set you on where we are in the online lending.

So as we've talked about, we hired Howard over a year ago, and he's been fantastic addition to the team, and he's built a very capable team over that period of time.

I think it's probably important to level-set you on how we approach this process.

So we're obviously keenly aware of the fact that this is a new business opportunity for us, and importantly, a new client base.

And so one of the things we did is we reached out to thousands of consumers to really understand what they want and their borrowing priorities.

And through that we learned some things that probably aren't so surprising.

They want a product that is simple, it's straightforward, it provides a lot of value, and they also want what they refer to as really a high quality user experience, and so what we have attempted to do is take all this feedback, we developed one product.

We've emphasized a number of times that we're going to be very deliberate and slow with this.

So we developed one product, which we plan to launch later this fall.

So that's where we stand (inaudible) over the next several months.

Okay.

And sorry, what is that one product?

Is it in unsecured loan or what's the --

Unsecured consumer loan product.

Okay.

Would they ask -- target a customer of shorter duration, small loan size, bigger loan size?

We will come back to you with all those details in the fall.

Okay fair enough.

Thanks for all the answers.

Thank you.

Mike Mayo, CLSA.

Good morning, Mike.

Hi.

So headcount was down a lot.

Just over three months, I guess down 5%?

Is that right?

That's correct.

Where did those headcount reductions occur?

So, in terms of the headcount process, the process itself really started back in February in terms of our analytics.

As you know, Mike, we go through -- what gets a lot of attention is that we referred to it as a review of the 5%.

In years, it varies.

Sometimes those reviews yield small reductions.

Sometimes, we actually add people.

It varied by business.

Obviously for businesses that have hit heavier headwinds, like fixed income, they elected to go beyond the 5% in terms of their exercise, and then there are supporting businesses that are adjacent there.

So things like ops and tech, but this is a broad exercise across the firm.

Now I would point out, again, that this is netted against hiring.

So we are still hiring.

And so -- but the 5%, as I pointed out, on a run rate basis, it's $700 million.

I'm sorry.

What's $700 million?

$700 million is the cost savings on a run rate basis associated with that exercise.

And that's not reflected in the second quarter?

It is reflected in the quarter to the extent to which it's reflected in our compensation accrual, which is our best estimate for the year.

Okay, and so what was the gross headcount reduction?

Net is 5% before the hiring.

Was it like 6% or 7%?

The biggest addition, offsetting that, would have been, for example, roughly 600 new analysts that joined the firm in June.

And that's a big headcount reduction in just three months.

How do you know that you did it correctly?

Did you cut into muscle as you cut fat?

It's interesting.

We, as you know, Mike, sometimes I think that because we don't announce targets in advance that people misunderstand a bit about the way that run the business.

And so we view this as a very thoughtful exercise.

We don't feel like we have sacrificed any optionality.

We certainly have not sacrificed any commitment to our clients.

These exercises are done at the business level and built up from the business level.

All right.

Thank you.

Thanks Mike

Guy Moszkowski, Autonomous Research.

Good morning.

Good morning, Guy.

I just wanted to return, first of all, to the capital management question and maybe ask it a little bit differently, in terms of what we might expect over the next several quarters.

So, you bumped up the buyback to $1.7 billion.

The diluted share count fell by about 2% in the quarter.

If you annualize, then you're 2 or 3 percentage points ahead of what the last five years run rate has been in terms of how you have reduced the diluted share count.

So, in the absence of a specific guide post-CCAR, what should we be thinking about in terms of that attempt to reduce the share count?

Should we be thinking in terms of that 5% run rate, or maybe a couple of percentage points higher in light of what you've done recently?

I think the reluctance for me to be more specific in terms of guiding you really reflects the dynamic nature how we do it.

So you have to think about -- and it is obviously more complicated than this, but you have to think about the three competing factors that we're always managing.

The first and most important is that we put ourself in a very strong financial position, so that we are there for our clients.

So if we saw a big uptick in client demand for our capital, we would be very happy to deploy that capital and actually not return it to shareholders.

And so this really reflects the fact that the client demand for a period of time hasn't been there.

Now, the second thing we do in [the terms of] the strength of the financial footing of the firm, obviously you've seen us do a huge amount of work, and as you see it reflected in our ratios, with 13.7% standardized at the end of this quarter.

Obviously, we have been very focused how we have been derisking the firm and deploying that capital when demanded for us.

And ultimately, that gives you the flexibility to either return it or not, and that's why you've seen the uptick over the past couple of years in terms of levels of activity.

But the average diluted share count, as you pointed, is at a low level.

Okay that's actually useful in terms of understanding your overall framework.

So thanks for that.

And then this is actually -- it turns out to be a related question.

You caveated in the release that the environment for FICC continues to be pretty challenging because of low rates in volumes and low client activity, which implies there is a more normal run rate that you think is achievable.

Can you give us a sense of what that might be, and does that take into account revenue pressures from shift to electronic trading, as well as the -- alternatively, the potential to gain share from global competitors who may be retrenching?

So I'll make a couple of comments on that.

Guy, I'd say that, first, in terms of client activity levels and run rate, if you will -- run rate's a difficult thing, but I don't think anyone would disagree that when you look at the trading activity levels and the industry trends over the last couple of years, obviously they have been in decline.

When you look at the factors in terms of our clients and what they need, our clients are still there and they still need those services.

They need them from us.

And so the type of environment we have been in, if you actually look at, for lack of a better language, the violence of the first quarter in January and February and then the concerns about Brexit in the second quarter, I think it's fair for us to say these feel like these are the types of factors that contribute to reduced client sentiment.

They reduce confidence, and as a result, they reduce activity.

Now one interesting take away, and we've seen this before, sporadically, is -- after Brexit, when volumes were much higher for those couple of days, in all the things that we watch, we could see a demonstrable uptick in our market shares.

That may be the result of the current competitive environment, and as we've talked about, a number of the global competitors are going through restructuring; they have been quite challenged.

So when volumes pick up, we feel like we see it.

But it's difficult for me to tell you what the run rate will be over a long period of time, given the dynamic nature of markets, and kind-of the unique place we find ourselves with respect to global growth in interest rates.

So you can elaborate a little bit on those metrics, even though I recognize it was just for a short period of time, but the metrics that told you that you were picking up market share?

Because up until now, when we've asked you that question, you've generally said it's still hard to measure.

It's early days.

You're not really going to be able to tell in this kind of environment.

But you sound much more concrete about it now?

One of the things that we are able to do over time, given all of the public regulatory reporting, is we are able to monitor those things more closely in fixed income than historically exist, and obviously you have exchanges that you can monitor.

Exchange volumes are not necessarily the greatest indicator, but over long periods of time you can see it, or under unique circumstances when you get big spikes in activity.

But it feels like it to us, Guy.

Okay, that's helpful.

Thank you.

Fiona Swaffield, RBC Capital Markets

Hi.

I have questions in two areas.

Firstly, I think you made some comments about security services and margins and volumes being somewhat down.

I wonder if you can go into that in more detail and are we -- historically, we've seen wider spreads.

Is this kind of a real change in trend?

And the second question was on your clients.

In a recent presentation, Goldman talked about a mix shift in clients, or stronger growth among some clients versus others over 2015, going back.

Has there been a continued shift-change, if we looked at the client mix in 2016?

Thanks, Fiona.

With respect to (inaudible) [for prime] services that's just reflective of activity levels, and as markets were volatile in the first and second quarter, you saw that translate through respect to demand, market prices, and spread.

There's nothing really to highlight there, other than it's reflective of the environment.

In terms of the client base and our client footings, we're always looking to grow our market share across all segments and across all regions.

And so we continue to focus on that.

There's always things we can do better.

Okay.

Thanks Fiona.

Kian Abouhossein, JPMorgan.

Yes, hi.

First question -- (technical difficulties)

Kian, are you there?

I think we lost you.

Kian, I think you've been placed on mute?

Okay, we'll move on to the next question.

Jim Mitchell, Buckingham Research.

Good morning.

Good morning, Jim.

Just a couple of quick, small questions.

On FICC, you guys mentioned that mortgages were down significantly.

None of your peers really talked about that.

Is there anything unusual there for you guys in mortgage that hurt you in the quarter?

No, I think that's maybe just reflective of different product lines that businesses may have.

We're not as big in things like credit cards and other parts of things, which may flow through those business lines.

I don't really have the visibility into the competitor base well enough to tell you.

Why was mortgages so much weaker than a year ago?

I'm just trying to think through the dynamic there, this quarter.

Client activities and inventory, in terms of the way it moved year-over-year.

Great.

Okay, and maybe I missed it, did you give us the fully phased-in ratios?

No I didn't.

Want me to just run through them for you?

So, just to recap again, and I'll start with the advanced.

Transitional, 12.2%; the fully phased is 11.8%; standardized, 13.7%; fully phased, 13.1%.

So those gaps are closing as you sell down the private equity.

So that's progressing nicely.

Great.

Thanks.

Okay.

Thank you.

Kian Abouhossein, JPMorgan.

Welcome back, Kian.

Sorry, I got disconnected somehow.

Just briefly on Brexit, and I really have two questions.

The first one is related to -- clearly, we [had to sell off] high volatility.

A lot of transaction volumes, as said you indicated, and FX, et cetera.

Historically, after such an environment, we see more of a dry up of the business.

Is that something that you are seeing, or do you see more seasonal adjustment to the business as you see in normal times, or is there more a pronounced adjustment to the business environment transaction volumes as getting a bit lower than usually what you would expect?

I think that's a reasonable question, in terms of the unique nature of Brexit.

It's interesting how the world -- the market reaction, the activity levels right around Brexit, obviously, I don't think surprising to any of us.

I think you could have sat there, those couple days after Brexit, and if you were forecasting the next month of activity, you might have been surprised.

If we could have known in advance that equity markets would rebound so strongly, there would be a rebound in currencies and then the world would sort of normalize.

I think that may be a little bit different, to go back to the core of your question about things we've seen in the past.

This normalization was so quick that it actually maybe something that's a better harbinger in the near term, usually following one of these events, for activity levels.

I can frame that for you a little bit in more detail.

I talked about the merger business earlier.

If we stay in this low growth environment, unless something is really uniquely impacted by Brexit, and if the negotiation process takes a long period of time then, as I said, our bankers don't necessarily see this as being a headwind.

If we stay in this low interest rate environment, and you take a look over at our asset management business, then this is really an environment where clients need advice.

And that also translates into our ICS business.

This is a very content rich environment now, and markets have stabilized so quickly, whether it's debt or equity, et cetera, that I don't know if I would have guessed a couple of weeks ago that the market would have rebounded so quickly, but it feels pretty normalized.

For now.

And the thesis that you underlined, do you see that already so far planning out?

I think there would have been a lot of questions a few weeks ago about the cross-border mergers, for example, into the UK, and obviously we've seen that within two weeks.

So I think there's evidence.

Okay.

And the second question on Brexit is -- I think there was an earlier question about the impact of Brexit on you, but clearly there this issue of EU passporting, and there is clearly the potential of using MiFID2 article 46, 47, assuming there is no EU passporting.

Is there something you feel, as a European player, sitting in the UK, you would be able to use to your benefit, or is that not strong enough of a regulatory setting in order to operate out of the UK?

I think the answer is that it's just too early to tell, in terms of how this process is going to unfold.

As I said earlier, like everyone else, yourself included, we're hopeful that this is a really thoughtful and prudent process, but it really is a question.

We're contingency planners and so we will continue to plan for multiple outcomes, but way too early to speak specifically.

Okay.

Thank you very much.

Thanks Kian

Brennan Hawken, UBS

Hey, Brennan.

Good morning.

How are you doing, Harvey?

Good.

Quick one on NII.

I think when you were walking through INL, you said that NII was around $250 million or so.

So, if we are run-rating that at about $1 billion, when we look at your I&L balance sheet in the queue, and just using the last quarter's numbers, because I doubt they are that different.

If we sum up the debt and the loans, you get to about $70 billion or so, just over.

Which is a little over a 1% net yield.

Is it that funding costs for that portfolio are really high?

What causes that?

Or is it that the asset yields are low?

What causes that yield to seem a bit low to folks?

That's a good question.

Let's start with -- why don't I just level set you on the balance sheet.

The INL balance sheet first.

You were very accurate in your high-level commentary, but the balance sheet is down roughly $2 billion quarter over quarter, down to $97.1 billion.

That breaks out between roughly $20.8 billion of what we call equity, and of that $3.5 billion is public equity and the total 16.8% of corporate equity And then the rest, as you said, is debt.

With respect to the NIM, in part, it has to do with deposits, but for the most part, it has to due with the quality of the portfolio.

As you know, a large portion of the portfolio is collateralized, so it's just less risky.

So it's more on the asset side, rather than on the funding side?

It's a mix.

Look, we don't have branches all over the United States, so we don't have the lowest marginal cost of funding in terms of deposit, but it really is more the collateralized nature of the lending that we are doing.

Got it.

That helps.

Thanks Harvey.

And then one question on capital post-CCAR here.

We, in the past, have gotten the dividend increase in the first quarter for you guys post-CCAR.

I believe you mentioned in your press release post-CCAR that you were approved for a dividend hike.

So was this -- the difference this year just around timing with the Board not having time to meet before the third quarter dividend got announced, or should we think about this CCAR year differently than past years?

I think what we intended to communicate was that the approval gave us the flexibility to do all those things, but we weren't speaking specifically to any decision-making with respect to the dividend.

As you know, our preferred methodology, because it gives us a lot more flexibility in terms of how we manage our capital, is to provide capital returned to shareholders, but there is nothing specific or you shouldn't interpret anything as a take away year-to-year, as we think about the dividend.

Those will be discrete decisions as we think through the capital planning process.

Okay.

Thanks, Harvey.

Thank you.

Steven Chubak, Nomura.

Hi, good morning.

Good morning, Steven.

How are you?

Well, thanks.

Harvey, first question I have is on CCAR.

You noted in the past that CCAR is the firms binding constraint on capital, and I'm just wondering whether the favorable result in the latest exam positions you to maybe attribute or allocate less capital to market-making activities?

Or said a bit differently, does it enable you to be more competitive on pricing, assuming that your attributable equity has come down?

So, interesting question.

So, historic -- I guess you could say CCAR is binding if you asked for capital return and you have to revise it.

That's not necessarily what we meant to communicate.

Obviously, if you just looked at our headline ratios at 13.7% and 12.2%, we have significant excess capital relative to the required regulatory minimum.

It's a dynamic process for us, and so in this particular year, the Federal Reserve's interpretation of their scenario was more favorable than our interpretation of the scenario.

But it's our interpretation of the scenario that's going to govern our capital policy and how we think about capital management.

And so, that's how we'll approach it.

It's our test.

Got it.

So when thinking about capital allocation, should we look at your own submission as a way to infer how much capital you're allocating for certain activities, or is that not reasonable?

Yes, except for the fact that -- the one thing I would say is the capital allocation process itself, and now we're talking about operating principles -- we're not talking about test.

The operating principles, we designed the firm and we manage the firm to be very flexible.

So if there is client demand for capital in investment banking, we want to be in a position to deploy that if there's client demand for capital, because the vast majority of our capital is high velocity.

If there are opportunities and client demand in investing and lending, which tend to be longer term commitment to capital, obviously we engage in those also.

But we don't allocate down to capital in a way that says -- okay here's your capital, Mr. and Mrs.

Business.

You use that; we will see you in a year.

We feel like a be getting much better ability to deliver to our clients globally if we can be more flexible and dynamic with it.

Got it.

Thanks, Harvey, and just one more follow up for me.

There was a senior regulator who recently made remarks suggesting that they could impose some tougher capital requirements for activities specifically in the physical commodity space.

And I know that's been debated for some time, but do you have any sense as to what form that proposal might take and whether it could compel any changes in terms of how you strategically manage that business?

No, look, we'll have to see what the rule comes out with.

The vast majority of our business, as you know, is not unlike a lot of the other capital markets businesses where we are working with corporate clients on hedging their exposures.

We are working with investors who want access to the commodity markets, and so commodity hedging for a consumer or a producer of a commodity, to them it's no different than the way a corporate would hedge foreign exchange.

But we'll have to see what ultimately rules look like, but obviously we are very committed to those clients.

Thanks, Harvey.

Do you have any sense as to the timing as to when we will get clarity on that role?

No, I only have the same information you have.

Fair enough.

All right, Harvey, thanks for taking my questions.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, Harvey.

Thanks for taking my question.

Just a couple of quick follow-ups.

First of all, in terms of the additional global core liquidity you had on the balance sheet at both the end of the quarter and for the average of the quarter, that was up a bit from last quarter.

Is that primarily due to the GE deposits, or is there something else going on there?

No, that's correct.

We took in $16 billion roughly of deposits, and that's really the whole driver of the increase, both in the balance sheet and in the GCLA.

Okay, fair enough.

And then, in terms of the backlog decline, both sequentially and year-over-year, is there any specific geography, Asia, Europe, North America, that is meaningfully stronger or weaker within that trend?

No, not necessarily.

Okay, that's it for me.

Thank you.

Eric Wasserstrom, Guggenheim Partners.

Thanks very much.

Harvey, just to circle back to the expense commentary for a moment, would it be your expectation that the actions you have taken will allow you to generate operating -- positive operating leverage, or maybe just more broadly, what is your expectation about operating leverage for the back half of this year?

So, look, you've seen it.

It seems like ages ago now, but in the first quarter of 2015, we had an improved market environment, we were very quickly able to deliver lots of operating leverage, and you saw near 15% ROE in that quarter.

Like I said, it feels like a long time ago, now.

We continually review all the businesses to ensure that we are maintaining the right footprint.

So this is all about making sure that we find the right balance between our commitment to our clients over the long-term and expense management, and obviously first half of this year has not been the greatest environment, and so you are just seeing us respond to it.

And can you help me understand, when you say $700 million of run rate savings, from what level and under what revenue circumstances?

The way to think about that is, if we finished the end of 2015 with a certain [FICC], that all those adjustments and resources on a run-rate basis would be $700 million, so -- all other factors being equal.

But that won't translate into this year, because there's severance and other related costs.

The net of that will be something more like $350 million, so you should really think of that as translating into 2017.

Now this will be dynamic of course, because we will be hiring more people, and so you and I are really sterilizing the discussion for this number, but I think that's the best way do it explain it to you.

And it sounds like you think that the actions you have taken are sufficient to address this current revenue circumstance, but what would cause you to perhaps reconsider and make additional adjustments?

Certainly, if the environment continued to be challenged, we would continue to refine the business.

On the flip side, if the environment globally improved dramatically and there was a real demand for our resources, which has been -- no difficulty in attracting very, very high quality talent to the firm.

So we're also being very thoughtful about giving people an opportunity to want to be at Goldman Sachs that want to be here.

Great.

And just one quick accounting question, I think last quarter you indicated your expected tax rate for the full year would be around 31%.

Has that changed at all, given the second quarter's figure?

Given where we are running now, I would say something just shy of 30% feels like a better expectation, where we stand now.

Great.

Thanks very much.

Devin Ryan, JMP Securities.

Good morning, Harvey.

Good morning, Devin.

I appreciate the update on the digital consumer finance business initiative.

I understand the current view it that it is going to be a slow build.

It sounds like it could take some time to really move the needle under the current path, but is there a case for buying something that enhances either the lending capabilities or liability gathering, just so you get to that critical mass more quickly, or just thinking about the strategy, is it just by its nature needs to be built up organically just so that it's a differentiated platform?

It's a good question.

Obviously you've seen us do a number of smaller bolt-on acquisitions in IMD, and the thesis behind those, because we're certainly not reluctant to do that, is when we feel like we have a capability that -- if there is a service we would like to enhance for our clients or a capability we are quite good at that we think we can add scale to, we will just weigh the costs and benefits of acquiring versus building in-house.

This particular effort, when we looked at it, we really felt like best designed from scratch, and the reason for that is I think we're kind of uniquely positioned.

It allows us to leverage our technology skills and our risk skills, but this is really about, if you look at sort of the competitive landscape, there are benefits that online lending platforms provide to consumers, and there are benefits that large commercial providers of credit provide to consumers.

We're just really into looking to bridge the gap between those strengths and offer consumers, as best we can, a really thoughtful and differentiated product.

Got it.

That's very helpful.

Separately, love some thoughts about how you guys are thinking about the upcoming election, just as an influence on business, either from a client perspective or even how you are thinking about planning?

In your business, there's been a lot of rhetoric around some pretty bold proposals recently, reinstating last Steagal for example in financials, some similar kind of bold themes in other sectors.

I'm just curious how much is this uncertainty into the election delaying decision-making, if at all, or keeping a lid on client activity?

No, I think this cycle will have its unique aspects to it versus other presidential cycles, but historically there's always been some element which may have ultimately deferred a decision that a client might make to a later period, but these are short-term in nature.

We don't see any significant impact in terms of the near-term.

Got it.

Just last one quickly, the decline in VaR.

I know that can bounce around, but was that just derisking into the UK referendum or just the reduced volatility?

Just curious what drove that?

It was the lowest level in quite some time.

Obviously, VaR declined pretty meaningfully in average over the quarter, but really that was a combination of two factors.

There was reduced client activity going into Brexit, and as I mentioned earlier, we are being pretty prudent as we approach the date.

Understood.

Got it.

Thanks, Harvey.

Thank you.

Marty Mosby, Vining Sparks.

Harvey I wanted to go back into the CCAR and think about the adjustments on operational risk.

Like we had talked about, there had been some double counting.

You did get a benefit of 250 basis points, so to speak, and your minimum ratio is going higher.

Is that -- as we have talked about double counting in SIFI possibly going into CCAR.

Looks like you got a break on operational risk.

It almost equals your SIFI charge almost exactly?

We don't have any visibility into those calculations, Marty.

As you know, there's no transparency in our process.

I really can't comment.

I think this year's test and last year's test and the year prior to that test, I think it just confirms what the Federal Reserve's been very clear about.

Their test is going to be dynamic from year-to-year.

They are going to incorporate lots of different variables.

That's how they designed, it so I actually think they are just fulfilling their design criteria.

The other thing I was going to ask you was on the -- this quarter and the headcount reduction, is this where the severance costs would probably hit?

When you look at dividing it, if you just said you are at full run rate in the second quarter, which I know you probably weren't, but $175 million per quarter, and then you look at the net for the year, you're talking about this year as being $350 million net, severance then being possibly $350 million.

I was trying to think of the timing of the severance in relation to the gains, in a sense of the expense savings and how that might have effected the second quarter.

The way to think about is on an annualized basis, Marty.

You should incorporate those numbers as $700 million on a run rate basis.

That run rate basis, and this is again a very sterilized way we're doing this conversation.

That's all other factors being equal going into 2017, and this year that will translate roughly into $350 million of savings, this year.

How that flows through quarter to quarter, that's very specific to a number of circumstances.

Would it be safe to say that a majority of the severance was going to be at least in the second quarter?

Some but not all.

Thanks.

Brian Kleinhanzl, KBW.

Good morning, Harvey.

Hey, Brian.

Just a quick question on the Volcker investments.

I know you said previously that there is a chance that this could get extended as you get into 2017, but I mean there's really been no discussion, as far as I've seen, with regards to that.

So how should we think about those Volcker investments over the course of the next year?

Is there really just some type of liquidity event in 2Q 2017 that will become or happen, because -- if there is no extension, or are you just to a wait-and-see approach on writing those down?

So, as I mentioned before, we have $4.3 billion as private, $2.1 billion.

I went through the waterfall, so I won't do it again.

You would've seen a communication from the regulators that basically spoke to the confirmation of the extension to 2017, and then there has been public submissions in terms of industry-wide requests for incremental extensions, which I believe under the Volcker interpretations, can be as much as an incremental five years.

And if you remember, if you go back to the genesis of Volcker, it wasn't designed to force fire sales or anything like that.

The industry, again, has been working with the regulators through various bodies, and we will see how the regulators finally respond to that.

But I think the industry has done a good job, as have we, of bringing down these levels, but we're sitting alongside our clients mostly on these funds.

So we don't have unilateral authority to sell these assets.

Okay.

Thanks.

Thank you.

At this time, there are no further questions.

Please continue with any closing remarks.

Great.

Since there aren't any more questions, we just want to thank everybody for joining the call.

Hopefully, we will all get to see you over the course of the coming months.

If you of any other questions, give a call in to Dane and the team, but otherwise thanks for participating and have a great summer.

Ladies and gentlemen, this does conclude the Goldman Sachs second-quarter 2016 earnings conference call.

Thank you for your participation.

You may now disconnect.