高盛 (GS) 2016 Q3 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs' third-quarter 2016 earnings conference call.

This call is being recorded today October 18, 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 third-quarter earnings conference call.

Today's call may include forward-looking statements. These statements represent the Firm's belief regarding future events, that by their nature are uncertain, and outside of the Firm's control. The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the Firm's future results, please see the description of risk factors in our current Annual Report on Form 10-K for the year ended December 2015.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, capital ratios, risk weighted assets, global core liquid assets, and supplementary leverage ratio. And you should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.GS.com. This audio cast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

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

Thanks, Dane, and thanks to everyone for dialing in. I'll walk you through the third quarter and year-to-date results, then I'm happy to answer any questions.

Net revenues were $8.2 billion. Net earnings, $2.1 billion. Earnings per diluted share, $4.88, and our annualized return on common equity was 11.2%.

For the year to date, net revenues were $22.4 billion, net earnings $5.1 billion. Earnings per diluted share, $11.24. And our annualized return on common equity was 8.7%.

Relative to the first quarter of this year, the second, and now the third quarter have shown steady improvements. This improvement is reflected in third-quarter revenues, which increased 19% year over year. We also had a modest sequential increase, which is particularly noteworthy, given the third quarter is often seasonally slower.

A few factors contributed to the enhanced operating environment. The markets generally improved, with equity prices steadily moving higher. The S&P 500 was up 3.3% in the third quarter. The MSCI World increased by 4.8%, and the VIX declined by 15%.

Credit spreads also tightened during the quarter, with US investment grade and high yield cash spreads tighter by 12 basis points, and 87 basis points respectively. In addition there weren't any major changes to the global economic outlook over the course of the quarter. For example, consensus estimates for global GDP growth remained roughly consistent. Ultimately, a more favorable backdrop and improved client sentiment translated into year-over-year revenue growth in three of our four business segments.

Now let's discuss them. Investment banking produced third-quarter revenues of $1.5 billion, 14% lower than a strong second quarter. Although revenues declined sequentially, our investment banking backlog remained robust, and was up versus last quarter.

Breaking down the components of investment banking in the quarter, advisory revenues were $658 million, down 17% compared to the second quarter, as industrywide completed activity declined. Year to date, Goldman Sachs ranked first in worldwide announced and completed M&A.

We advised on a number of significant transactions that closed during the third quarter, including: Arm Holdings' GBP24.4 billion sale to SoftBank Group; AGL Resources' $12 billion merger with Southern Company; and Lockheed Martin's $5 billion spinoff and merger of its IS and GS business into Leidos. We also advised on a number of important transactions that were announced during the third quarter, including WhiteWave Foods' $12.5 billion sale to Group Danone. Hewlett Packard Enterprises' $8.8 billion spinoff and merger of non-core software assets with Micro Focus International, and Abbott Medical Optics' $4.3 billion sale to Johnson & Johnson.

Moving to underwriting, revenues were $879 million in the third quarter, down 11% sequentially, due to a decline in both debt and equity underwriting. Equity underwriting revenues were $227 million, down 16% compared to the second quarter, due to a continued weak backdrop for equity issuance. However, the end of the quarter, was significantly more active than the beginning, with more than half of the quarter's IPO volume occurring in September.

Debt underwriting revenues of $652 million were down 10% quarter over quarter, following a robust second quarter. For the first nine months of the year, debt underwriting produced record year-to-date results. During the third quarter, we actively supported our clients' financing needs, participating in: Postal Savings Bank of China's $7.4 billion IPO; Great Plains Energy's $2.5 billion follow-on and convertible offering to support its purchase of Westar; and Fortis' $2 billion investment grade offering for the purchase of ITC.

Turning to institutional client services, which comprises both our FICC and equities businesses, net revenues were $3.7 billion in the third quarter, up 2% compared to the second quarter. FICC line execution net revenues were $2 billion in the third quarter, up 2% sequentially. Credit increased and benefited from strong primary issuance, and tighter spreads.

Mortgages also increased, and included better market-making conditions, given tighter spreads. Rates was down slightly as client activity was driven by the continued discussion around potential central bank actions. Currencies was essentially unchanged compared to the second quarter, with lower client activity, particularly post the Brexit vote. And commodities declined during the quarter, as activity remained light.

In equities, which includes equities client execution, commissions and fees and security services, net revenues for the third quarter were $1.8 billion, up 2% quarter over quarter. Equities client execution net revenues of $678 million were up 16% sequentially, reflecting better market-making conditions.

Commissions and fees were $719 million, down 3% quarter over quarter. Security services generated net revenues of $387 million, down 8% relative to the seasonally stronger second quarter. Turning to risk, average daily volume in the third quarter declined to $57 million, down $5 million sequentially.

Moving on to our investing and lending activities, collectively, these businesses produced net revenues of $1.4 billion in the third quarter. Equity securities generated net revenues of $920 million, reflecting Company-specific events, sales, and gains in public equity investments. Net revenues from debt securities and loans were $478 million, and included approximately $275 million of net interest income.

Investment management, we reported third-quarter net revenues of $1.5 billion, up 10% from the second quarter, as incentive fees, management fees, and transaction revenues all increased. Assets under supervision increased $37 billion sequentially, to a record $1.35 trillion. The increase was due to net market appreciation and net inflows. Long-term fee-based net inflows of $14 billion were primarily driven by fixed income products.

Now, let me turn to expenses. Year-to-date compensation and benefits expense, which includes salaries, bonuses, amortization of prior-year equity awards and other items such as benefits, declined by 13%. This was roughly in line with net revenues.

The 13% year-to-date decline results in a compensation to net revenues ratio of 41%. This is 100 basis points lower than the Firm's accrual in the first half of this year. Third-quarter non-compensation expenses were $2.1 billion, down slightly, compared to the second quarter.

Now, I would like to take you through a few key statistics. Total staff was approximately 34,900, roughly flat for the second quarter. Our effective tax rate for the year to date was 26.9%. Our global core liquid assets ended the third quarter at $214 billion, and our balance sheet was $880 billion.

Our common equity tier one ratio was 14%, using the standardized approach. It was 12.4% under the Basel III advanced approach. Our supplementary leverage ratio finished at 6.3%. In the quarter, we repurchased 7.8 million shares for $1.3 billion.

In terms of capital, our ratios have significantly strengthened over the last several years. This reflects the transformation of our balance sheets, and our cumulative efforts to derisk the Firm. All of these actions, combined with more than $30 billion of earnings since 2011, position the Firm to grow our capital ratios and simultaneously bring our basic share count to its lowest point ever.

Before I wrap-up, I want to cover three topics. Our client franchise, expense initiatives, and new opportunities.

With respect to our global client franchise, it's in great shape. We have a strong position in each of our four segments: Investment banking, institutional client services, investing and lending, and investment management. While many of our clients are currently challenged by the low-growth environment, we are committed to partnering with them as they look to navigate these headwinds.

On expenses, last quarter we discussed the $700 million savings initiative that we undertook in the first half of the year, and we continue to look at additional means of improving our efficiency, without impacting our global client franchise. Focusing on operating efficiency not only positions us for margin expansion in better environments, but it also provides additional benefits. It allows the Firm to maintain its global footprint, and to continue to invest in the future, which is an essential component of sustainable value creation.

While there are currently economic headwinds in several countries globally, our focus on efficiency across all of our businesses and regions allows the Firm not only to maintain, but also to invest in our client franchise through the cycle. Additionally, our expense discipline allows us to invest in new opportunities.

Last week, we launched a new, online personal loan platform, Marcus, by Goldman Sachs. Marcus's goal is to enter the consumer credit market, and provide a product that is simple, transparent, flexible, and provides consumers with real value. Like any new effort, we are taking a slow and methodical approach with Marcus. We are leveraging all of the Firm's preexisting strengths across risk management and technology, and we have brought in an experienced team of consumer lending professionals to drive markets forward, led by Harit Talwar.

Before taking your questions I would like to leave you with one thought, the Firm is as focused on navigating today's environment as we are on preparing for the future. You have to do the first really well, to be in a position to do the latter. Thanks again for dialing in, and I'm happy to answer your questions.

(Operator Instructions)

Glenn Schorr with Evercore ISI.

So I appreciate the color around things related to FICC, and I have a question of overall backdrop. In the first quarter of 2015, the Swiss re-pegged, stuff went bonkers for a couple of weeks and you made tons of money, even more than the overall industry. This quarter, it didn't seem like there was too many a-ha moments. I mean credit spreads tightened, and we had the aftermath of Brexit and stuff. But in your text, you point out low rates and slow economic growth as headwinds for FICC. You talk about lower market volumes and volatility in equities.

I'm just curious. When you looked at the quarter we just had, and FICC particularly, is it more like you had a nice pickup first quarter in 2015, and you are setting us up for keep calm, things have returned back to normal? Or is this possibly a little bit higher activity environment, given the uncertainty?

So it's a great question. Year over year, we were up 49% on a core basis.

Yes.

I think in some respects that speaks to a weaker third-quarter environment last year. But I have to agree with you, I wouldn't say it was a particularly strong quarter for FICC. Year over year, I talked about some of the drivers. I would say, maybe the best way to describe it, Glenn, is it wasn't so much about tail winds as it was about not having so many headwinds in the quarter. And of course it translated nicely for us.

Well, I'll take it as we'll get a little bit higher operating environment.

One last one on I&L. It's interesting that take-out multiples were near their highs, and you would expect a lot of exits. This one happened to be a better quarter. You talked about some companies, specifically about some sales in the up markets.

But I guess the question is, are you finding opportunities to also put money to work, especially on the equity side? I saw the UFC deal. And I'm a huge Conor McGregor fan, but that was close to the 6 times cap. So curious about how you see the investing environment for I&L?

So the opportunities for awhile have been more on the debt side. You've seen the I&L balance sheet transition. When you see it at the end of this quarter, it is going to be close to 80% debt. But selectively we are certainly seeing opportunities, whether they be in what we would call other forms of equity in real estate or other areas. And selectively, we've seen some good opportunities in corporate equity.

As you've probably seen, we are in the market now raising a fund. And the reception to that has been quite strong.

How big is the I&L balance sheet now? You said it's 80% fixed income, but it's over 100% now?

Just to give you the exact numbers, it's $98.9 billion, call it just under $99 billion, and that's up $1.8 billion quarter over quarter. And I said almost 80%; it's 78% really debt and other assets -- which leaves you basically with $21.5 billion of what we would categorize as equity.

All right. Awesome. Thanks, Harvey.

Christian Bolu with Credit Suisse.

Question on your consumer lending efforts. Given the FAM, we'll be facing a very different demographic than you have historically faced. Maybe just talk about how you think about reputational risk and how you would mitigate it?

Yes, so it's a great question.

So I think the short answer is providing value to the consumer. So one of the reasons we have said so many times that this is going to be a very deliberate and methodical approach and a bit of crawl before we walk in this business is because we are well aware that this is a new effort for us. Some of this is not new for us -- our technology skills, the risk management.

But the interface through the technology with this new important client base, it is a different space for us. So we've hired obviously people with decades of experience. But I think the greatest mitigating factor is slow growth, monitoring it very closely. But also, when we put this together, we took input from consumers. And it really is, I don't know if it's the first ever, but it really is a lending product that is driven by consumer input.

And so that means providing them with flexibility, with real value, with simplicity. That is why we've come out with something. We got feedback; consumers don't necessarily like and they don't understand the fee structures. So we have created a no fe- product, no small print. You call our call centers, people pick up.

Some of these things sound simple, but they're quite important in terms of what consumers want. And if you deliver what consumers want and you really control your processes, then obviously you create value. And you deliver what regulators want also.

Okay, thanks, that's helpful.

And then just a clean up question. On the buyback at $1.2 billion in the quarter, which was a bit lower than the first-half run rate, I know the last CCAR cycle, buybacks were back-end weighted. How should we think about the pace for this cycle?

You're right. A year ago there were some idiosyncrasies to the tests, which led to the more back-end weighted profile. This year, we have a bit of flexibility in terms of how we'll approach the next couple of quarters. But a lot of this is going to be driven by, as you know, the environment and demand for balance sheet.

We would really like to start putting our capital to work if the environment improved from where it is today. But certainly there is some flexibility in the profile for us to go up a little bit from these levels. But again, certainly not committing to that.

You know how we think about capital management. And share repurchase for us is not to be equated with dividends. And so it is going to be dynamic.

Okay. Thank you, Harvey.

Michael Carrier with Bank of America Merrill Lynch.

First question on capital ratios. Your ratio continues to improve, based on recent comments by Tarullo and where CCAR is heading maybe into 2018. Did anything change in how you managed through that process?

And then just with your last comments on the last question, on balancing buybacks versus investments. Are you starting to see some opportunities to make investments? Maybe it's because of market share opportunities globally, but just wanted to get your thoughts on that.

Again on the ratios, as I mentioned, 14% under standardized and 12.4% under advanced. By the way, just while I have you, because I know I'll get the question, Mike. It's 13.4% standardized fully phased, and 11.9% on the advanced fully phased.

In terms of the stress testing white paper and Governor Tarullo's comments, I would say at a high level, obviously they put a ton of work into this with various constituencies. Our initial impressions were their framework seemed quite thoughtful. And it seemed somewhat consistent with the way we actually manage the Firm.

So we manage the Firm obviously on a forward-looking basis in terms of how we stress test. But we obviously also manage the spot capital ratios. And under our spot capital ratios, as you can see, we have lots of capacity.

So we'll have to see, ultimately, the details in the NPR. But again, they did the right thing here by giving the banks the opportunity to make adjustments. Because as you know, this won't be incorporated into the 2017 cycle. So to the extent in which firms need to adapt, will be able to adapt after we see the NPR.

But I think our starting point puts us in a great position. And, again, the treatment of share repurchase. And we'll see what happens with balance sheet and other things. But we'll take our normal approach, in terms of capital management from here. But it seems like the right direction.

Okay, then just quick follow-up on I&L. When you look at some of the things that the Fed has put out there on physical commodities and some of the pressure on that part of the market, versus what you have been doing on the debt side, where do you see the outlook? Based on maybe some of these potential changes, the increase in RWAs and what you could still grow, versus what could potentially be at risk.

That's a great question.

In terms of -- why don't we just talk about the commodities NPR. The market's been waiting for this for awhile. As you know, we have been in the commodity business for decades. And we think it's really important that the Federal Reserve is taking the lead here in terms of an important area of focus for us in the industry. But especially as it relates to ultimately establishing uniform standards across the industry, so we welcome all that.

With respect to our business, we've obviously been very vocal in our commitment to the commodity business. And sometimes I think maybe that gets misunderstood. So I want to underscore it for you that what we are committed to is serving our clients and their needs. And you can unpack that a bit, and simplify it by saying, there are really three activities that are critical to our clients.

It is critical for them to hedge, and that is consumers and producers who have commodity price exposure. Financing of those businesses is critical and obviously, market-making activities, which provide liquidity to the markets and are a critical component of making those markets function. That is what we are most committed to.

You've seen over the years, we have been reducing on balance sheet investing in commodities. And so we'll work with the industry and with regulators, like we would in any NPR process. But we are most focused on ensuring that those services, from the Goldman Sachs' perspective and across the industry, can get provided to clients in a safe and cost-effective way. No different than we would approach any of the NPRs.

Okay, thanks a lot.

Matt O'Connor with Deutsche Bank.

I was wondering if you could talk a little bit more about the targeted customer base for the new lending platform in terms of FICO scores, income, or however you are defining it.

Yes, so with this launch and with this one product, we are focused on the prime borrower base.

How do you define prime? It is a pretty big segment, overall.

So we would define it broadly for you, let's just say above 660 FICO category.

Okay, and then just over time, will you provide more disclosures on this? Because as I step back and look at certainly the names I cover, it just seems like it could be one of the meaningful new initiatives that's out there in terms of changing the profile of the Company a little bit. And I think more disclosures over time would be helpful to be able to track the performance.

Sure. We are happy, as it grows, obviously as it becomes more meaningful -- just to underscore this, I got an e-mail last evening that we booked our first loan. So if you want to consider that continuous updating of financial disclosure, Matt. I don't mean to make light of your question. Obviously, as it grows and becomes more meaningful, we'll spend more time with you on it.

I think the important thing now is that we make sure that everyone understands the product, the pace we expect to move at, which will be very deliberate and slow. And that, in terms of returns long-term, if that is where you are getting, obviously, I have talked a lot about the consumer here. But we built this business to be accretive in the long run to Goldman Sachs' returns. But we are happy to keep you updated.

Okay. And then completely unrelated, any color on the regional performance within fixed income trading this quarter?

No, there was nothing specific that jumped out. It was really more across the products. But it wasn't anything particularly in the regional cuts.

Okay. All right, thank you.

Mike Mayo with CLSA.

In the past, you mentioned that you felt some competitors were having a more permanent retreat from the markets. Did you see some of the benefit of share gains this quarter, as part of your capital markets revenue?

And also, your comp ratio was up 100 basis points year over year. Are you trying to hire more people or pay more in an effort to gain share?

With respect to the market share, certainly over the course of the past year, I would say, there's been periods, particularly things like some of our core things, prime brokerage, in fixed income. Across the regions, we've seen discrete shifts in market share. I would say when we look at it in terms of the core businesses, for example, like credit, as we monitor those market shares, certainly with certain client segments, like asset managers, it feels like we are picking up market share.

Again, one of the difficult things about market share is you really need volume to grow. And even though obviously our performance this year, significantly better than last year, it's the best quarter we have had in five quarters, you really need activity levels to pick up from here.

Now, just in terms of the second part of your question, the 41% at this point is our best estimate. We've told you forever that as a conceptual matter, you should expect in periods where revenues to decline, that compensation and benefits expense should lag that. And obviously we've talked to you a ton about operating leverage. And so if revenues grow, you should also expect compensation and benefits expense to lag that growth, because of the operating leverage. But at this stage, 41% on output.

And one follow-up. Brexit, is this a chance to gain additional share? Or is this just pain that everybody has to share? And do you think more business shifts to the US?

I would say that Brexit potentially is something that could drive share to the US I think what we've witnessed over the last several years is US firms like ourselves with really, really strong market shares and leading business positions, whether you look at FICC, investment banking, equities, asset management. If you are a leader in a franchise throughout this cycle, particularly as activity picks up, I think there is share to gain.

I think our European clients need us. But in terms of Brexit, I think it's unclear whether that's having any impact at this stage. It feels like early days.

All right, thank you.

Betsy Graseck with Morgan Stanley.

I just had a couple of questions looking at the VAR that you put out in your note, obviously, in the press release. It seemed like volatility actually came down a bit in certain segments, and yet the VAR came down as well. And I look at this and I'm thinking is there an opportunity for you to allocate a little bit more in this environment and continue to generate some nice size trading revenues?

I think that observation's correct. I think what's most important about that observation is just the capacity we have under the capital ratios. So, obviously.

But again, the VAR is going to be driven by market volatilities and by client demand. And as client demand picks up, or as market volatilities pick up, certainly you would expect that to translate through. But we are not feeling constrained at all, really only by the macro environment and our client appetite at this stage.

So in this past quarter, it was more a function of client demand pulling back? Because it feels like you have the capital capacity to have had more VAR allocated this past quarter.

Yes, no. When you look at it in terms of -- so you're talking about year over year sequentially. If you look at it more sequentially, it is kind of a mix of volatility levels coming down and what I'll call position changes. If you look at it year over year, it is more about position changes.

Yes.

I think your big point is this environment wasn't a particularly strong environment. Again, it's the third quarter. It's got some of the seasonal characteristics.

Yes. Okay.

And then just secondly on Asia, could you give us a sense as to how you are reorienting your Asia franchise? I notice that there was some headcount changes over there and some management changes. Could you give us a sense as to what the strategy is for that region?

As you remember, on the last call, we talked about the expense initiatives we launched in the first half, which translated through to a $700 million run rate savings. Anything you are reading in the press is a bit distorted. This process in Asia is just a continuation of the process that has been ongoing for the rest of the Firm. In terms of Asia, completely committed to the region.

That makes sense. I'm just saying I think there was also a comment around the head of Asia was changing, and so wondered if there was a shift in focus on running?

No, they are completely unrelated events. If you were sitting in the management committee yesterday, you would have heard Mark talking about how he joined the Firm in 1976 and he just felt this was the appropriate time for him. But they are completely unrelated in terms of there is nothing strategic in that.

Okay. All right, thanks.

Guy Mozkowski with Autonomous.

I wanted to follow-up on the I&L questions. Specifically, maybe you can just give us some color, maybe some examples, of how you have been continuing feed the equity balances to offset the gains harvesting that you have been doing over the past couple of years. Because you've harvested quite a bit, and yet you have been able to maintain that asset line item in the $21 billion, $21.5 billion range. And in the context of that, maybe you can comment on some of the recent proposals or requests that the Fed has made for congressional action to tighten up Volcker.

In terms of the I&L balance sheet, again you were right to point out that the $21 billion, $21.5 billion has been relatively constant. Obviously, that's become a smaller component of the balance sheet. As I mentioned before, it's closer to 8%. And 8% is really lending and other items.

And so I don't have details in front of me to give you blow by blow breakdowns on where reinvestment is occurring. Obviously, corporate private equity has been slow over the last couple of years. But that $21.5 billion, 20% of that now is made up of real estate globally. And so that's been a meaningful participant.

Now, why have you generally not seen the asset class going lower? Obviously, it's a bit of a high class problem. The assets have been performing; the markets have been generally going up over the last couple of years. And you've seen that performance out of the I&L segment, but that is part of the gives and the gets.

In terms of the I think your -- I don't think it's as much talking about Volcker as you are talking about the Fed discussions with Congress. It's very early days, and we'll see we'll see how that evolves.

Is that your question?

Yes I think that before the commodities NPR came out, the Fed had also, I think, made some noises about asking for Congressional guidance, I guess, on cutting back on merchant banking that's allowed within Volcker. And I was wondering if you had some sense of whether you would be able to continue to feed that equity line and keep it in the range it's been in, or grow it if, in fact, there were further restrictions on merchant banking.

Well, obviously the opportunities exists. We think we are providing an important layer of capital. But these conversations are evolving, and it's super early. So there would be no way for us to interpret or give you any guidance on that.

Fair enough.

I guess the other question, also I&L-related is, and had this has to do with the negative operating leverage comment that you had made for the Firm broadly. So for the nine months, your revenues are down; your comp is down not as much, maybe a couple of percentage points differential, which is a negative operating leverage. But the biggest component of the revenue decline has been I&L.

My question is, if I&L had declined in line with the rest of the Firm, would it be possible to keep the comp declining in line as well? In other words, would you have been able to maintain your margin better if it hadn't been I&L that was driving the revenue down?

On the compensation benefits expense, you are right. Revenues are down 15% year to date, and compensation benefits down 13%. Now, maybe you would characterize that as negative operating leverage. I don't know that is meaningful negative operating leverage. The reason we were able to achieve that almost lock-step decline was because of the expense initiatives we launched in the beginning of the year.

In terms of the contribution of an individual segment, we look at this as a Firm-wide collective as we go through the compensation process. And obviously compensation, as we have repeated to you many times before, it's about performance. But it's also about managing the Company for the long term and executing our strategy for the long term. So our compensation process is not going to be driven by one segment's contribution one way or another.

Okay that's helpful. I appreciate it.

Fiona Swaffield with RBC.

I just wanted to ask about pricing. You mentioned, we talked about market share. Have you seen, given that some banks are putting less capital to work than others, any impact on pricing in any of your products?

And there's a follow-up as well on the tax rate. Now that it's come in lower again, what you're thinking about for the future. Thank you.

So in pricing, at the margin, it's very business specific. We have seen in some cases what I'll call a rational repricing in things like prime brokerage. But again, in this low volume environment, I don't know how much of that you'll see.

In other words, the same low-volume low-growth environment we have globally that is contributing to what looks like in the future an extraordinarily strong competitive environment for our businesses is the same thing that doesn't allow for a lot of price improvement. So I think this is one of these things where, even though this has taken a while, you need an environment that is challenged for a while to get competitor retreats, but the same challenges don't allow for price adjustment. It may be over time, you see price adjustments. But certainly in things, the more capital-intensive parts of the business, like prime brokerage, where we are a market leader.

In terms of tax, I think in terms of your estimates, obviously it will be driven by regional contributions. But I would say 28% to 29%, that range.

Thank you.

Jim Mitchell with Buckingham Research.

Maybe just a question on Asia, in a more positive way. You have the Hong Kong-Shenzhen connect going into place later this year. It seemed like when the Hong Kong-Shanghai connect went in, you had a nice boost in equity trading, the industry did, in the first half of 2015. Do you expect something similar this time around?

I don't know necessarily. If you have a strong view in terms of the immediate, I do think that over the intermediate term it's an important development. I think more broadly, while it might not be a straight path to increasing volumes, I think more broadly in Asia our perspective is, and with China, that we're on a long upward trajectory of activity.

And our role and ability to work with clients in the region, whether it's training, advisory, capital raising, this just feels like a very long positive trajectory. But it's not going to be a straight line.

Fair enough.

And then maybe a follow-up on the pipeline. You did note you're down year over year. Is that mostly M&A? Can you give any more color on what you're seeing in terms of the outlook on the pipeline?

The pipeline feels pretty good, when you talk to our M&A team. And the backlog sequentially was up, not down.

Right.

But the activity levels that I mentioned, in terms of completed transactions in the market, obviously down over year after very, very healthy levels. The best perspective I can share with you is the one I get from talking to our M&A bankers. And it hasn't shifted much over the course of the year. The same fundamental factors that are contributing to the last two years of M&A activity, generally low top-line growth, a desire to drive efficiencies, access in the capital markets, all those factors feel in place.

Now, regionally, the US feels more active than Europe, and Asia feels a bit more active than Europe. But I'm giving you really very localized commentary. Long term, it feels like the fundamental factors are in place.

And the underwriting side of the equation?

So in underwriting, as you saw, we have had a very strong debt performance. We had a record for the first nine months of this year on a year-to-date basis. I mentioned before that half the IPO volume, or a meaningful portion of the IPO volume, actually occurred in September.

Right.

So it does feel like we're starting to get into a market where a lot of that activity that got pushed from the first quarter into the second quarter, that still exists. So we feel reasonably good about activity levels in the Capital Markets on an intermediate basis.

Okay, great. Thanks.

Chris Kotowski with Oppenheimer.

Yes, I wonder if you could give us some more color on the new private equity fund? I saw a press report saying it's between $5 billion and $8 billion. But if you could just comment on the targeted size and mandate? Is it global or North American? Is it pure corporate equity, or is it broader?

And then as a follow-on to that, if it's $5 billion to $8 billion, the Blackstones and Apollos of the world are raising $18 billion-plus. So what's the strategy to put the money to work? Is it to go more middle market? To do fewer deals or to bring in more co-investors? Those kind of questions.

I'm happy to talk about it. I don't know that I'll get to all of your questions, but let me just give you the high level. So we are in the market.

There are really two fundamental reasons why we decided to engage in the fund raise. One was really to have a full offering for our private wealth clients. And the second is if you look at the capital regime, particularly under CCAR as it relates to private equity, corporate equity specifically, those capital requirements continue to edge up. So they're giving us the flexibility to utilize a fund and to provide that to our clients. It seemed like it made a ton of sense.

Now, in terms of the fund size, we have been talking about $5 billion to $8 billion. That is what the team feels is the right size for the horizon they are thinking about. So they are not looking to raise the largest fund in the world, despite the fact that there has been very significant interest in terms of how we are approaching it. And in terms of its focus, its focus will be on corporate private equity.

Okay, and should we assume that you will commit 3% to it? And is it the standard asset management 1% and 20%? And I assume that these will show up on the asset management side?

And then kind of related to that, is this all a wealth management, asset management, standalone business that's walled off from investment banking? Or can there be cross-pollination between the two?

Well, the activities allow for us, obviously, to work with our investment bankers. But it is an asset management-driven product, and it's Volcker compliant in its design.

Okay, all right. Thank you.

Brennan Hawken with UBS.

So first question on non-comp. I think you took a charge here in occupancy. Is there some benefit that we should see flowing through in subsequent quarters from that occupancy charge this quarter?

Yes, we took a $63 million charge. This relates to one asset that we leased out. The run rate on that is small. But generally speaking, when we look at these things, we look for a reasonably short term, in terms of pay back, in terms of recouping those expenses.

But this has been something we were just waiting for the market to recover. But it's a small item.

Okay. And then, hoping to ask a follow-up for your previous comments on FICC. I think you commented that the quarter wasn't a particularly strong one, even though the year-over-year growth was good. And it seemed like you commented that you are gaining share in FICC, at least among some market participants.

But if we look at year-to-date trends in revenue, it does look like some of the US money center banks are growing double digit plus over 2015 year to date, whereas Goldman's revenue iss down. Can you help us understand maybe why that's diverging? Is it a business mix issue? Is there something else going on? Are you shifting away from certain clients or what have you? Any help you could give us there, Harvey, would be great.

Yes, it's no problem.

I think it is more environment specific, and there could be some aspects to different footprint. All these businesses at this stage in FICC -- and again, we don't have much visibility into competitors -- they are all very different. I mean, some of these are enormous balance sheets. Some of them are very big in emerging markets; some are not.

I think when you look at it, I wouldn't overemphasize the first quarter of 2015, which I think is really the factor that is influencing your math. And again, I wouldn't overemphasize the performance that we had in the third quarter either because things just don't shift that quickly. I think that the third quarter was solid for us.

But as I talked about, currencies, commodities was down year over year, so it certainly wasn't an environment we were hitting on all cylinders. And even with that, we were in a double-digit ROE environment. So it feels pretty good to us, and the momentum feels good.

Okay, thanks.

Steven Chubak with Nomura.

Wanted to start off with just a follow-up question relating to the earlier merchant banking discussion. Recognize that many of the recommendations are, in fact just that, that have come from the regulators. But just thinking about the strategy for this business, longer term, looking at the activities more broadly, it's been a very good profit source, historically. But it also consumes significant amounts of capital. And under a CCAR lens, some have speculated it could even be ROE dilutive overall.

I was wondering, given the current backdrop and some of the high-end regulatory scrutiny, whether you have considered strategic alternatives for the business, such as an IPO or a spin, that could generate value while maybe allowing for some degree of regulatory unshackling?

I think you're right to underscore, which I mentioned earlier, the fact that over time the CCAR requirements under -- let's just use private equity investing and corporate equity -- have certainly increased. Now, the nice thing about that analytic framework is it's perfectly transparent. You know what the global market shocks are, et cetera. So you can certainly evaluate investments that you are making.

Now, we are talking about investments at the bottom part of the capital structure. So in terms of the return profile, we are obviously very selective about how we deploy that capital. But as I mentioned before, one of the nice things about launching this fund is it does give us flexibility in terms of how to think about deploying that capital. And it creates a new, important product for our clients. So we have options.

Got it, okay. That's very helpful color, Harvey.

Maybe just one follow-up on the capital side. Actually, we're shifting over to the denominator. It is quite evident that you have made significant strides in mitigating your standardized RWAs. I think it's down about 15% since the end of 2014. But the advanced risk rated assets have actually crept higher.

I know some of that is going to be a function of increases in op risk. But I was hoping you could speak to any mitigation potential that you can achieve on the advanced risk rated assets moving forward, particularly if the Collins floor does end up applying to some of the new proposed capital changes that Tarullo spoke to in his recent remarks.

Yes, so as I mentioned, on the advanced transitional, we are at 12.4% under the current capital regime. Obviously, that gives us more than enough capacity. We obviously have things that roll off and things like that, but not material enough for me to highlight for you.

To the extent to which, I think at this stage, whether you look at the supplementary leverage ratio, standardized, advanced, we have the tools in place through our return on attributed equity framework, the ROE framework which we talked a lot about. We have the tools in place at this stage and, more importantly the culture, the people engagement across the entire Firm. We'll adapt as needed, but right now we feel that we have more than enough capacity.

Got it. Thanks for taking my questions.

Matt Burnell with Wells Fargo Securities.

Just a couple of quick ones. You mentioned that there was the strongest inflow of AUM in the quarter was in fixed income. Any color as to what was driving that? And was that all liquidity or was it slightly higher margin flow?

No, so liquidity products, I believe, was up $2 billion in the quarter. So this was long-term fee-based assets that were really the driver. And the team has done a very good job in their advisory businesses. And so that, I would say, would be the more meaningful part of the driver in terms of this quarter's flows.

Okay, and just circling back to another question previously asked. If I back out the charge that you took in occupancy this quarter, it looks like, as well as litigation, it looks like you are running in the last couple of quarters at around 24%, 25% non-comp to revenue ratio. I understand revenue can be a bit volatile, but it's been trending prior to that at 30%-plus. Is 25% a new run rate? Or is it really going to depend -- should we really think more about the dollar value rather than the ratio?

We don't target a ratio. You should think of the ratio as an output. Now, obviously, we have been very diligent around expenses over the last couple of years, reflecting the environment.

If you happened to have a lot of historical financials, you would see that market development this quarter was under $100 million. I think the lowest it's been in seven years. Obviously, we have been very focused on this. We don't target a ratio.

And a big driver obviously is BC&E. And if you saw a big activity pick-up, that would move with the environment as well. But we are very focused on expenses, as you know.

Yes. Thanks very much.

Eric Wasserstrom with Guggenheim.

Just to step back for a moment, can we just talk about how we should contemplate revenue growth across the mix of businesses more broadly? Because I look at what happened this quarter and what's occurred over the course of the year. And in the underwriting businesses and in the advisory business, obviously you know the statistics much better than I. But advisory may be moving to a new, lower plateau than what we've seen recently.

And with all the cross currents running through the trading environment and through the investing environment, how do we contemplate the overall go-forward mix of business?

I think we don't target a mix, as you know. We focus on the clients in those businesses where, as you know, we have leading market positions; and so we feel good about that. I think it's a bit more of what your expectation for the environment is.

We control the micro issues we can focus on: our client engagement, expenses, capital management. But a lot of the things are outside of our control. And I would say that in aggregate, when you look at the vast majority of our businesses, this is not an extraordinary environment. Despite the fact that third-quarter performance was strong on a relative basis, there were lots of challenges regionally.

You could certainly envision an environment that was significantly better from where we are today. You've heard me say this a lot, but, we root for growth. And an environment of negative interest rates in vast parts of the world is not indicative of a world that is growing at a great pace. So you can see much better environments than we have today, and we hope that ends up being the case.

But just from a planning perspective, I mean is there any reason to think that, or that this environment, that those policy dynamics are changing over, let's say, a medium-term horizon?

Just like I think they could change always pretty quickly for the negative, and we tend to be more contingency planners, you could certainly see things break for the high side. Obviously, rates could move back into positive territory, which would be an indicator. And there's been speculation in the market that we might be more on the cusp of that in the United States.

I think the most important takeaway is whether or not we move into that environment in the near term, we are incorporating all those current factors into how we are running the Firm today which, in a pretty muted environment, we are able to grow revenues, demonstrate a double-digit ROE. And we truly believe we are well-positioned in the franchise, with significant operating leverage, if the environment improves. So we feel quite good about our position. But we are rooting for better environment for everybody.

If I could sneak in one last one on Marcus. Most firms that do similar kind of lending typically have a 2.5% to 3% pre-tax ROA. How does that compare with what it is you are targeting?

So that's perfectly consistent with what we are able to generate. Of course, we don't have any legacy infrastructure or cost structure. This is all a white sheet of paper for us. So we'll see how it evolves, but that is certainly achievable.

Thanks very much.

Devin Ryan with JMP Securities.

It seems like we are speaking a lot more about your technology footprint on these calls. And you have been increasingly highlighting a number of those capabilities. When we look at those initiatives, like Marcus or Symphony, Marquee, or consolidating the electronic trading book across businesses, and maybe I missed something there, but where do you see the most immediate opportunities to actually move the needle? And I guess that's part one.

Part two is as you think about future investments in the technology, do you think more of the incremental spend from here is going to be more offensive positioning, revenue-producing, rather than defensive?

So it's a great question. I would say that, broadly speaking, and this won't be completely inclusive. But I think if you define our technology strategy as focused on client engagement and those tools and services we can deliver to clients that provide differentiated value to those clients. And you see us doing that in our capital markets businesses, and obviously you see us creating that with Marcus.

Two, there are times when we feel like, given our core technology skills, we are in a position to develop technology which would be better enhanced outside of the Firm, ultimately, even though we've incubated it in the Firm. Symphony would be a great example of that. We feel like, as an information sharing platform with better security, better compliance controls, we felt like that was something better utilized by a broad range of market participants.

And lastly, our own technology internally is quite important for making us more efficient, and adapting to regulatory change, and managing our risk. And that's obviously been very core to what we do. If we look across all three of those different platforms, if you will, for lack of better language. I would say the most important thing, in addition to controlling the Firm, is our client engagement. And Marcus reflects that trend as it relates to consumers.

Got it, that's great. Very helpful. Maybe just a quick follow-up.

Just any update on the momentum in deposit gathering within the online bank? Just how that has been, I don't know if you give any numbers there, but how that's been maybe relative to expectations now that we are a little ways away from the launch?

So it's more than exceeded our expectations. I think in the past quarter, we picked up another $1 billion of deposits. And so the momentum there feels quite good, and the team has done an excellent job of transitioning the platform into Goldman.

Got it. Thanks very much.

Brian Kleinhanzl with KBW.

Harvey, actually I'm all good. All my questions were asked. Thanks.

Okay, great. Thanks, Brian.

Marty Mosby with Vining Sparks.

Going back to the comp ratio, and what you said earlier about as revenues go higher, the comp ratios should really drift lower. As we are having lower revenues this year, the comp ratios should probably drift a little bit higher than it was last year. Is that the concept you were really pushing forward earlier?

This is completely consistent, Marty, as you know. You have been following us forever in terms of broadly speaking, and it may not be the case in any given year. But broadly speaking, we've encouraged you to expect that compensation and benefits expense will lag revenue moves.

So you've seen it through the year to date; 41% is our best estimate. But revenues are down 15%; compensation benefit expense down 13%. In environments where revenues are up, base case, you should expect a lag in that direction also, particularly given how much we have emphasized operating leverage with you.

That is what I thought. I've just been spoiled the last two year with revenues being fairly consistent on a year-on-year basis.

We like it.

The other thing, you mentioned you had four businesses, which is outlined on income statement very clearly. When you talk about the new consumer business and lending, it really doesn't fit into any of those four. Do you feel like you could put deposits maybe in asset management? But are you thinking about this as evolving into a fifth business? Or how would you tuck it into your overall strategic mix today?

So three of the four segments are up this year, obviously. The one segment, which we've worked hard to unpack for everybody, is investing and lending. And this would very naturally fall into the lending segment. Obviously, to the extent to which down the road as an activity in and of itself, if it had material contribution, we could talk about highlighting more. But I think it will get a lot of attention as it grows anyway. It's pretty exciting.

Got you. Thanks.

At this time, there are no further questions. Please continue with any closings remarks.

Since there are no more questions, I just really want to take a moment to thank all of you for joining the call. Hopefully, I and other members of senior management will see many of you in the coming months.

If any additional questions come up, please don't hesitate to reach out to Dane or the team. Otherwise, please enjoy the rest of your day. And I look forward to speaking with you on our fourth-quarter earnings call in January. Take care, everyone, and thanks again.

Ladies and gentlemen, this does conclude the Goldman Sachs third-quarter 2016 earnings conference call. Thank you for your participation. You may now disconnect.