高盛 (GS) 2017 Q2 法說會逐字稿

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

I would like to welcome everyone to the Goldman Sachs' Second Quarter 2017 Earnings Conference Call.

This call is being recorded today, July 18, 2017.

Thank you.

Mr. Holmes, you may begin your conference.

Good morning.

This is Dane Holmes, Head of Investor Relations at Goldman Sachs, and 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 results, please see the description of risk factors on our current annual report on Form 10-K for the year ended December 2016.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, capital ratios, risk-weighted assets, global core liquid assets and supplementary leverage ratio.

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

This audiocast is copyrighted material of The Goldman Sachs Group, Inc.

and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, Marty Chavez, will now review the firm's results.

Marty?

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

I'll walk you through the second quarter and first half results, then I'll be happy to answer any question.

In the second quarter, we produced net revenues of $7.9 billion, net earnings of $1.8 billion, earnings per diluted share of $3.95 and an annualized return on common equity of 8.7%.

Taking a step back to review our year-to-date results, we had firmwide net revenues of $15.9 billion, net earnings of $4.1 billion, earnings per diluted share of $9.10 and a return on common equity of 10.1%.

As you can see, the first 6 months of 2017 reflected improved performance.

We were able to achieve this despite what continues to be a challenging operating environment in certain businesses.

Our revenues were up more than $1.6 billion or 12% compared with the first half of last year.

Meanwhile, expenses were up only 6%, demonstrating the positive operating leverage that is embedded within our operations.

Despite a difficult backdrop for our FICC business, the firm grew pretax margin by 340 basis points versus last year, and our ROE increased 260 basis points.

The improvement stems from having a diversified set of leading global businesses.

Weakness in FICC, particularly in commodities, was offset with results in Investing & Lending, Investment Management and Underwriting.

As all of you are aware, many of the themes that we discussed during the first quarter continued into the second: Rising market values and low volatility.

On one hand, rising market prices were supportive of capital markets activity, Investment Management performance and our Investing & Lending activities.

We recorded our third best quarterly revenue performance in debt underwriting, reflecting our multiyear effort to improve our relative positioning with our clients.

Another area of strength is Investment Management, where we posted record management and other fees and assets under supervision.

And Investing & Lending generated $1.6 billion of revenues in the quarter, with net interest income within debt securities and loans reaching more than $400 million.

On the other hand, low levels of volatility, sequentially lower in several FICC asset classes, negatively affected the FICC environment.

The current backdrop has been particularly challenging for our FICC franchise, creating headwinds in areas that are core strengths for the firm.

For example, we are a market leader in commodities, but it was a challenging environment on multiple fronts.

In addition, our clients place significant value on the firm's long-standing commitment to market-making as well as our strength in derivatives, but client activity levels understandably declined given the low volatility environment.

With that as a broad overview, let's now discuss individual business performance in greater detail.

Investment Banking produced second quarter net revenues of $1.7 billion, up slightly compared to the first quarter.

Our Investment Banking backlog increased since the end of the first quarter.

Breaking down the components of Investment Banking in the second quarter: advisory revenues were $749 million, roughly flat to 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: C.R. Bard's $24 billion sale to Becton, Dickinson; Amazon's $13.7 billion acquisition of Whole Foods; and DuPont Fabros Technology's $7.6 billion merger with Digital Realty Trust.

We also advised on a number of significant transactions that closed during the second quarter, including: Syngenta's $43.6 billion sale to ChemChina; HPE's $13.5 billion spinoff and merger of its Enterprise Services business with Computer Sciences; and PrivateBancorp's $5 billion sale to CIBC.

Moving to Underwriting.

Net revenues were $981 million in the second quarter, up 4% on a sequential basis.

Equity underwriting revenues were $260 million, down 16% quarter-over-quarter due to lower follow-on offerings.

Debt underwriting revenues of $721 million reflected continued strengths across all products and were up 13% relative to the first quarter.

During the second quarter, we actively supported our clients' financing needs, participating in: QUALCOMM's $11 billion bond offering in support of its acquisition of NXP; Intrum Justitia's EUR 3 billion bond offering in support of the combination with Lindorff; and Banco Macro's $766 million follow-on offering.

Turning to Institutional Client Services, which comprises both our FICC and Equities businesses.

Net revenues were $3.1 billion in the second quarter, down 9% compared to the first quarter.

FICC Client Execution net revenues were $1.2 billion in the second quarter, down 31% sequentially as volatility and client conviction remained low and led to weaker client activity quarter-over-quarter.

All of our businesses produced lower net revenues quarter-over-quarter.

Rates was down significantly.

Credit, mortgages and currencies all declined.

Across many of these products, volatility trended lower in the quarter and clients were less active.

Commodities was also significantly lower and was our worst quarter on record.

Not surprisingly, given the results, it was a difficult quarter on all fronts.

The market backdrop was challenged.

Client activity remained light.

And we didn't navigate the market as well as we aspire to or as well as we have in the past.

Nevertheless, the firm remains committed in every way to help our clients manage their commodity risks.

Now moving to Equities, which includes equities client execution, commissions and fees and securities services.

Net revenues for the second quarter were $1.9 billion, up 13% sequentially.

Equities client execution net revenues of $687 million were up 24% compared to first quarter due to stronger results in cash products.

The business continued to operate in an environment with global equity market strength.

Commissions and fees were $764 million, up 4% versus the first quarter as volumes increased modestly.

Securities services generated net revenues of $441 million, up 15% quarter-over-quarter due to seasonally stronger client activity.

Turning to risk.

Average daily VaR in the second quarter was $51 million, down from $64 million in the first quarter, the byproduct of lower volatility levels.

Moving on to our Investing & Lending activities.

Collectively, these businesses produced net revenues of $1.6 billion in the second quarter.

Equity securities generated net revenues of $1.2 billion, reflecting sales, corporate performance and gains in public equity investments.

Net revenues from debt securities and loans were $396 million and as I mentioned before, included more than $400 million of net interest income.

In Investment Management, we reported second quarter net revenues of $1.5 billion.

This is up 2% from the first quarter primarily as a result of higher management and other fees, which were a record for the quarter.

Assets under supervision increased $33 billion sequentially to a record $1.41 trillion.

The increase primarily reflected $23 billion of net inflows in connection with the acquisition of a portion of various investors and $17 billion of net market appreciation.

This was partially offset by net outflows in liquidity 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 41%.

This is the lowest first half accrual in our public history and 100 basis points lower than the accrual in the first half of 2016.

As we discussed last quarter, the reduction in the accrual rate reflects the completion of the nearly $900 million expense initiative that we announced last year.

Second quarter noncompensation expenses were $2.1 billion, down slightly from the first quarter.

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

Total staff was approximately 34,100, unchanged from the first quarter.

Our effective tax rate for the year-to-date was 19.1%.

If you exclude the tax benefit related to the settlement of equity awards, our effective tax rate for the year-to-date would have been roughly 29%.

Our global core liquid assets ended the second quarter at $221 billion.

And our balance sheet and Level 3 assets were $907 billion and $21 billion, respectively.

Our Common Equity Tier 1 ratio was 12.5% under the Basel III advanced approach on a transitional basis and 12.2% on a fully phased-in basis.

It was 13.9% using the standardized approach on a transitional basis and 13.5% on a fully phased-in basis.

Our supplementary leverage ratio finished at 6.3%.

And finally, we repurchased 6.6 million shares of common stock for $1.5 billion in the quarter.

For the 4-quarter CCAR cycle for 2016, we provided shareholders with nearly $7 billion of capital through share buybacks and common stock dividends.

In terms of this year's CCAR test, the Federal Reserve Board did not object to our plan, which includes the potential for share repurchases, an increase in our common stock dividend and the issuance and redemption of capital securities.

We are pleased with this outcome and believe we have flexibility to manage our capital going forward.

Now for some brief summary comments.

The first half of 2017 provided 2 important reminders.

First is the value of having a leading diversified franchise.

Despite a difficult first half of 2017 for one of our major businesses, FICC, we posted 12% year-over-year revenue growth and a 10.1% return on common equity.

In addition, we were able to produce $9.10 of earnings per diluted share.

We benefited from leading positions in many of our businesses.

And while their relative performance may vary in any individual quarter, their collective value has been central to our outperformance over the long term.

The second reminder is the ongoing and long-term benefits associated with being a prudent manager of both cost and capital.

Over the last several years, we have been looking for ways to operate more efficiently.

This includes shifting our organizational footprint to different locations such as Salt Lake City, where we now have more than 2,300 people.

It has meant leveraging technology to improve internal productivity and client engagement.

It has also meant returning more than $35 billion of capital since the beginning of 2012, and in the process, creating our lowest ever share count.

This has positioned the firm to provide more operating leverage to shareholders.

And it has also given us the capacity to make strategic investments such as Marcus and expand our Investment Management business by acquisition.

Ultimately, we know that by recruiting and retaining the best people and providing our clients with the best advice and service, we are well positioned to outperform over the long-term.

Our commitment to these ideals is unwavering.

Thank you again for dialing in.

And with that, let's move to the Q&A portion of the conference call.

I'm happy to answer all of your questions.

(Operator Instructions) Your next question, from the line of Glenn Schorr with Evercore ISI.

So I definitely heard all the commentary on FICC, and I think commodities is one of the things that stands out, that makes you different than the others.

But maybe we could talk about mix of clients and how much that adds to maybe the differentiated performance that we're seeing, meaning you seem more volatility dependent, right, we've talked about in the past.

And when VaR's low, you're (inaudible) more than others.

Is there anything that Goldman can do to broaden the mix of both clients and products to be less volatility dependent?

In the past, you have a relationship with Sumitomo that brought a bigger lending mix.

I'm just thinking out loud.

Sure, Glenn.

Obviously, that's the -- a question on our minds as well as yours.

And so to step back for a moment, while there are nuances and everyone's franchise is a bit different, as we all know, our franchise emphasizes providing liquidity to active asset managers.

So it really isn't just a question of low volatility, it's more a sequence of low volatility, less dispersion, less client activity, reduced opportunity set and lower revenues.

Also, as you mentioned and I mentioned in the prepared remarks, we have a leading commodities business, which has a greater weight in our franchise than in other franchises.

And it was a challenging backdrop where commodity is really challenging on all fronts.

And in addition, while it was a potentially better business environment for mortgages year-on-year, we have a smaller weight of mortgages in our franchise.

So those are some effects that are likely there.

To get to the second part of your question on actions that one can take, I can tell you that everyone in our FICC post business is intently focused on this topic and at a granular, molecular level, working on it, as are all of us in the leadership team.

So much of it is blocking and tackling.

So in no particular order, we're looking to see where potentially there are gaps in our client coverage and onboard new clients and serve them.

Also, the ongoing question in every business, generally, is how do we do better with the clients who are already clients of the firm?

How can we cover them better?

How can we have a greater impact with them?

How can we provide them new solutions to their challenges?

And that is really an iterative process of communicating with the clients.

Our business starts and ends with them.

And so it's communicating with them, coming up with new products, technologies, tools, analytics, workflows and iterating so that we have an offering that is what they're looking for, and that's something that we're going to continue doing and we're totally committed to it.

Maybe the related follow-up is more cyclical than that structural piece, and just like -- I guess, I scratch my head at times and say, "Why is volatility so low?" Like theoretically, we've been waiting for this inflectionary point for the U.S. to be off QE to start raising rates, which is different than what's going on in Europe and Asia.

You've had some currency movements, some commodity movement.

You would have thought this would have been a better volatile backdrop and people would have wanted your liquidity, but it's not happening.

Well -- I'm sorry, Glenn, we -- I interrupted.

No, I don't know.

Are we just -- are we hooked on idiosyncratic events and actually, these asset class moves aren't good enough?

What I would say there, Glenn, is really on predicting when anything will be different than it is.

Just looking back historically, 1 year ago, exactly at this time, I don't think any one of us would have predicted the strong client activity market environment of the second half of 2016.

It arrived and we had the capacity to serve our clients when they became more active on the back of any number of events happening globally.

As for the environment, generally, one can think of a number of possible drivers that would change the environment.

Some things that would potentially be supportive to a greater client activity would be, of course, economic growth, confidence, pro-growth policies.

But ultimately, our business is driven by the clients and their activity.

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

Just one more question on the FICC side.

You mentioned, in terms of looking at the business and maybe some of the client gaps, the market share.

I guess, when we look at the first half of '17, it's weak and maybe commodities is a bigger part of that.

But I think even in '16, when we look at the global competitors, it seems like the FICC business has been a little bit more challenged.

I'm just trying to figure out how far along like in that process is the management team or is the FICC franchise in terms of reassessing whether it's the client, the product mix, that you're trying to diversify and broaden the growth of new opportunities?

Well, it's a really good question.

And so let's go into some other effects that may be going on here and of course, I'll caveat it by saying that we don't have transparency into our competitors' FICC businesses.

But I'll note that historically, we've had strength in derivatives.

And this was a week quarter, like the first quarter, for derivatives.

Also, it's likely that some of our competitors have bigger corporate footprints than we do as well as bigger financing footprints than we do.

And so, while the core of our business in FICC has been, as I mentioned, providing liquidity to active asset managers.

It isn't a matter of just focusing on active asset managers and having a leading active manager franchise, it's also a question of how we can deepen our impact with the clients and have a leading cash offering as well.

So it isn't one or the other, it's a question of doing both.

Similarly, talking about asset managers, we can have a great asset manager franchise and a great corporate franchise and working on both.

And so this is something that all of us are evaluating and making changes and working on and we're committed to it.

We know we need to do better.

Okay.

And then just a follow-up, I guess, on CCAR and just capital priorities.

Given, I guess, the combination of some of the maybe the challenges on the trading side, but then also just a valuation, the stock, did anything change in terms of how much you guys are focused on capital return versus reinvesting in the business, M&A activity?

And if there is areas -- I know you guys have been active on the asset management side, but anything else on that front?

Well, so just a few thoughts on CCAR.

We've learned a lot going through the process for a few years now.

And without question, the process makes the industry safer and sounder.

This year, the Federal Reserve's analysis showed that 34 banks could withstand $0.5 trillion in stress losses and continue lending to their clients.

It's a robust process and it's evolving every year.

And ultimately, regulators have the authority for capital.

Of course, we have our view and detailed analytics of what's the right amount of capital to hold.

At various times in the past, as you will know, we've resubmitted on CCAR, which is another way of saying that we believe that we had more excess capital than we could return or deploy.

This year, we did not resubmit.

And we deem it important to operate from a position of strength to have, therefore, excess capital and also to have excess capital to deploy to the clients.

And we're ready and looking forward to increased opportunity, increased client activity and therefore, more opportunities to deploy capital.

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

So I -- you talked a lot about customer sets and just very, very low levels of volatility and activity, and I think a lot of that is sort of manifest in the market, so we get that.

That said, you've said now twice, in last quarter's call and this one, that you could have navigated the markets better.

And I -- is that only with respect to commodities?

Is that more broadly?

And can you just give us a little bit more color on what you mean by that?

Sure.

So looking at our FICC businesses, as we discussed, year-on-year, they all declined, except for mortgages.

And sequentially, they all declined.

And while there are nuances, the primary driver across most of the businesses, and I'll get to commodities in a moment, the primary driver for the decline sequentially or year-on-year was lower client activity with all the drivers that we discussed, lower volatility, less dispersion, less opportunity set.

Commodities is a story of challenges on all fronts.

And there, it was lower client activity and also a difficult market-making environment.

As you know, in market-making, if I could use for a moment a store analogy, though it's more complex than the typical store, our clients -- we need to have in our store the products that the clients are seeking.

And we need to have a capacity to create the products that the clients are seeking.

And sometimes, clients are also selling us products that go into the store, which is maybe different from a typical store.

And all of this is happening in a dynamic market environment where the value of all the products in the store is moving up and down.

And so managing that central problem of risk management in a market-making business requires choices and art and science, and it's an uncertain process.

And you can make good choices and have less than good outcomes.

And so that's what I mean when I say it's a challenging market environment.

And also, we didn't navigate the market in making those choices as well as we want to and as well as we typically have.

Okay, that's helpful.

And then turning the page to equities, which we haven't really talked about much but where you actually had a pretty meaningful improvement relative to both of the referenced quarters and looking in particular at the customer execution.

Are you starting to see some of the benefits of the investments that you've made in quant-oriented products?

Did you just have a very successful period in terms of equity derivatives despite the fact that VaR wasn't great?

Actually, you said cash products, it doesn't sound like it was that -- maybe you can just give us a little bit more color for how you saw such a significant increase in execution results?

Well, Guy, I'd be very happy to go into some significant detail on our Equities business.

As we mentioned, it was an environment of higher equity prices and low volatility, and then you asked the questions, why is this -- how is this different, and I would note several things.

First, our volumes held up rather well, and you can see that in the commission's line, which we break out.

Then looking at the equities client execution line, and you referenced this, we had better cash results globally.

And beyond the U.S., we had better cash and derivatives results.

And we noticed our market share going up, not just with our active manager clients but also the passive managers.

As for providing capital in equities client execution, we observed increased demand around a variety of events: the European elections; also, as we noticed last year, around the Brexit referendum.

In addition, as it relates to equities client execution, we observed a normalization in the markets in Asia.

And to get to another part of your question, we are observing the positive results of investing over multiple quarters in both execution and in capital commitment.

And then in addition, I would note, corporate activity remained healthy and is typically not correlated with the activity of the active manager clients.

And so referencing all of these because they're all interesting and useful observations and notions that we can apply in our other businesses.

For example, in the FICC business, we've already begun applying some of these.

And for instance, U.S. corporate credit, and now we're extending it to Europe and into our other businesses.

And just one more for me, which is sort of part question, part observation on the CCAR result.

And the question is would you ever consider changing your policy to tell us what you were approved for, like most of your peers do or all of your peers do?

I think analysts, investors are grown up enough to understand it's not a commitment, that it's just an approval.

But the observation part of it is I just don't think you're doing yourselves any favors by not telling us.

Well, I appreciate you sharing that observation, Guy, and I'm not going to make a prediction about what we will or won't do in the future.

Obviously, we do think about this a lot and we have observed that the other banks who went through the CCAR process disclosed their authorization.

We just see it as such a dynamic process.

As you said, it's not a commitment and we know you understand that nevertheless because it's an authorization and we're constantly reevaluating it.

We haven't disclosed it, and that's just where we are.

Your next question is from the line of Jeff Harte with Sandler O'Neill.

My question is more on a macro level, is we're looking at potential LCR and SLR easing.

I'm kind of sitting back trying to think how much LCR, SLR easing could potentially increase the financing available to clients, so therefore, kind of boost trading volumes, overall market activity.

And I guess, I'm kind of looking back at 2Q '14 when we got the final SLR rule and we saw you repo book kind of decline that quarter.

How much could easing there help overall trading activities or kind of attracting trading activities as opposed to just helping Goldman Sachs?

I mean, do you have a feel for how big an impact that had in your trading businesses back in 2Q '14?

Sure, it's a great question.

I'll just step back for a moment to observe the executive order and then the Treasury report that followed it, which I know all of us have reviewed.

There's on the order of 100 recommendations in that report, as you know.

And about 2/3 of them roughly are activities that the regulators could undertake that don't require legislative authorization.

And the report did get a bit more specific on the ratios that you mentioned, particularly SLR.

And there's certainly been a lot of commentary and research out in the market about what changes to the SLR might create in terms of capacity, and there's many views on this.

As you know, SLR was the most binding metric for us this year.

It was the first time that it was incorporated into the CCAR process.

Although as to how the CCAR process will evolve, the stress capital buffer is another proposal, it's really not knowable.

We also note and you know that various regulators have expressed different views on recalibration.

So for instance, Governor Powell was broadly in favor and the Chairman of the FDIC, Mr. Gruenberg, not so.

And so I wouldn't want to speculate too much beyond saying that if the Treasury reports recommendation were to be adopted by the regulators, and as I said, that's not knowable right now, but if it were, potentially, a recalibration such as that might change the way that we think about our prime brokerage business and the matchbook business.

But as for how that will show up in client activity and revenues, there's many inputs to client activity and this is just one.

Okay.

I mean, do you -- has the availability of financing the kind of active trading accounts been a meaningful deterioration or I guess, maybe problem, over the last couple of years?

I wouldn't say it's a problem.

It's just we're continuously evolving and responding to the regulatory environment, capital plan.

It's a planning process.

It's complex, it's nonlinear, it's changing and not sure that any of this has really much of an effect on whether there are alpha opportunities for the active managers.

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

Two questions.

Just one, you mentioned in your prepared remarks that some of what you think you'll be doing or focusing on as an organization is just plain old blocking and tackling.

Could you just give us a sense as to what you mean by that?

I have my own views, but I wanted to understand what you meant by that?

So blocking and tackling is actually a very broad topic and a lot of this is just with what any business would do.

It's our people across the firm at all our levels of seniority, meeting with clients.

There's no substitute for going to visit clients and talking with them and understanding their objectives, their benchmarks, their challenges, things that are working for them, things that are not, understanding how they see the value that we're adding to them, whether it's in liquidity provision or other services, understanding ways in which we can have a better engagement with them.

And for instance, a topic that we've been working on for some time now, ways of extending and sharing our analytics and data with them as a way of bringing them the relationship, strengthening the relationship and leading potentially to more activities.

So there's certainly just this aspect of it's constantly changing because the clients' needs and requirements are changing, for risk management products and services and the format, the package, the way in which they want those services delivered.

And the only way to know about that is to work with the clients at various levels, front, middle and back, across the client organization, engage with them and iterate.

We've done this in other businesses.

As I just mentioned, we've seen the fruits of doing this in, for instance, our Equities business, which has led to new offerings over the last few years.

But it's really something that applies very broadly across our businesses.

And in investment banking, a few years ago, we identified an opportunity to do better with our clients and to cover more clients in debt capital markets.

And you've seen the results of that multi-year effort in our league table rankings and in our revenues in Investment Management, the opportunities brought to provide holistic solutions to clients, for instance, CIO outsourcing and to deliver that organically as well as through acquisitions.

So that's an example.

And really, we see all of these approaches and techniques is applying very broadly across our businesses and has a huge emphasis in doing that in our FICC business as well.

Got it, okay.

And then just separately switching gears to Marcus, there's been some commentary, I think, Lloyd and others have talked about, the takeup rate that you've had.

Could you give us a sense of progression from here?

Are you looking for the same level of growth that you've been able to generate?

And how much, over the course of the next couple of years, do you anticipate taking your risk capital and applying it to utilizing it in Marcus?

Sure.

So as you know, with Marcus, we saw an opportunity not so very long ago given our market position, our strength in technology and analytics, the fact that we didn't have bricks and mortars branches or legacy systems or credit cards and just looking at all of the activity in this burgeoning world of digital consumer finance, we saw an opportunity.

And we put together a deliberate, methodical, organic plan.

Lloyd mentioned some of our progress according to that plan where we crossed the $1 billion threshold in loan balances.

And this customer-centric plan is progressing and we're executing according to plan.

We don't have loan balance targets.

And we're excited about this business and believe that it can generate high-teen ROEs.

Just stepping back, just to put -- I'd like to take a minute to put Marcus in a broader context, of all the ways that we're seeking and delivering growth opportunities for the firm.

Of course, one is the markets.

Another one is expanding the franchise.

Another would be improving our relative positioning, and then also new products and opportunities.

Even in our mature, competitive markets such as banking, institutional client services, investment management, there's opportunities to close market share gaps, improve the client mix, do better with the clients.

And we've taken purposeful actions to make that happen.

There is, in the area of consumer, a number of new opportunities that we're evaluating, including Marcus, which is the first example and an opportunity to leverage our strong brand into areas beyond our traditional franchise, and Marcus is one such greenfield opportunity where we don't need a leading market share for it to be a significant opportunity for us.

And then last, does it help with CCAR at all?

I'm sorry.

Could you repeat that, Betsy?

I didn't hear that.

Does the Marcus revenue stream, the NII associated with it, does that help at all with CCAR?

Is there an opportunity to improve the optionality in the capital structure by having this type of revenue stream come through?

I think it's a little too early to answer you on that one, Betsy.

Marcus really isn't -- it's not a material NII story.

At this point, it's really much more a return on attributed equity story.

And as you know, CCAR is a fluid and constantly evolving process.

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

I got a follow-up on FICC.

So you spoke to the market-making and issues with central risk book.

But just wanted to dig in a little because sequentially, VaR is down for you guys but yet stable at many of your money center competitors, which I would think should normalize for market volatility.

So could you square those 2 factors going on?

Did something happen where early on -- the market-making difficulties you ran into were early on in the quarter and you guys cut back a bit on the balance sheet, that's what led to the VaR decline versus peer sequentially?

How did that all shake out?

Or any increased color will be helpful.

Sure.

Everyone's approach to VaR, the way in which people incorporate VaR into the businesses is different.

We don't have VaR targets and VaR is an output of client activity, client demand for capital.

As we discussed, and as you noted, it declined from $64 million to $51 million sequentially, so call it 20%.

And looking across the product areas, really, its lower volatility is the main driver.

In currencies, there's a bit of a positional driver in addition to the VaR driver.

And then also, there's a diversification effect.

So there was increased correlation and there's the change in the VaR, as it's measured in the different product areas, that led to a change in the diversification effect, so that was a small contribution to VaR.

But really, it's not a matter of cutting it back.

It's just a matter of there was less client demand for the VaR capacity.

Okay, okay.

And then another follow-up here on the commodity comments that you made earlier.

So a few years ago, Goldman disclosed the breakdown of your FICC business with commodities being roughly 8% of ICS revenues.

It seems as though your commentary suggests that, that has increased in recent years.

Can you give us a sense about how large you think on average that's trended over the last couple of years versus this several years ago disclosure at this point?

So I would just observe that out of the 73 quarters that we've been a public company, it was the worst quarter for the commodities business.

And we don't break out further the contribution of the individual product lines.

There's a lot of reasons for that, but really, we just think of it as a business that serves the clients holistically across a number of different products, and that's where I leave it.

Okay.

Is it possible -- just to clarify a bit here, was it -- given it's the worst commodities quarter on record, does that mean that it might have actually been a -- there could have been a negative revenue figure?

Or was it positive?

Or is that something you can't disclose?

I'll just say we don't disclose the product breakout.

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

Maybe a question on the derivatives, bigger picture.

You guys have always had superior risk management that's enabled you to be kind of top market share in derivatives.

But I guess, the question is, now, how much do you think or concerned about maybe structural headwinds on the demand side when you have greater transparency in the markets?

You have pressures on seas and flows on active managers from passives and even exchanges at current grab market share from OTC markets.

Can we -- at what point, I guess, do you start to rethink that business in your advantage and that business for us, it's something -- hey, we just have to maintain our top market share and hopefully, it comes back.

Just how are you thinking about the response to any, I guess, continued pressure in that business relative to the peer group?

Sure, it's a great question.

So just, to one micro point that you made on exchange versus OTC, I'll note that it's often the experience that they really are -- they might seem like they're in opposition to one another.

But often, there's actually a virtuous cycle where the availability of an exchange liquidity actually makes it easier for market-makers to make markets and OTC products, therefore hedging more on exchanges, so it's a virtuous cycle.

So I wouldn't necessarily see those in opposition.

As for derivatives versus cash, again, I wouldn't see it as one or the other.

Why not both?

And of course, we're going to continue investing in our historical strengths in derivatives and stay with our clients over the long term, not just in the quarters where they are extremely active.

But I'll just note that as for product format or package, right, there's so many different formats and they're constantly evolving, right?

So for a particular kind of risk, you could have futures, derivatives, cash, systematic trading strategies, ETFs and it just goes on and on.

And really, as opposed to attempting to predict which product format is going to be appealing to the client, I think that would be really brittle to have a prediction and move everything in that direction.

And really, the way we're seeing it, the way we see generally everything, is preparing the firm to respond to a variety of different market states and a variety of different client needs.

And so if the clients are in some period of time, and it could be secular, it could be cyclical, it doesn't matter, who knows, if the clients are looking for cash solutions, then building strength in cash solutions is part of what we'll do.

We have experience, and I'll just note the Equities business as one example of declining commissions.

And commissions are at a small fraction in the Equities business of where they were, say, 15 years ago.

And that has not been an obstacle to constantly evolving the business and finding new ways to serve the clients.

And I expect that kind of learning and things we've learned and observed in our U.S. corporate credit business to be valuable observations that we can extend to all of our businesses.

It makes sense.

Just maybe one quick follow-up on that.

Just do you think there's a correlation in, say hedge fund clients' willingness to take on leverage in the derivatives markets?

Is it correlated, do you think, with sort of flows, like their desire to stay more liquid and therefore, don't want to take on say more illiquid assets like derivatives and that's something we should be watching to see an inflection there?

How do you think about what is driving their decision-making process?

There it would be -- it would be tough to speculate on their thought process.

Of course, we talk to them and -- all the time.

And what they're telling us is that this whole backdrop of lower volatility, less dispersion is -- leads to less conviction and a lower opportunity set for them and for us.

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

So I had a follow-up question on the line discussion on derivatives.

There was a report that was published a few years ago by the Financial Crisis Inquiry Commission, which show that derivatives actually contributed more than 50% of your FICC revenue.

And given the impact that weaker derivatives had on results this quarter and recognizing, as you noted, there are a lot of different derivative product formats we need to think through, I mean, how has that mix evolved in the recent years?

And how should we expect that to traject longer term?

So well, great question, Steven.

I'll just note that we don't really -- while we, of course, we have all kinds of analytics, we don't really break out the business in that particular way.

We have noted that, that ratio between cash and derivatives, for example, in the rates business, just to give one example, where there is, for instance, the soft data repositories and those other data sources, it seems that there's more activity really across the industry in the product format of T-bills and futures, of course, swaps.

Vanilla swaps continue to be a hugely important part of that business.

Again, I'll just go back to what I mentioned, which is something we believe profoundly, which is that we go where the clients lead us.

And of course, it's iterative, we have ideas for new products and solutions, and we work on that with the clients and we see if it fits their needs and we evolve from there, and we planned for a variety of different outcomes.

So is there a trajectory on more derivatives versus cash in the future or less?

That's really not how we think about it.

It's much more a matter of being prepared to offer the clients both.

And it's become increasingly much more a dynamic than just that kind of dichotomy of cash or derivatives.

There's product formats that are being created really all the time.

And having the capability and the capacity to operate across products and across different kinds of product format is core to our franchise.

Got it.

And just one follow-up for me on the discussion on the Treasury white paper and the SLR in particular.

We and many of our clients are going through the exercise of trying to assess the cumulative benefit that could accrete to you as well as many of your peers.

And you noted that the SLR and CCAR appears to be your binding constraint today.

But the constraint that appears to be nearly as binding is the 4% Tier 1 leverage in CCAR.

I didn't know if you had any thoughts just to whether you anticipate that in a similar vein or fashion that the carveout would be applied to that measure as well.

Or how you're thinking about binding this in the event that you get some of those reforms as outlined by the Treasury push-through?

Well, it's a great question, Steven.

I would say that we don't really, other than the observation, which you can see in the Fed's website that SLR was binding this year, we don't really -- I don't think it would be useful to call out a particular rule.

There's -- as we look at the way the rules are written, they are having a powerful effect on systemic safety and soundness.

And even before the election and the executive order and the Treasury report, regulators were already beginning to step back and look at the totality of the rules and see all the ways that they interact.

Just as one example, Governor Tarullo gave a very thoughtful speech on stress capital buffer concept as a possible evolution of CCAR.

We don't know when or if that concept will appear in CCAR.

But interestingly, that approach links capital returns, balance sheet, risk-weighted assets, spot and stressed ratios really in a manner that's very aligned with how we think about capital planning.

And all of these metrics kind of feed into one another and there's an interplay.

So I don't think it would be useful to speculate on any one metric other than to say we do what we do, which is we build analytics, models, processes and we set ourselves up so that we can respond to the clients in a variety of different regulatory market scenarios.

Your next question comes from the line of Gerard Cassidy with RBC Capital.

I don't know if I heard you correctly, and I apologize ahead of time, but when you were talking about the FICC business, obviously, customer behavior and the market's lack of volatility was a contributor to the weak number in FICC.

But I think you also said you weren't as happy about your navigating -- or your company's navigating in the markets.

If that is -- if I heard it correctly, how much of the downturn was due to the customers versus your own trading capabilities?

And how does that compare to the first quarter when you compare the 2?

Well, it's -- I think to go back to that store analogy, there's -- well, it would be maybe a wonderful utopian thing to be able to separate the 2 and say one is client activity and one is navigating the markets.

They're really interwoven.

And so in making prices to clients, they want to buy, so we sell, they want to sell, so we buy, there's choices there.

And then in the strategies that we employ to manage the resulting basis risk, there's strategies there.

And then we step back and at the end, observe the results.

And it was a comment that I really wanted to make very particularly about the commodities business.

As for the rest of the FICC businesses, it really was a story of lower client activity.

Very good.

And then coming back to the investment banking pipelines.

Can you give us more color, geographically or industry, strategic versus financial, what are you guys seeing in that pipeline?

Sure.

So I look at the backlog, really, it's driven primarily by underwriting.

But looking at banking broadly, I would say CEOs are confident, the conversations are happening all the time, strategic M&A in the U.S. is -- those discussions are occurring, especially in technology, in consumer retail, in natural resources.

In Europe, I would say it's hard to predict given the Brexit uncertainty.

There's healthy activity and we certainly see opportunities in Europe for debt underwriting.

In Asia, we're still seeing the trend of Chinese buying of international assets and we remain optimistic over the long term.

And as for the debt markets, again, no predictions here other than to note what we all know which is that trends and rate and spreads and volatility and M&A activity all drive demand for issuance.

And even though rates have moved up, overall financing costs are still quite low by historical standards.

Great.

And then just finally, can you guys give us any additional color on the Treasury's proposal for retrofitting the Volcker Rule, just how you guys are seeing it evolve?

Well, again, I would say there is the Treasury's proposal and there are discussions about how Volcker might evolve as it relates both to market-making as well as to the Volcker-covered funds.

I wouldn't make any specific comment on how Volcker might evolve other than to observe again, the regulators.

Multiple regulators have talked about this publicly.

They're taking an opportunity to step back and potentially recalibrate.

What I would say is that as and when this recalibration occurs, we'd expect the regulations to continue to be thoughtful, to protect the system and at the same time, to support growth and function -- well-functioning markets.

Your next question is from the line of Al Alevizakos with HSBC.

My question is basically, we talked a lot about equities.

And obviously, their performance is very strong, particularly, after I think the relative underperformance in Q1.

And I wanted to actually touch on the equity capital markets on the ECM.

I was surprised because the figure was actually weaker than I was expecting.

And it was coming off a weakish Q2 2016.

And I also believe that the ideologic numbers were pointing up overall materially for the quarter.

So would you mind telling me if there was something special there?

Or do you think like it was kind of a one-off that's going to be reversed in Q3?

That is a great question.

So as you noted, year-to-date, our volumes are strong and outperforming.

And of course, the quarter is important and useful in standard construct.

At the same time, it's -- it can also be a relatively arbitrary boundary.

But working within that boundary, sequentially, there were lower follow-ons and year-on-year, lower convert.

And as for the drivers of the revenue results, as they sync from the volume results, it's something that is very complicated output.

There is -- where one can get conflicted out, sometimes in smaller deals, there's actually fewer underwriters.

And as you know, everyone as part of the league table, but there's fewer underwriters, there's fewer banks to share among.

And so there's a lot of effects going on there as for what the actual drivers are.

As we always do, we'll look into it and respond.

Great.

And if I can turn your attention into the I&L division.

You've already spoken about the NII strength.

And you said that the figure is more around USD 400 million.

I'm just trying to get a feeling on the recurring part that relates to your increased lending through corporate and private banking versus the standard kind of one-off interest that's coming from your equity investments.

Could you kind of give us an indication whether you start seeing more and more recurring NII shift in the division?

Well, looking at the I&L portfolio, right now, it stands at just over $106 billion, and that's almost $4 billion increase sequentially and 79% of that is lending.

On that NII figure that we quoted, more than $400 million, that is recurring.

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

So a couple of quick questions here.

On the deposit funding, I know you've been growing and kind of consumer, I guess, we will call those consumer deposits.

And I know that you have growing markets that much, so where -- what other businesses are being funded by those deposits?

I'm sorry, I didn't hear the last part of the question.

Could you say that again, Brian, please?

Yes, which other businesses are utilizing that deposit funding?

Are they supporting I&L?

All right.

Sorry, yes.

So well, our private wealth management business is an example of one of those businesses.

As of the first quarter, it's about $29 billion of loans and commitments to our prior wealth management clients, and that's up about $1 billion sequentially.

Okay.

And have you seen any specific impact from MiFID II on your overall businesses, both in equity and FICC that play a role in the results this quarter?

I would say it's significant certainly in terms of the effort across our businesses.

And really, as you know, MiFID II is an extremely broad undertaking, arguably broader than for instance, the U.S. regulatory changes since the crisis.

I would just call out a couple of major areas of MiFID II.

So on execution services, as that evolves, we're staying close to the clients.

And then as for research, it's crucial, we believe, to continue to provide differentiated strong content and to be a scale player with differentiated content that the clients value.

Potentially, there's some mindshare impact because this is a big lift across the industry with a singular go-live date in early January of next year.

But as for whether there's a long-term impact, it's too early to say.

At this time, there are no further questions.

Please continue with any closing remarks.

Well, first, I'd like to thank all of you for calling in.

I've met many of you and I look forward to getting to meet all of you in person.

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

And I wish you all a great summer.

Thank you.

Ladies and gentlemen, this does conclude the Goldman Sachs Second Quarter 2017 Earnings Conference Call.

Thank you for your participation.

You may now disconnect.