高盛 (GS) 2017 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 2017 Earnings Conference Call.

This call is being recorded today, October 17, 2017.

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 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 third quarter and year-to-date results, then I'll be happy to answer any questions.

In the third quarter, we produced net revenues of $8.3 billion, net earnings of $2.1 billion, earnings per diluted share of $5.02 and an annualized return on common equity of 10.9%.

Taking a step back to review our year-to-date results, we had firmwide net revenues of $24.2 billion, net earnings of $6.2 billion, earnings per diluted share of $14.11 and a return on common equity of 10.3%.

Year-to-date, our firmwide revenues are up 8% or $1.8 billion versus the same period last year, reflecting a broad contribution across most of our businesses.

Revenue strength in Investment Banking and Investment Management helped to offset weaker FICC performance.

Our Investing & Lending activities posted strong performance, driven by the quality of our portfolio, increasing asset prices and the ongoing expansion of our lending and financing footprint.

We are committed to expanding our global client franchise and correspondingly, our revenue production, despite the challenging operating environment.

As Harvey discussed at a recent conference, we have detailed plans across each of our businesses to drive stronger client relationships and shareholder value creation in the current operating environment.

With more than $5 billion of revenue opportunities identified, we are executing across this multiple plan.

As it relates specifically to this quarter's performance, revenues increased 6% sequentially and 2% year-over-year.

A year-over-year increase is particularly noteworthy given the strength of our performance in the third quarter of 2016.

Importantly, our emphasis on cost efficiency and commitment to operating leverage for our shareholders continued into the third quarter.

These efforts have positioned the firm to accrue a compensation-to-net revenue ratio of 40% for the year-to-date, down 100 basis points versus this point last year.

As a result of revenue growth and expense discipline, our pretax earnings are up 16% to $8 billion and our ROE is 160 basis points higher at 10.3% for the first 9 months of the year.

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

Investment Banking produced third quarter net revenues of $1.8 billion, up 4% compared to the second quarter, including strong results in advisory.

Our Investment Banking backlog decreased since the end of the second quarter as replenishment of M&A transactions was lower.

Breaking down the components of Investment Banking in the third quarter, advisory revenues were $911 million, up 22% compared to the second quarter as deal closings accelerated.

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 third quarter, including: Worldpay's merger with Vantiv for a combined enterprise value of $28.8 billion; CVC's EUR 5.8 billion sale of its majority stake in ista to Cheung Kong Property Holdings; and Home Shopping Network's $2.6 billion sale to Liberty Interactive.

We also advised on a number of significant transactions that closed during the third quarter including: DuPont's combination with Dow Chemical in a $130 billion merger of equals; Baker Hughes' $32 billion merger with GE Oil & Gas; and Hewlett-Packard Enterprise's $8.8 billion spinoff and merger of noncore software assets with Micro Focus International.

Moving to Underwriting.

Net revenues were $886 million in the third quarter, down 10% on a sequential basis.

Equity underwriting revenues were $212 million, down 18% quarter-over-quarter as IPO volumes declined.

Debt underwriting revenues of $674 million included strong acquisition finance activity.

Results were down 7% relative to a very robust second quarter.

Year-to-date, Goldman Sachs ranked first in worldwide common stock offerings and also had a leading position in leveraged finance.

During the third quarter, we actively supported our clients' financing needs participating in: Amazon's $16 billion debt offering to support its purchase of Whole Foods; Japan Post's $10.8 billion follow-on offering; and Discovery Communication's $6.3 billion bond offering to support its purchase of Scripps Networks.

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

Net revenues were $3.1 billion in the third quarter, up 2% compared to the second quarter, reflecting a recovery in FICC performance.

FICC Client Execution net revenues were $1.5 billion in the third quarter, up 25% sequentially.

While volatility and client conviction remained low, improvements across all of our businesses aided performance.

Following a more challenging second quarter, rates improved significantly amid better U.S. economic data and expectations for Central Bank actions.

Commodities posted a modest improvement sequentially.

Despite the increase, third quarter results still represented a bottom-decile performance.

Credit improved given better performance in our financing solutions business.

Mortgages and currencies were up modestly quarter-over-quarter.

Now moving to Equities.

Net revenues for the third quarter were $1.7 billion, down 12% sequentially.

Equities client execution net revenues of $584 million were down 15% compared to the second quarter.

There was a limited opportunity set in derivatives, and low volatility weighed on results.

Commissions and fees were $681 million, down 11% versus the second quarter as U.S. volumes decreased industry-wide.

Securities services generated net revenues of $403 million, down 9% sequentially, reflecting typical second quarter seasonality.

Balances were slightly higher quarter-over-quarter, and funding spreads remained relatively tight given that close to 90% of our stock borrows for clients were in very liquid collateral.

Turning to risk.

Average daily VaR in the third quarter was $47 million, down from $51 million in the second quarter, driven by lower commodity price risk.

Moving on to our Investing & Lending activities.

Collectively, these businesses produced net revenues of $1.9 billion in the third quarter.

Equity securities generated net revenues of $1.4 billion, reflecting sales, corporate performance and gains in public equity investments.

Of the $1.4 billion, roughly 60% was driven by public mark-to-market and events such as sales.

Given the favorable market backdrop, we've been actively harvesting our portfolio.

Net revenues from debt securities and loans were $492 million and included approximately $450 million of net interest income.

With respect to the I&L balance sheet, we ended the third quarter with $116 billion in total assets.

Given our continued efforts to expand our lending footprint, loans receivable were the biggest growth driver, up $8 billion quarter-over-quarter to $61 billion.

In Investment Management, we reported third quarter net revenues of $1.5 billion, flat with the second quarter.

Assets under supervision increased $50 billion sequentially to a record $1.46 trillion.

The increase primarily reflected $13 billion of long-term net inflows, $14 billion of liquidity product net inflows and $23 billion of net market appreciation.

Now let me turn to expenses.

As mentioned earlier, compensation and benefits expense for the year-to-date, which include salaries, bonuses, amortization of prior year equity awards and other items, such as benefits, was accrued at a compensation-to-net revenues ratio of 40%.

This is 100 basis points lower than the accrual in the first 9 months of 2016.

Third quarter noncompensation expenses were $2.2 billion, up 2% from the second quarter.

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

Total staff was approximately 35,800, up 5% from the second quarter and reflected seasonal hiring.

Our effective tax rate for the year-to-date was 22.6%.

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 third quarter at $220 billion, and our balance sheet and level 3 assets were $930 billion and $21 billion, respectively.

Our Common Equity Tier 1 ratio was 12% under the Basel III Advanced approach on a transitional basis, and 11.7% on a fully phased-in basis.

It was 13.3% using the Standardized approach on a transitional basis and 13% on a fully phased-in basis.

Our supplementary leverage ratio finished at 6.1%.

Increased lending and derivative exposures drove declines in the Advanced and Standardized ratios, whereas the SLR was lower sequentially given increases in the balance sheet.

And finally, we repurchased 9.6 million shares of common stock for $2.2 billion in the quarter.

On the subject of CCAR, we extensively engaged with our shareholders to solicit views on potential disclosure.

Not surprisingly, we got different perspectives on the topic.

It is clear at this point that we are the only CCAR bank that hasn't disclosed.

Accordingly, we are disclosing our 2017 CCAR buyback authorization of $8.7 billion.

Of course, the Fed's non-objection to our capital plan is similar to authorizations we received from our board and our shareholders: It is a limit, not a requirement.

We will determine our share repurchases in connection with the opportunities and risks that are present in the market.

This includes, but is not limited to, the $5 billion of revenue opportunities we recently presented on.

To close, let me spend a moment on the $5 billion of growth initiatives.

They incorporate opportunities from across our global franchise, including Investment Banking, FICC, Equities, Investment Management and lending.

The breadth of these opportunities demonstrates the growth potential of each of our businesses.

Client feedback continues to be quite positive, and importantly, there is tremendous energy internally around these initiatives.

We believe successful completion of these opportunities would drive an incremental $2.5 billion in annual pretax earnings at a 30% marginal ROE.

We look forward to updating you on these initiatives as they evolve.

And you should have confidence that the full capacity and capability of this firm is concentrated on delivering on these and other initiatives.

Before we move on to Q&A, I want to thank Dane Holmes.

As you probably know, Dane will become the firm's new Global Head of Human Capital Management in January.

He has been a trusted adviser to me, and we are all excited about his new role and his continued ability to drive positive outcomes for the firm and our people.

We also want to welcome back Heather Miner as the new Head of Investor Relations.

Many of you will know Heather from her 8 years in IR previously.

We both look forward to maintaining an active dialogue with our shareholders and the analyst community.

With that, I want to thank you again for dialing in, and I'm happy to answer all of your questions.

(Operator Instructions) Your first question is from the line of Glenn Schorr with Evercore.

So the balance sheet keeps growing in I&L and it keeps producing, so God bless.

The question on the debt side, how much do you think of that balance sheet is relationship lending versus straight investment versus more of an asset management-like revenue?

And of that $450 million in NII, do you still feel like $400 million is about the quarterly run rate given current balance sheet?

Well, Glenn, so let's go through the lending part of the I&L portfolio.

There's, as we said, $61.5 billion of loans receivable held for investment, and that figure increased $7.5 billion on this quarter.

And so looking into the components of that increase, I would say $1 billion of that is related to increased lending in our private wealth management business, and then $5 billion of it is a broad category, we'll call it corporate and relationship, and that includes project finance, financing for asset managers, relationship lending, mortgage warehousing.

When we think about the net interest income in our Investing & Lending line, that has grown significantly over time, and we see it as a stable and growing revenue for us.

And your comments on cap ratios and SLR, do they constrain your ability to continue to do this?

You mentioned your buyback.

That's pretty darn big.

Are -- should we be thinking those as trade-offs?

Or can you do both?

So based on regulatory constraints, as you know from the CCAR results, we do not have significant excess today.

And CCAR has been our binding constraint.

And well, as you know, the test evolved, and so we don't know how the test will evolve.

But based on our own assessment of risk, we have significant excess, and that gives us capacity to support the clients.

And so we'll continue with the approach that we've always had, which is for these capital decisions to remain dynamic, with the top priority being having strong capital and liquidity to support the clients and to support our growth.

You've gotten used to the return, and we have as well.

And we have been through a period of returning capital, implementing the regulations, all good for systemic safety and soundness.

But we have pivoted to growth.

And based on the opportunities that we've been outlining to the market, we would certainly prefer deploying our capital resources to support these 30% -- and ahead of 30% marginal ROEs.

We prefer that to buying back our shares.

Appreciate that.

One last small one.

Acquisition of Genesis Capital in the quarter, commercial lender, could you talk about where that fits in?

Sure.

So the Genesis is similar in -- to businesses that we've been doing for a considerable period of time in our Investment Management business.

And so the loans fit within all of our risk parameters, and we saw an opportunity for accretive returns, plugging it into our platform and our controls and saw the opportunities to grow it by plugging it into our platform.

Your next question is from the line of Mike Carrier with Bank of America.

First question, just on Investment Banking, the results came in strong.

You mentioned on the M&A side, some deals closing.

And then you also just mentioned the pipeline, you're down.

Just any context around that.

Because I think on the equity side, it seems like the IPO pipeline is strong.

So just maybe any color on the M&A front.

And then given that tax reform is a bit more in the headlines, just any change or change in the number of conversations across different industries if we get that as a potential catalyst heading into '18 or '19.

So as I mentioned, Mike, the backlog is down sequentially and down year-to-date, and that's just the natural side effect of the strong closings that we had in the third quarter.

Some of those deals had actually been in the backlog for a couple of quarters.

And so we're going to distinguish the formal backlog from the pipeline.

So the pipeline, as we noted in equity underwriting, is strong also in our conversations with clients.

On the advisory side, there's no sense of slowdown.

We're seeing a pickup in client dialogue particularly, I would note, in technology, media, telecom as well as industrials and natural resources.

And so it's strong for all of the reasons that you would expect: that CEOs are confident.

Equity markets support valuations and acquisition currencies.

The financing markets are open.

The overall levels of financing costs are relatively low by historical standards.

That's all constructive.

On tax reform, which you also mentioned, that is certainly a part of our engagement with clients.

And I will also note, however, that clients, it seems to us, have moved toward saying, "Well, tax reform would be a good thing," but it's not stopping us from considering strategic acquisitions and sales right now.

Okay, that's helpful.

And then just as a follow-up, the MiFID II is on the horizon heading into '18.

I know there's still a lot of shifting strategies in the industry and conversations.

But any kind of indication on how you think that impacts on the industry and you guys, either from a research standpoint, trading standpoint or market share?

Sure.

I'll go through all of them.

First, I would start by saying that it's our view that the MiFID II impact will mean that it's critically important to have not only differentiated content, but also scale and a global reach, all of which we have in our businesses.

And so just going through the various aspects of it, as you know, it's a significant effort.

And there is a big bang go-live date in early January on the execution side.

It's staying close to our clients, understanding the liquidity provision, execution capabilities that they need and designing them.

We have the software, we have the people.

And so we're working on all of that and that is progressing.

On the research side, again, it's important to have that differentiated content and the breadth of research.

And the conversations about the price discovery for the research product are progressing.

And in our asset management business, we, and several other asset managers have recently disclosed our intent to pay for research.

There's ongoing discussions, we understand, between the SEC and the European regulators that may lead to some form of release.

So we're following those closely.

But to put it all together, again, the emphasis is MiFID II is going to make it even more important than it's ever been, and it's always been important to have scale and depth and breadth.

And I wouldn't trade our franchise with anyone else's.

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

You mentioned a little bit of detail within the loan growth this quarter on an earlier question.

But I guess, just bigger picture, what kind of goal posts will you be providing to us on the $5 billion of revenue targets as we think out the next couple of years here?

So on the $5 billion of revenue targets, important to emphasize again that they don't depend on any improvement in the underlying market conditions or any change in regulation.

Of that $5 billion opportunity that we're pursuing over the next $3 billion -- 3 years, $2 billion of it, $2 billion of the revenue opportunity annually relates to lending.

And we called out in our discussion in September the various parts of that market, which we've talked about, our private wealth management business, GS Select, institutional lending of various kinds.

And internally, as you would expect, we've had growth initiatives since forever.

And you've seen some of the results of those, whether it's in asset management or in our debt underwriting business or growing our asset management business.

And so we have considerable experience and are putting time and energy into the frameworks, the tracking and the measurement of the milestones and the resources that we're putting against those milestones.

And we will, of course, give you regular updates as these opportunities materialize over the next 3 years.

And I appreciate the added disclosure as, I'm sure, everybody did on the CCAR here.

I would just throw out there, I think improved disclosure on these initiatives over time as they take hold, especially the lending and maybe some more break out of FICC, I think over time, will be helpful.

You give good commentary around it, but I think having numbers around it as well would be helpful.

Well, we definitely are taking that on.

And going back to what we described in September, there's a breakdown of various aspects of the revenue opportunity as well as our balance sheet and capital against it.

And so we will absolutely be having a continuous dialogue with you on that as we progress.

Your next question is from the line of Mike Mayo with Wells Fargo Securities.

Can you talk about the potential for reduced regulatory costs if there's deregulation?

And I'm not really asking about risk appetite or how you might change with that, but really just overhead costs to comply with regulations today and what it could be in the future.

So Mike, we, like all of us in the industry, are noting the various Treasury reports, for instance, the recommendations.

We've seen some progress against the recommendations of the first Treasury report.

For instance, to give just a couple of examples, the OCC has asked for a prospectus on the Volcker Rule.

There has been some news from Basel Committee on net stable funding ratio, and there are a few other examples as well.

And so we're seeing that.

And certainly, some of the U.S. regulators have been very specific in their discussions about simplifying some aspects of the rules, for instance, among others, the CFTC.

And so there's a sense that there's this movement in the topic.

But I would say that for us, absolutely, these things are great.

If and when they happen, they're not embedded in any of our plans.

If they -- if and when they occur, they'd be a tailwind to our plans.

And as you know, we take a broad and holistic approach to all of these things, not only by training our people but by building all of these regulatory processes into the way we do business.

So for instance, being able to do these simulations of our balance sheet and income statement and cash flows several months, 18 months into the future is an important part of how we make decisions.

I'm not really seeing it as something that we break out specifically as a cost and as a cost that would be reduced.

But certainly, I'm happy to say that our focus has shifted beyond the implementing of the regulations, which is something we always do as they arrive, to growth.

Well, as a follow up on expenses.

For your $5 billion of growth initiatives, what are the upfront expenses?

Were there any in the third quarter?

And do you expect any special charges?

Or how much of a ramp up?

So on the $5 billion of revenue opportunities, we described for you the blended marginal margin of those opportunities.

And there is a bit of a drag upfront really relating to hiring, to people.

So as we mentioned in September, our lateral hires are, year-to-date, up by -- they doubled from the same period last year.

And we broke out the kinds of professionals we're hiring, and you'll see that coverage and distribution is a major focus of that.

As we progress on the initiative, perhaps there'll be some modest upward pressure on the comp ratio, but we wouldn't see that being material in the context of the firm.

And we also don't see any significant charges for this growth.

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

Could we talk about a couple of things?

One is Marcus.

I know in the deck last September, you indicated that you're looking to drive that to $12 billion footings over the next couple of years.

Could you just give us a little bit more color on the average kind of person that you're looking for?

And what kind of yields you're expecting?

And how you think through the impact of a recession on that business?

Right.

So on Marcus, we recently passed $1.7 billion in originations, and we're on track to reach $2 billion 10 weeks from now by the end of this year.

Our focus is absolutely on prime borrowers.

The FICO score it realized is definitely above 700.

These are small-ticket items.

And as we've said, and this continues to be the case, this is organically growing business.

We're doing it slowly and deliberately.

I'll note that while we have, and have had for a long time, strong risk analytics, particularly credit risk analytics underlying the business, this -- we're not leading with underwriting in this business.

We're leading with a better product and service and a digital experience for consumers.

And that remains the focus.

I suppose the -- I would also add on the realized losses, they have been less than what was put into the plan.

And we are well aware, as all of us are, of where we are in the credit cycle.

Even though Marcus is a new business for us, the people who are building and leading that business for us are industry veterans in consumer finance, and we're plugging them in with our long track record of being thoughtful, prudent risk managers for both Marcus, market and credit risk.

And we've also supplemented our teams with people who have consumer finance experience across the board, from branding and marketing, to the 360-degree customer view and, of course, to all of the control functions.

And we're extending the risk culture we've always had into this business, where we worry about everything and plan for all of the contingencies, and don't take it for granted.

And especially remind ourselves every day, we're not leading with underwriting, we're leading with a better product.

That all makes sense.

Just that would be helpful if you had a little more detail on that.

And I know that -- I think you're planning on giving a little more detail around the granularity of the cycle mix and yields and loss content, like we get in other CAR [card] portfolios.

So we'll appreciate that when it comes.

Just a second question I had was on the dividend.

I know you gave the buyback of $8.7 billion for the full year.

Are you going to let us know what the dividend outlook is here?

Yes, Betsy, I'm happy to mention that as well.

So the Fed's non-objection to our plan had in the capital plan the option to raise the dividend by $0.05 per share in the second quarter of next year.

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

I was hoping you could maybe unpack a bit the $5 billion of incremental equity tied to your growth targets.

I know we've got -- I think you laid out $28 billion of loan balances.

But I'm guessing there's probably some balance sheet consumption on your trading initiatives, too.

So could you maybe just give us an idea about that attribution?

Sure.

So on the initiatives, we did highlight for you our $5 billion of required equity.

We -- I'm happy to walk you through it.

And again, as with all aspects of what we set out for you and for the market, it's really -- it's bottoms up.

Looking at the activities where -- the businesses where these activities are going to occur.

So roughly $2 billion of the $5 billion annual opportunity in 3 years is related to lending.

And most of that balance sheet is in our Marcus, in our institutional lending and private wealth management and GS Select businesses.

And that totals $28 billion of balance sheet.

And to get to the equity, we looked at the businesses that these activities are embedded in, and we projected the RWA density out from those businesses.

So it was just that and bottoms up again.

On the FICC part of the activity, which is $100 million of the annual opportunities that we identified and that we're pursuing, that one I would see in a bit of a different perspective.

FICC capital is dynamic.

We see actually considerable scope for the velocity of our FICC portfolio to increase.

And so it's really portfolio driven and dynamic and don't see a considerable or specific equity component attributable to that.

Okay.

And then following up on Mike's question about MiFID and your response there, I appreciate all of that.

It seems as though if we look through your disclosure about the lateral hires that you've made recently, both EMEA and FICC sales functions tend to feature prominently in some of those lateral hires.

Do you all think that the -- does that have to do with positioning yourself in front of MiFID?

Do you feel as though that FICC sales effort will become more important and, therefore, you're trying to invest and bulk up there?

Can you just -- or am I just jumping to the wrong conclusion from that chart?

If you could just help understand that, that'd be great.

Sure, Brennan.

I wouldn't see the hires, which we've been talking about and which, as you noted, are weighted toward sales distribution, I wouldn't see them so much as MiFID related.

I'm sure that's in there.

Of course, it's in there.

But it's not the driver.

Really, there, it's the coverage gaps that we've been talking about, and we saw the opportunity and noted our ability to bring in the talent.

So of the hires, of the offers we've been making, the acceptance rate's over 80%.

And we've looked and we talked about this in September in some detail, specifically in FICC, looking at all the clients and noting the ones for whom they say we are a top-3 FICC provider.

And the ratio of the clients where we're a top-3 FICC provider is in the neighborhood of the 30s percent for banks and asset managers and insurance companies.

And it's considerably higher for some other segments.

And so just closing those gaps is something that, of course, requires all the resources of the firm.

But it's a people business and so especially the people, and so that's the main driver of the hiring.

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

So just -- not to harp, but I wanted to expand a little bit on Betsy's question about expected loss through the cycle.

Because one of the pushbacks that I've had when I've spoken to investors about your growth opportunities is that the implied margins on the loan asset balances don't seem to many people like they really incorporate sort of full through the cycle loss potential.

And I was wondering if you could elaborate a little bit on that, maybe look at Marcus and maybe 1 or 2 of the other lending categories and talk about what your loan loss expectations look like.

Yes, so on loan loss expectations, again, on -- I'll start with the Marcus example.

It's prime borrowers, and that's an important, important part of the strategy.

And there, again, we apply our analytics.

We -- while the Marcus business is a new one for us, loan-level analytics are an old one for us, particularly as they relate to securitizations of various kinds.

And so we have that prudent and comprehensive approach to risk management and prudent reserving.

So the ALLLs against that portfolio are something that get a careful scrutiny and attention from all of us.

And that'll continue, and that's part of our process.

And also we shared with you the realized losses are less than what we expected in our plan.

But that's so far, and that's where we are in our business growth in our cycle.

Let's go to a different example, which is in our -- on our PWM business.

These are high-net-worth individuals, and it's very different business.

They're the highest-quality borrowers, and they're also -- the loans are significantly over-collateralized.

Fair enough.

Okay, and maybe just changing the subject, and maybe I'll pursue some of these questions on credit with you offline.

But on FICC, you noted that commodities was still sort of bottom decile.

I guess that means in terms of your historical quarter revenue experience with commodities.

But it sounded like it was better linked quarter.

I was just hoping that you could give us a little bit of color, on the one hand, what got better, but on the other hand, why you still believe that you're doing sort of bottom-decile quarters here.

Well, so to start with that one part of your question, so for our commodities business, even though it was an improvement from the second quarter, which you all remember, was our worst commodities quarter since our -- in our history as a public company of 73 quarters.

Now at 74 quarters as a public company, as I mentioned, the third quarter commodity performance was bottom decile of those 74 quarters.

And it's on track to have the worst full year performance since the IPO.

But I would like to step back for just a minute and just quickly go through the sequential drivers, the year-on-year drivers.

But I'd like to give you the 9-month on 9-month view, a bigger time period as well because there's some informational content in that view that you don't get if you're just looking at -- if you're just comparing quarters.

And so sequentially, yes, our FICC business improved.

And that's, obviously, something that's good to see.

But it is, by no means, aspirational.

We know we can do better, and we know we need to do better.

So it is an improvement.

In the sequential comparison in FICC ICS, it's really rates that drove the majority of that improvement.

I'll get to the other driver in a second.

But it's really the rates business.

And there, particularly in the latter part of the third quarter, there was better U.S. economic data.

There were Central Bank actions.

The volumes increased.

Rates broke out of the 10-month trading range.

Curve flattened.

Lots of things happened, and so rates is really the main driver.

And the other driver is that the challenges in -- the inventory challenges we've described in commodities -- and by the way, that business is challenged on all fronts, not just inventory.

The inventory challenges were a little better in the third quarter than in the second quarter, and there's also connection to our VaR number, which declined a bit, $4 million sequentially.

And the drivers in the VaR number going down were all continuing to decline across products, but also reduced commodity positions.

So that's the sequential story.

The year-on-year story, as you know, 4 out of the 5 FICC businesses were lower.

Mortgages was the only business that was up, and the year-on-year story is really 2 main factors: lower client activity across the FICC businesses, particularly in the macro businesses; and then the inventory challenges in commodities.

But as I said at the outset, I think if we step back and look at the first 9 months of this year in FICC and compare it to the first 9 months of last year, you see something different that you couldn't otherwise piece together, which is if you look at the delta in FICC, half of that decline -- and so it's a 23% decline, 9 months on 9 months.

Half of it is attributable to commodities inventory.

And of that amount, half of that occurred in the second quarter.

And so I think that gives you the whole picture.

Okay.

That's really helpful.

And since I was the guy who gave you such a hard time about the buyback disclosure last quarter, I should certainly thank you for doing it now.

We were listening, Guy.

Thank you.

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

Maybe you could just talk about your deposit-gathering efforts, how that's progressing so far.

Sure.

So deposit gathering is an important part of our financing strategy, just continuing to diversify our sources of funding.

Our Treasurer, Robin Vince, gave quite a lucid discussion of this in our fixed income investor call.

And we're happy to say more about it.

In the deposit gathering, we'll note that, of course, as you know, we acquired an online savings account platform that had previously been a part of GE.

And we're gratified to see the growth in those deposits on really, essentially, no marketing of it.

And so in those deposits, even though there have been the Fed Reserve raising the funds rate over the last several months, the experience in the online savings account has been that the rates have gone from 105 basis points to very recently 130, which is near the top end.

And so that tells you something.

It's an attractive funding source for us relative to the wholesale market.

It also tells you something about the realized beta that we've experienced so far.

But then what were the flows like in the quarter?

Not going to get into the specifics on the flows.

But I think, Heather, that's a good one to get back on.

Okay.

And maybe just one question on regulatory change.

SLR, I think, could be a big positive for you in terms of the leverage constraint, but I think there's been some uncertainty about how or if the Tier 1 leverage continues or not.

How do you -- how do we kind of, I guess, try to get our arms around?

Do you have a thought on -- that the SLR has changed.

Would the Tier 1 leverage also change, therefore, freeing up some capital for balance sheet?

Or do you think that remains?

So I'll get to that, but actually I've pulled out the growth in total deposits.

This is not just the online savings account.

It's about $7 billion quarter on quarter.

But to get back on your question on SLR, so certainly, there's been a lot of discussion about how the SLR ratio might change.

And as we said in the second quarter, if the various Treasury recommendations on treatment of Central Bank cash, treasuries, initial margin at CPPs, if those all come into force and we don't have the details, but that's a roughly 70 basis point improvement on our SLR at the second quarter.

I wouldn't expect it would be much different from the third quarter.

And so to the extent those changes happen, it would very likely have us thinking differently, more expansively about our prime brokerage and matched book businesses.

And then I think this has been well highlighted across the industry.

If those changes were to come into effect, it would be equivalent of creating another SIFI in terms of SLR capacity for the various businesses that are SLR-intensive.

So these are all potentially tailwinds.

And as you know, we, and many others, welcome the initiative and the detail of the first and second Treasury reports.

It's -- they're the potential tailwinds.

They're not baked into our $5 billion annual revenue plan.

No, no, I appreciate that.

I was just thinking about the constraints in the CCAR from Tier 1 leverage, which would limit any benefits from the SLR.

And I'm just trying to get a sense of, do you think that would also change to help free up that capacity or not?

I would love to know the answer to that question.

CCAR is, as you know, a continuously evolving process.

I suppose one way of looking at it would be the perfect result would be for all of the constraints in CCAR, Tier 1, SLR on and on, all of them to be exactly binding by exactly the same amount.

That would be a perfect optimization.

But of course, it's evolving, and we don't know exactly how it's going to play out.

The -- as you know, there was a white paper, and Governor Tarullo, just before his departure, outlined a variety of proposals.

And we've read them closely.

I'm sure you have as well.

And we considered the proposal to be thoughtful.

But many of the important things still remain to be seen, and they would have to be in an upcoming notice of proposed rulemaking.

And that's when we'll get the insight on your questions.

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

I wanted to start off with a 2 parter around Investment Management.

So first, just on the quarterly trends, I was hoping you can just shed some light on what drove the decline in management fees linked quarter, just given the strong equity markets that we saw and the pretty health continued, healthy increase in AUM.

And then just thinking longer term in relation to the $1 billion revenue target, it's a business, Investment Management, where we're seeing pretty substantial secular headwinds and fee pressures.

And I've gotten a lot of questions from clients as to what's giving you guys the confidence that you can hit that $1 billion incremental revenue target.

I was hoping you can shed some additional light on those opportunities.

Sure.

So let me start with the first part of your question.

Yes, as you noted, we have grown assets under supervision by $50 billion.

About half of that was market appreciation.

And then looking into the other half, that was again almost evenly split between gathering long-term assets, mostly fixed income, and then also an increase in assets in our liquidity products.

And so on the effective fee, the effective fee actually has been stable sequentially.

And so really, the answer to your question is it's in the other part of management and other fees.

There's some puts and takes that were slight offsets when you do the quarter-on-quarter comparison.

Going to the second part of your question on the Investment Management opportunities that we outlined, which was, as we said, $1 billion annual revenue opportunity.

Look at that in 3 parts, and the 3 parts are roughly balanced.

The key to all 3 parts is the -- is what had been the key to that business and the successful asset gathering over the long haul that you've seen, which is that it's broad and it's deep across asset classes as well as different products and distribution channels, retail and institutional.

And so to go back to the breakout of the $1 billion in annual revenue growth, splitting it into the 3 parts, I'll start with GSAM.

So there, it's growing our alternatives platform, advisory and insurance, EPS and liquidity products.

On PWM, we're hiring advisers, investing in the platform, including digital experiences, adding products and services there.

And the third part is Ayco.

It's our corporate executive counseling business.

And there, we absolutely see opportunities in incoming from our clients on expanding those financial planning services in 2 ways: first, to more of the people inside the companies that we're already working with; and then in addition, to more companies.

So really stepping back, it's the franchise which is unique in the case of Investment Management.

It's a broad product portfolio that has room to grow across the board.

And it's diversified, and hence, the opportunity set.

That was really helpful color.

And then just switching over to just one question on the capital discussion, I think, as it relates to Jim's earlier question on thinking about various binding constraints.

Just given your historically strong discipline on managing to what's your most binding capital ratio, I was a little bit surprised to see the deterioration in the SLR linked quarter.

I'm just wondering if you can give us some insight in how you're thinking about the need to focus more on some of the growth opportunities, which maybe you had not emphasized as much given your continued strong capital discipline.

And separately, we did see your GSIB surcharge also increase last quarter or your systemic risk score, and I'm wondering how you're thinking about managing to that as well.

Sure.

So I'll start with the SLR, fully phased.

So as you know, it declined by 20 basis points sequentially, and that is growth in the balance sheet.

And you also saw that in the increase in the balance sheet from $907 million at the end of the second quarter to $930 million now.

And there, it's supporting our clients and deploying the balance sheet when we see the opportunities to do so.

It was, as you know, in CCAR 2017, the binding constraints.

And that's something that we're deeply aware of.

But as we know, much depends on the next evolution of CCAR, and also potentially on recalibration of SLR.

There's been different views from different regulators on recalibrating SLR or not recalibrating SLR.

We don't know exactly how all of that's going to evolve.

Now can you remind me of the second part of your question?

Yes, just around the GSIB score.

I think, in the past year, you had been at 2.5 and it increased to 3 last quarter.

And how you're thinking about managing that score as you think about some of the growth initiatives.

Sure.

Right.

So also in the third quarter, the GSIB buffer, we're again in that 3% range.

And it's something that we look at every day.

And we work with divisional leaders as we see opportunities to have our strong balance sheet and capital and deploy it, and invest in our business and long-term growth.

We can do both.

We can both grow the business and return capital.

But at the margin, I would say, growth is more valuable.

And as for where, as you know, the GSIB print at the end of this quarter is an important one, and I can't predict where it's going to end up in this quarter.

Your next question's from the line of Devin Ryan with JMP Securities.

So maybe, first one here, the securities-based loan arrangement with Fidelity that was announced last quarter, it was pretty interesting.

And I'm curious, is that starting to ramp?

And it also sounded like there could be more arrangements in the future with additional wealth management firms that don't have those capabilities.

So really just trying to get a sense of the broader securities-based loan strategy that the firm had with outside firms.

And then how big that is within kind of the private wealth piece of the balance sheet opportunity?

Sure.

So we highlighted for you in the growth initiatives on annual revenue opportunity of $500 million related to PWM and GS Select together.

On GS Select, this is something that we're all excited about and focused on, which is to, again -- and you'll detect this theme in other places, lead with an all-digital, straight-through offering.

It is extremely early days in that business, and we're very pleased with the Fidelity announcement that you noted.

They saw the innovation in the platform and opportunity to just have a great service.

As you know, it's loans of up to $25 million, and they're significantly over-collateralized, and it's an interesting opportunity.

It's too early to give you progress, but it is a part of the initiatives that we outlined, which right now we're aggregating under PWM -- PWM and GS Select together, a $500 million revenue opportunity, $11 billion of balance sheet over 3 years.

And the implied yield is evident from that.

Okay.

That's helpful.

And just follow-up here.

It sounded like some of the hiring that the firm's doing ahead of revenue could influence comp ratio bit, but it sounded like that's going to be modest.

Can you maybe just more broadly, speak to what you're seeing in the competitive environment in comp dynamics right now?

It seems like some of the European firms are more aggressively recruiting again in some of the areas that Goldman's also looking to expand.

So maybe that's temporary, but I'm just curious kind of how that feeds through as you think about kind of the outlook for the comp ratio.

Sure.

So I would say that the most important thing to think about for us, and we believe for our shareholders, is the operating leverage.

And the comp ratio, obviously, a part of that.

You will have noted the first half, 2:1 ratio between the revenue growth and the expense growth.

And you'll also see that ratio in our 9-month results versus 9 months of last year.

As revenues grow, though, that -- I would not expect that ratio to be linear, and we would see even more operating leverage.

In the competitive dynamics, as we mentioned and this is continuing, lateral hiring is up significantly.

It's doubled from last year, and we are continuously happy to see, but no way take it for granted, that we're very successful in attracting the talent.

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

Question -- a lot has been talked about amongst you folks as well as your peers about the lack of volatility in the marketplace, particularly in FICC.

With the Federal Reserve moving into a full unwind next year, have you guys mapped out what the volatility could do because of this changing position by the Federal Reserve and what it might do for the revenues for your FICC business?

Sure.

So well, we think about volatility a lot and we think, at least as much, maybe more, about the level of client activity, which is very important for us.

And so looking at the Fed's announcement, so the Fed has been extremely thoughtful and transparent in its communications, and we would expect that to continue.

It's just part of how the Fed operates.

We don't, of course, know exactly what's going to happen, and we don't make predictions.

But we do create lots and lots of contingency plans.

And so looking at what the Fed has said, as you know, they've been very specific.

They've given us $10 billion a month, and then that's going to increase every 3 months by $10 billion until it gets to $50 billion, and letting assets roll off at redemption from their balance sheet.

And they've given us the mix between treasuries and agencies.

They said it's going to -- they expect that mix to be stable with some variation, just depending on the maturities in their balance sheet.

So really, you can't get much more specific and communicative than that.

And I'll also just note, so there's a positive backdrop.

So the U.S. economy's performing.

There's improving GDP growth.

Depending on who you talk to, the U.S. is at or perhaps even beyond full employment.

And at the same time, all of this unwinding, quantitative easing is unprecedented territory.

It never happened before, so you could see volatility and spikes showing up in this process simply because it's never happened before.

We don't see QE unwind risk priced into the markets.

You could imagine vol spikes, that debt client confidence make market-making difficult.

You could also imagine a positive scenario with modest vol, more conviction, more activity.

All of these things could be catalysts for the FICC business: rising inflation; any changes in Central Bank policies against the expected trajectory; clarity on U.S. policies of all kinds; tax, obviously, regulation; also infrastructure.

All of these things you could see as better catalysts.

The important thing to note and pause on is that the Fed has been clear that the economic backdrop is good, and that's generally good for business.

Great.

And then second question, can you give us some color on -- you'd talked about the total dollar amount of the capital return on the call today.

The dividend payout ratio, was there any guidance where you think that may eventually end up in a more normalized atmosphere in the next 12 to 24 months, where you guys are comfortable to have the dividend payout ratio?

So all we know for now is that a $0.05 increase -- the option to increase by $0.05 is embedded in our capital plan, which is what the Fed has approved.

And as for the dividend payout ratio, it's been around 15% for a while.

And I'm not going to predict what that will be in the future.

Just -- that $0.05 is all we know for now.

We continue to emphasize buybacks, as you know.

But really, as we said a month ago and so important for us, we would always prefer to execute on these 30%-plus marginal ROE opportunities compared to buying back our shares.

Your next question's from the line of Marlin Mosby with Vining Sparks.

I was going to ask 2 questions.

One was when you think of the Investing & Lending, especially on the equity side where you said you all, given the market conditions, are you said kind of harvesting aggressively, is part of that related to -- because if you look at the increase, you're about $1.8 billion increase in what you had in the equity security gains.

Here's about $1.3 billion decline in fixed income, so you kind of have an offsetting effect for those 2 things, which is letting your overall revenues still grow this year.

So just didn't know if you all were doing that just because of the market conditions or you're trying to balance the mix.

And so should we expect this when we have some volatility in other sides of the business?

Well, you definitely noticed those offsetting effects.

And we did too, obviously.

I would say in that area of our business, we're fiduciaries.

And so we see it as in the interest of our clients to harvest these investments.

And the asset price levels in the market are supportive, so it's a good time.

That portfolio, as you know, while we report on the results quarterly, we think of it over much, much longer time horizons than quarterly.

Then my second question is, if you look at the seasonal progression of that comp ratio, given that you do have this investment lending gains, your revenues are still kind of at the same level you had last year.

So should we still see the drop-off in comp ratio kind of at the end of the year as you true-up your bonuses and get all that squared away?

So yes, revenues sequentially are up; year-on-year, are up; and year-to-date, importantly, are up 8% which is significant.

As for the comp ratio, of course, we -- it's an important part of our business.

And we put a lot of time and energy into considering it and setting it appropriately.

And the 40% that we put it to, so 40% for the 9 months year-to-date is, as we mentioned, 100 basis points lower than last year.

And at this point, it's the best estimate we have.

Usually seasonally, we drop down around 30% in the fourth quarter, so just didn't know if that was still a reasonable assumption.

Or is there anything different about this year that would cause that to vary from several prior years where we're seeing that trend?

No, of course, that trend is there.

I will just say go back to the commitment to operating leverage, something we think about everyday of the many things we think about everyday.

But really, I can't say more about where we're going to end up this year other than it's the best estimate, taking in all the information that we have right now.

Perfect.

So year-over-year, operating leverage would be something to make sure we kind of still assume, so that would make sense.

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

A quick question on capital return with that disclosure that you gave.

So I mean, the share purchase authorization is up 50% year-on-year.

When you look at kind of your DFAST, CCAR results, I mean your capital level is up a little bit.

At the starting point, it was up a little bit year-on-year.

The losses that you saw within DFAST were up modestly as well.

So what allowed you, I guess, within this year's CCAR to kind of return more capital?

Was there some kind of change in how the Fed looked at RWA inflation or something else?

I mean, because I think historically you said -- or the previous CFO had said that there was kind of a checkmark here of minimum ratios.

Is that still the case?

Yes, so the main difference is just the different starting point in capital ratios.

And there was no other real changes from the Fed side?

And...

Not, no, the -- nothing too surprising, right?

There were some things that the Fed said that they would do over a 2-year period, and that's what happened.

There really wasn't any big -- any surprises of note.

It's just the different starting point.

And even though the capital dollar amounts were only up less than $2 billion year-on-year starting point, you were able to increase by more than that, it's just that the ratios were higher, simply?

Yes, it's just that the ratios are higher.

That's right.

At this time, there are no further questions.

Please continue with any closing remarks.

So thank you all for calling in.

I look forward to meeting with many of you over the balance of the quarter.

If you have any additional questions, please contact Heather.

And for those of you who I'm not able to connect with, enjoy the upcoming holiday season, and thank you.

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

Thank you for your participation.

You may now disconnect.