高盛 (GS) 2021 Q3 法說會逐字稿

Good morning. My name is Erica, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Third Quarter 2021 Earnings Conference Call. This call is being recorded today, October 15, 2021. Thank you. Ms. Halio, you may begin your conference.

Good morning. This is Carey Halio, Head of Investor Relations at Goldman Sachs. Welcome to our third quarter earnings conference call. Today, we will reference our earnings presentation, which can be found on the Investor Relations page of our website at www.gs.com.

Note information on forward-looking statements and non-GAAP measures appear in the earnings release and presentation. This audiocast is copyrighted material of the Goldman Sachs Group and may not be duplicated, reproduced or rebroadcast without our consent.

I am joined today by our Chairman and Chief Executive Officer, David Solomon; our Chief Financial Officer, Stephen Scherr, and our incoming CFO, Denis Coleman.

With that, let me pass the call to David.

Thank you, Carey, and good morning, everybody. I'm joining you today from California, where we have been hosting one of our best-known client events, the Builders + Innovators Summit. We bring together over 100 of the most intriguing entrepreneurs in the world to exchange ideas and hear from thought leaders about how to build successful and enduring companies. I've heard from a number of them that they're extremely excited to meet with our team and with other entrepreneurs here in California.

In addition, over the last few months, I've also been able to travel around to spend time with our employees and clients in person, which has been invigorating. In my conversations with clients and in the results we're reporting today, it's clear that our client franchise is on very solid footing.

This quarter, we announced 2 acquisitions, a key pillar of the strategic vision that we laid out at our Investor Day in 2020 centered around diversifying our business mix toward more recurring revenues and durable earnings. There's no question that we have been successfully executing on our growth plans, and now we are further investing in the growth of the firm to accelerate our strategic evolution.

First, in August, we announced the acquisition of a leading European asset manager, NN Investment Partners. The addition of $320 billion in assets under supervision will help us achieve greater scale in our Asset Management platform, enhance our distribution network on the continent and bolster our ESG capabilities.

On the topic of ESG, as world leaders prepare to convene in Glasgow later this month for COP26, I would like to underscore the firm's commitment to working across our businesses to deliver on the goals of the Paris Agreement. This includes partnering with our clients to help drive climate transition and inclusive growth, and we're making progress toward our target of $750 billion in sustainable financing, investing and advisory activity to help achieve these goals.

My view is that the businesses and markets need policy that supports the deliberate transition to a more sustainable future. This includes developing a mechanism to put a price on the cost of carbon. This transition is complex and won't happen overnight. It will require both the public and the private sectors to do their part. And given that fossil fuels will remain part of our energy mix for the near future, it is critical that we strike a balance between good public policy and recognizing the consequences of the supply constraints that we face.

Our second acquisition was GreenSky, which we announced in September. This transaction furthers our efforts to build the consumer banking platform of the future. It provides our Consumer business with an attractive and high credit quality customer acquisition channel via an impressive network of over 10,000 merchants in a secularly growing market. It has a digital cloud-based infrastructure and product capabilities that are synergistic with our broader platform. And with the addition of our bank funding model, we expect to generate 20%-plus returns at scale through recurring fee-based and net interest income revenues.

Importantly, these customers will be our customers. They will live in the market's ecosystem where we can holistically help them manage their financial lives.

Turning to Page 1 of our presentation. We produced net revenues of $13.6 billion, driven by year-on-year increases in 3 of our 4 business segments. On the bottom line, we delivered net earnings of $5.4 billion and quarterly earnings per share of $14.93.

Our year-to-date revenues of nearly $47 billion and net earnings of over $17.5 billion are higher than any full year results in our history and drove an ROE of nearly 26% and an ROTE of over 27%.

Our performance underscores the strength of our client franchise and a supportive market environment.

In Investment Banking, we produced our second highest quarterly revenues. Our clients were extremely active. They turned to Goldman Sachs for our leading M&A franchise, driving strategic activity and associated financing to elevated levels. We delivered solid results in Global Markets as we continue to focus on market share and engage with clients on a broader array of solutions.

In Asset Management, assets under supervision hit another record of $1.7 trillion, which will be further enhanced by the NNIP acquisition. We continue to transition our alternatives business to more third-party funds, and we have gained momentum as we spend a significant amount of time with new and existing institutional clients, raising $90 billion against our goal of $150 billion in gross fundraising commitments since our 2020 Investor Day.

And in Consumer & Wealth Management, we had a record quarter. In Wealth Management, we've seen strong, long-term fee-based inflows in the first 9 months of the year and had big client wins in Ayco that give us the opportunity to serve employees at all levels of their organizations.

In Consumer, we are now enabling 9 million customers to spend, borrow and save on a multiproduct platform.

All in, our strong performance, tireless focus on our clients and relentless execution of our strategy strengthen my confidence that we will continue to advance our strategic evolution and deliver higher, more durable returns for our shareholders.

Let me now turn to Page 2. Broadly speaking, the current operating environment still has solid fundamentals, but there is increasing uncertainty around a number of factors. On the one hand, fiscal and monetary policy remain accommodative, and equity market is still near all-time highs. COVID-19 vaccination rates are rising around the world. I believe that we are likely past the worst of the pandemic's effects on the global economy. And as technology behind the vaccines continues to improve, we will make further progress against the virus.

That being said, there are a number of emerging areas of uncertainty we're paying close attention to. First, the trajectory of inflation, particularly wage inflation in the short term. Second, there remains significant uncertainty around the Delta variant. Third, there's ongoing political debate in the U.S. over economic policy, including the potential for additional infrastructure deals, the longer-term extension of the federal debt ceiling and tax increases. And fourth, the U.S.-China relationship remains complicated.

Taken together, these items have the potential to be a headwind to growth. As further indicated by the downward revision and our economists' U.S. GDP expectations, earlier this week. Regardless of the market backdrop, I consistently hear from clients how much they value the high-quality service we provide, especially our differentiated advice and execution capabilities. As I look ahead, I remain optimistic about the opportunity set for Goldman Sachs and our ability to grow our firm. Activity levels remain high, particularly in investment banking and we have solid momentum in our Asset Management client business.

Before I close, I would like to thank Stephen for his nearly 3 decades of service to the firm. I've had the privilege to work with Stephen since the early 2000s, and I couldn't be more grateful for his counsel and friendship over the last 20 years.

In January, as we announced previously, Stephen will be succeeded by Denis Coleman, a 25-year veteran of Goldman Sachs, who has held numerous leadership positions within investment banking most recently as Co-Head of the Financing Group. He and Stephen have enjoyed a close working relationship for almost 20 years and are progressing toward a seamless transition in the CFO seat.

With that, I'll turn it over to Stephen.

Thank you, David. Good morning to all of you on the call. Before I turn to the results, let me say briefly that I have thoroughly enjoyed the opportunity to work closely with all of you, our shareholders and the analyst community over the past 3 years as CFO, and I am committed to facilitating a smooth handoff to Denis, who as Carey noted, has joined us on the call today.

On our results, let me begin with our business performance by segment, starting on Page 4. I'm pleased to start with Investment Banking, which has continued to experience strong momentum and produced its second highest quarterly net revenues of $3.7 billion. The consistency of performance in Investment Banking is a reflection of both elevated market activity and increased market share in a client that has long enjoyed a leading competitive position.

Financial advisory revenues of $1.6 billion were an all-time high. We maintained our #1 league table position for the year-to-date, participating in $1.4 trillion of announced transactions with a volume market share of 32%. M&A activity was elevated across geographies and industry groups, with particular strength in TMT and health care and benefited from our strategic footprint expansion and our significant position with financial sponsors who remain exceptionally active in the market.

Underwriting results were strong, notwithstanding more normalized activity relative to the very robust levels in the first half. Equity underwriting generated $1.2 billion in revenues, representing our fourth consecutive quarter with revenues in excess of $1 billion. We ranked #1 globally in equity underwriting for the year-to-date, with volumes in excess of $110 billion across 570 deals. That represents volume market share of 10%.

In debt underwriting, net revenues were $726 million, with performance supported by solid high-yield and investment-grade issuance as well as acquisition financing activity. Given the current levels of M&A announcements and continued healthy activity among financial sponsors, we expect acquisition financing activity to remain high. Despite significant levels of completed transactions, our Investment Banking backlog nonetheless ended the quarter significantly higher than year-end levels.

Corporate lending results of $152 million reflected revenues from transaction banking, middle market lending and the relationship loan book, including associated hedges. In Transaction Banking, we achieved our 5-year goal of $50 billion in deposits this quarter, well ahead of the target date. As a key growth initiative for the firm with a very large addressable market, we continue to successfully access the breadth of our corporate client base in adding customers and driving higher engagement on the platform, which has exceeded expectations. We remain confident in the longer-term revenue target for this business of $1 billion.

Moving to Global Markets on Page 5. Segment net revenues were $5.6 billion in the quarter, 23% higher year-on-year driven by healthy client activity, notably in Equities and a generally supportive market-making environment, characterized by heightened volatility in certain areas.

Results were also supported by recent market share gains across FICC and Equities. Global Markets again produced returns in excess of the target ROE expressed at our Investor Day, reflecting the strength of our franchise and ongoing attention to cost.

Turning to Page 6. Our FICC businesses generated $2.5 billion of net revenues for the third quarter. The decline in FICC intermediation versus a year ago was the result of lower revenues in rates, credit and mortgages, offset by materially better performance in commodities and higher results in currencies. Activity increased into the end of the quarter with September proving to be a very strong month. Our commodities business continued to perform well amidst the heightened level of volatility in the business, including in oil, natural gas and power. FICC financing revenues of $513 million were the best in over a decade and were up meaningfully, driven by mortgage lending, consistent with our strategy.

Total Equities revenues of $3.1 billion were very strong, helped by higher results in equities intermediation, amid better performance in both derivatives and cash and record equities financing as we saw record average balances in prime and opportunities to extend liquidity to clients.

Moving to Asset Management on Page 7. In the third quarter, we generated revenues of $2.3 billion. Management and other fees totaled $724 million, which were impacted by approximately $155 million of fee waivers on our money market funds. We again extended these waivers for clients, consistent with industry practice in this low rate environment.

Equity investments produced net revenues of $935 million amid $1.6 billion of gains on our $16 billion private investment portfolio plus our consolidated investment entities, partially offset by $820 million in losses on our $4 billion public portfolio. Losses in the public portfolio were dominated by a few positions, which by contrast, were material contributors to gains in the segment last quarter. Additionally, we had operating revenues of roughly $200 million related to our CIE portfolio.

Staying with Asset Management, Page 8, again, provides disclosure on the composition of our equity and debt positions by vintage, region and, where relevant, accounting treatment.

On Page 9, we show a longer time series of disclosure regarding the progress made in harvesting our on-balance sheet investments. Since our 2020 Investor Day, we have actively harvested positions of $16 billion, which have been partially offset by markups on the portfolio of $9 billion and additions of $5 billion, which include early fund facilitation and other commitments.

The implied capital associated with total dispositions across both private and public equity positions since our 2020 Investor Day is approximately $8 billion. We continue to have line of sight on $2.8 billion of incremental private asset sales corresponding to $2 billion of capital reduction. We remain focused on the execution of this strategy and meeting our capital target for the segment. To this end, we sold over $1 billion of CIE portfolio during the quarter and also disposed of $2 billion of private positions.

Moving to Page 10. Consumer and Wealth Management produced record revenues of $2 billion in the third quarter. In Wealth Management, very strong, long-term fee-based inflows for the year-to-date helped drive record management and other fees of $1.2 billion, which rose 10% versus the second quarter and 28% year-on-year. Incentive fees of $121 million largely reflected the recognition of overrides in certain of our investment funds. Private banking and lending revenues of $292 million rose 12%, with loans to private wealth clients up $2 billion sequentially, as demand for lending products remains high amid the low rate environment. I would add that we view private bank lending as an integral part of our wealth offering, with room for further growth based on the needs of our clients and our current penetration rates as well as the strong credit standing of this client base.

Consumer banking revenues were $382 million in the quarter, reflecting higher credit card loans and deposit balances year-over-year. We expect loan growth to accelerate in 2022 given the pending acquisitions of GreenSky and the General Motors credit card portfolio and continued expansion in our existing product set.

Looking across these 2 segments, Page 11 shows our firmwide assets under supervision and management and other fees. We have been building these businesses steadily and total AUS now stands at a record $2.4 trillion, putting us in the top 5 of both active managers and alternative asset managers globally. This growth has driven higher firmwide management and other fees, which rose 16% year-over-year to a record $1.9 billion.

On Page 12, we address net interest income and our lending portfolio across all segments. Total firmwide NII was $1.6 billion for the third quarter, higher versus a year ago, reflecting lower funding expenses and an increase in interest-earning assets. Our total loan portfolio at quarter end was $143 billion, up $12 billion sequentially, reflecting increases across the portfolio. Corresponding provision for credit losses of $175 million reflected portfolio growth.

On Page 13, you see our total quarterly operating expenses of $6.6 billion. Our efficiency ratio for the year-to-date stands at 52.8%, reflecting our ability to exhibit operating leverage while maintaining a pay-for-performance culture and investing for growth. Our year-to-date noncompensation expenses were down 17% but up 11% ex litigation, while our compensation expenses were up 34% on a year-to-date basis.

Turning to capital on Slide 14. Our common equity Tier 1 ratio was 14.1% at the end of the third quarter under the standardized approach, down 30 basis points sequentially. Despite higher capital on solid earnings generation, the decline was driven largely by a $43 billion increase in RWAs, partially reflecting revisions to RWA calculations based on regulatory feedback in the quarter.

In the quarter, we returned a total of $1.7 billion to shareholders, including common stock repurchases of $1 billion and $700 million in common stock dividends. Consistent with our capital management philosophy, we will prioritize deploying capital for our client franchise at attractive returns and then return any excess to shareholders via dividends and share repurchases.

In conclusion, we delivered another quarter of strong performance, reflecting the diversification and strength of our client franchise. Additionally, we announced 2 acquisitions that will enhance both our Asset Management and Consumer businesses and increase the firm's recurring revenue stream.

Looking forward, the overall opportunity set remains attractive across the firm as we continue to execute on our strategy we are building towards a path to sustainable mid-teens returns.

With that, we'll now open up the line for questions.

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

Stephen, I wonder if I could ask a quick follow-up question on your comments, just on capital. So you make a ton of money. Book is up 21% year-on-year, amazing. You did the GreenSky and NNIP deals, but RWA was up because activity is strong and SACCR is coming. So I wonder if you could just peel back the onion a little bit more and just talk about where you see your excess position now and if at the margin, we should be expecting continued investment in, say, the digital consumer build at the margin more so than the buyback side.

Sure, Glenn. So let me start kind of with a reiteration of our standing capital policy. As you know, our priority is to deploy capital in the business on behalf of clients, and to do that especially when returns are as attractive as they have been. So in a quarter where we produce 22.5% ROE, it's good to reason and consistent with that, that we deploy the capital in the business.

I'd also point out that in the dividend, our dividend is now at $2 a share, up from $1.25. So on an annual basis, we're returning an additional $1 billion or so to shareholders through the dividend. And where we exhaust opportunities that prove to be attractive, we'll return capital back, and that really represents what we do in terms of share repurchase.

Now in terms of the opportunity set, you referred into the Consumer business. It's unquestionably a priority. David has reflected time and again, the long-term view we have about how that business can grow and be accretive to the firm. But I would say that the deployment of capital knows not one segment nor one opportunity. It is a broad look across the firm. And we think always about how do we add in an agile way, deploy capital across the whole of the business. So I wouldn't necessarily say that it's targeted against anyone in particular.

Obviously, we're operating at a higher SCB, a higher minimum requirement pursuant to the Fed, therefore, surplus is less. And we, consistent with the policy, always look forward to what will be, in effect, a petition on capital that we know. SACCR is certainly one of them. And in that regard, while we've not made a formal decision on implementation and we'll let our regulators know when we do, we're looking forward to that. And our view is that when we put SACCR in place, it will increase our RWAs by about $15 billion or tax our ratio by about 30 basis points.

It is at that level, in part because as we look back when SACCR was finalized by Basel in '14 and then adopted by the Fed in '18 and '19, we began then to kind of proactively mitigate the effect. So the implementation now reflects mitigation progress we've made in anticipation of it as opposed to kind of a starting workstream. And obviously, the work was assembling data and understanding where appropriate netting pursuant to the rules could play out. But I think that's a reflection of a proactive engagement so as to minimize the impact to capital and ratio now relative to what it would have been. And so sorry for the long answer, but that gives you kind of a complete picture, if you will, of how we're thinking about capital.

That was comprehensive. I appreciate it. Take notes then. One last follow-up. Because year-to-date revenues are up 42% and so strong, you made a ton of money. Comp dollars accrued are up 34%. I wonder if we could talk about that a little bit in terms of comp leverage. I know it's a bottom up, and I know a lot of people at Goldman Sachs are killing it this year. But I think 1MDB impacted things last year. So just thinking full year to full year comp ratio, anything on the puts and takes on what to expect?

So maybe I start with the numbers, and then I'll turn it to David, who I think can reflect on kind of comp philosophy generally. But where we are right now, comp to net revenue, net of provision for credit loss is at 31% through 9 months. That was at 34% when we ended the second quarter.

We always reserve for compensation consistent with what's required of us, which is what do we think we need to pay the firm consistent with performance as at that date. Obviously, there's a quarter to go. So we're at a 31% ratio, revenue net of provision for credit loss.

You can see through 9 months in the comp and benefits line, not to confuse the 2 numbers, that number is up 34%, again, reflecting the performance of the business and a pay-for-performance philosophy more broadly. That 34% is obviously to be measured against revenues that are up 42% year-to-date and revenues net of provisions up 56%. So you can see the comp leverage that exists even when we are provisioning for what we believe to be a healthy and robust comp process.

I think overall, if you look at total operating expenses, because we look at it that way, including our noncomp expense, there continues to be the exhibition of leverage, operating leverage in the business. Again, revenue is up 42%, but total operating expenses ex litigation are up 24%. And so this just gives you a sense of the leverage in operating expenses broadly and in comp specifically. But maybe David wants to comment just on the philosophy.

Glenn, I appreciate the question. I know one of the things you're getting at. There's no question there's comp pressure. There's wage inflation everywhere at all aspects of every business right now. We're extremely focused on it. We are a pay-for-performance culture, and there's no question that people are performing. But we're very, very comfortable that we're managing this in a way where we can show real operating leverage to our shareholders given our performance, and at the same time, pay our people exceptionally for the exceptional performance. And we're on top of it, we feel good about it.

Your next question comes from the line of Christian Bolu with Autonomous.

Welcome, Denis. Firstly, just echo David's sentiment about Stephen. Congratulations and definitely will be very big shoes to fill for sure. So my first question here is on the digital consumer bank. That business continues to do very well. I think year-to-date, revenue growth is an impressive 30%, but that still lags some of the pure-play neobanks out there. And some of that might just be a function of product holes, I think a checking payment functions and investment functions and Marcus out a little bit light. So curious here how you think about the product road map from here for Marcus, the potential to use M&A to fill some of those product gaps. And then longer term, how should we think about sort of sustainable revenue growth for that business?

Sure. I'll start, and Stephen may add some comments. But we -- this is -- Christian, this is something that we're focused on over the long term. I think we've built an excellent platform. From a standing start of 0, in 5 years, we've built a very, very significant depository institution with over $100 billion of digital deposits, no branches, very small marketing budget or customer acquisition costs. The cost of the infrastructure that holds and drives those deposits is very, very efficient vis-à-vis other models.

We have 9 million customers that we're servicing right now. We have our own credit card platform that I think is really differentiated, and we're onboarding both other partnerships, but also have the opportunity for a proprietary card that's in development. We've talked publicly about adding digital checking to the portfolio during 2022, and that is on track and it's expanding. GreenSky allows us to broadly expand our point-of-sale capability. And as was highlighted in the starting comments, their tech platform, their cloud-based technology integrates very seamlessly into what we're doing. And so we feel very good about the fact that we're going to continue to grow this and build a consequential business.

We have a long-term view with it. I'm not going to comment on a revenue growth percentage. Unlike a lot of the fintechs that are simply trying to look at a revenue growth model, we're looking to build a sustainable business that contributes durable recurring earnings to Goldman Sachs over time and to compound that. And we do believe that if we serve clients well in a seamless way with good technology, it will continue to grow and we will do that.

I don't know, Stephen, if you have anything else you think should be added.

Well, the only thing I'd add, Christian, is if you just look at the year-over-year comparison, right, so you can't forget that we went through kind of a more challenging period in COVID, where we, by design, look to limit the amount of underwriting we were doing. We're now coming back to sort of turn that back on having seen the portfolio perform very well.

So year-over-year, revenues in Consumer are up 23% in the deposit line. They're up 54% in credit cards, and that's just a reflection of the renewed commitment that David is reflecting to sort of growing out that business and seeing it perform.

And I think David's comments are spot on. If you look at loans and savings and Apple Card soon to be joined by General Motors, the investing module and checking, this is not -- what's coming into focus is a big, broad platform that can serve customers in all of their needs as opposed to where we began in kind of a bespoke product set. And I think we're at a key moment now with the acquisition of GreenSky to sort of take that forward.

Great. My second question maybe is on back to trading, a bit of a high-class problem here, but the result is just another quarter of market share gains in the trading businesses. But the share gains have been so dramatic over the last few years, that one has to wonder how sticky it could be going forward. So just curious how you think about the sustainability of share gains in the trading business as we roll into sort of 2022 and 2023.

Well, Christian, I appreciate your focus on the share gains. I don't -- I think it's a really important part and highlight of what we've been executing on in the context of the strategy that we laid out when we went back to Investor Day. And so I think there are a couple of things that we've tried to do very differently over the last few years to strengthen the position of this business. And I think they're accruing results that will be quite sticky. And I don't want to say that the share gains are going to continue at this pace because they won't. We know that, but we've positioned the business much, much better for, I think, 2 principal reasons.

Number one, the business has been much more focused on having a client-centric One GS culture to really figure out how to serve the needs of our clients in a very holistic way. The business has been less transactional, more long term focused on the client relationship and the level of client service while bringing to bear the market-making, provisioning and financing capabilities of the firm that we have. And I'm hearing repeatedly from clients that they see a real switch in the way we're operating the business, and it's accruing to market share gains. It's benefiting us in that context.

Number two, we were never an organization that focused on financing our clients as a business segment that we could meaningfully grow and target. And so since the Investor Day, we targeted our ability to grow our financing capability across both Equities and FICC, and we've succeeded on that, and that's a place where we've taken market share. And that is more durable share, obviously, and we continue to think there are opportunities that we can continue to prosecute on the financing side, and that's different.

I would also highlight that we've been making significant investments in technology, and we have the scale and have developed platforms that enhance the competitive position that we have with clients. And I think one of the things that's happening broadly is the leading players here, given the tech necessity, have an advantage to secondary or tertiary players. And so we're benefiting from that also.

Now there's no question, this is a very conducive environment the performance in that business. And we're not sitting here saying this level of performance will continue. But I think that the way we're running the business, the focus we've made certainly takes us a step function up from where we were in 2019. I'd also say, as part of our Investor Day, we were focused on efficiencies in operating that business. And so even if we went back to a different level, we're at a higher hurdle return rate in the business at lower levels. And so we feel very good about the way the business is positioned.

Your next question comes from the line of Steven Chubak with Wolfe Research.

I wanted to start off with a question. It may be a multifaceted one on just sponsors and the alternative space. Sponsors have been really a significant and clearly growing contributor to increased M&A activity these last 12 months. You guys have certainly benefited from that. But with somewhat unique perspective into the business, just given you're building out your own third-party alternatives platform and you cited some really impressive fundraising numbers, I was hoping if you could just speak to how much longer this frenzied pace of both fundraising and deal activity could persist and whether there are any factors we should be watching, whether it's tax reform or higher rates that could potentially derail some of that momentum.

Sure. And I'll try to talk at a high level about some of this, Steve. And I think you're right, we're at a moment in time where the activity levels are quite high.

First, on fundraising. I'd just say that one of the reasons why we got very focused a few years ago on -- in a much more organized way growing our third-party capital and building institutional relationships to add to our alternatives platform is because there really is secular growth in the context of capital allocation into alternatives. And you get out and you get around the world, whether it's governments and sovereign wealth funds or broad institutions, all of them or a broad array of them are increasing their allocation to alternatives.

I think in addition, there's no question that we're in a position, the world is in a position where retail participation through wealthy individuals is broadly expanding in the alternative space. And so there's more access being offered to wealthy individuals. We've always had a distribution channel with ultra wealthy individuals, but that access is broadening more significantly.

And so I do think we have a number of years ahead of broad secular growth in terms of the capital allocation onto these broad global alternatives platforms. I think we're very well positioned for that. And so that's helping us in the context of our fundraising as we highlighted.

With respect to deal activity, there's a lot of dry powder out there. I would note that sponsor activity in M&A was a much higher percentage of activity this quarter than it's been over the last few years. And in the past, when sponsor activity has increased, it runs for a while, but then ultimately, there'll be something that backs it off.

We're watching the velocity of our lending activity into that sponsor activity very carefully, thinking very carefully about risk management around that. It feels at the moment given the continued accommodative monetary and fiscal policy environment and the reacceleration of the economy coming out of the pandemic, that this will run for some while, but that's also something that we're going to watch very carefully because it won't sustain at this pace. There'll certainly be speed bumps along the way.

Thanks, David, for all of that color. And maybe just for my follow-up, a question, Stephen, just on equity investments and the impact to capital. And one of the primary drivers of future SCB reduction, which you've talked about, is the harvesting of those equity investments. We know they get very punitive treatment in CCAR, but -- and this is a high-class problem, shrinking the investments, at least on a net basis has proven rather difficult and remains stubbornly above that $20 billion level. How much smaller does the book need to get in order to meaningfully reduce your SCB? And is that 13% to 13.5% CET1 target still the appropriate long-term bogey just given some of the stubbornly high equity investments that have persisted for the better part of a couple of years now?

Sure. Let me start with the end part of your question. Our strongly held view is that 13% to 13.5% is the right place for this firm to operate. Now our ability to get there is obviously frustrated by what the Fed is otherwise requiring of us in the context of CCAR and SCB.

So in that context, what we can do and what we are doing is candidly taking action into our own hands, meaning we're not waiting for petitions to be well received in order that the requirement comes down. But instead, we're pivoting and moving from balance sheet into fund format.

I think if you look at the Page 9 in our deck, what you'll see is what's happened in terms of $16 billion of dispositions and what that has meant for AE free-up. So I'll just give you a sense of it.

In the last 9 months, we've seen reduction in balance sheet of $8.9 billion, corresponding to $4.6 billion of AE. Since Investor Day, $16.2 billion of reduction in balance sheet and $8.3 billion of freed AE, and we have line of sight from where we sit to about $2.8 billion of balance sheet reduction, freeing up about $2 billion of AE.

I give you all those numbers because you can see the magnitude of the activity that's been going on that will continue. And we had always focused in on whether or not at Investor Day, we would experience a bit of a canyon, if you will, of revenue, meaning we would see balance sheet reduction come off at a quicker pace, faster slope than what might have been a yawning line, if you will, to fundraising and deployment. That's not happening.

As David has said, we have $90 billion of fundraising, which -- and underlying that is about $50 billion of AUS, which is fee paying. And so that transition is being managed well, and this just gives you a sense of the overall capital reduction in the context of what we're trying to achieve.

Your next question comes from the line of Jeff Harte with Piper Sandler.

So balance sheet growth has stepped up since the pandemic, and that's something we've kind of been waiting for really kind of since the great financial crisis. Can you talk a bit about how much of that growth has really been driven by client demand for balance sheet, which would be a good thing versus just being a function of kind of QE in the flood of liquidity in the market?

Well, I would say that much of the balance sheet growth that has gone on has been attributed to client activity. If you just look at segment by segment, you look at growth in our financing activity in investment banking that supports our M&A franchise, you look at financing that's going on in the context of both FICC and Equities that were up year-on-year and that David was reflecting in the answer to his question around kind of sustainability and the forward in our trading business, and so a good deal of this is balance sheet in support of clients.

I would point out though that in the context of growing balance sheet, it doesn't grow in isolation, meaning we have various risk metrics that are in place. Capital has obviously grown. Liquidity maintained at the firm obviously grows in the form of our GCLA. And so all of these, I think, are meant to be read in tandem in the context of serving clients, but doing that in a way where balance sheet growth is held in the context of various risk, be it capital and liquidity profile of the firm itself.

We're not -- we are not a bank, notwithstanding the fact that we have strategically grown our deposit base that are experiencing the kind of outsized growth in deposits that you're seeing or that you have seen at the bigger commercial banks. And that is inflating balance sheet there. We're not seeing that kind of inflation frankly, in part because this is a new platform for us and a strategic pivot in terms of very usable deposits as a substitute for wholesale funding.

Okay. And as we think about the kind of recurring question for a number of quarters now, capital markets and kind of how sustainable are these really strong activity levels. Understanding that you can't predict that things could shut off tomorrow, how do you think about things like Investment Banking and Global Markets when you look at kind of the budgeting process into next year and maybe the year beyond? I mean how do you approach that? What's your outlook from that perspective?

I think our outlook, there are a confluence of things, Jeff, that are going on that are obviously quite accommodative for this. You're right, at any point in time, that mix could change, and we wouldn't see the same robust amount of client activity, but we have fundamental growth in markets. We have fundamental growth and economic activity around the world. And that, over periods of time, grows long-term growth in these business platforms.

So I certainly would say we're running a very, very robust capital markets activity in the Investment Banking franchise at the moment. But I'd also say, whenever things slow down or rebalance a little, we're going to find that these businesses are baseline fundamentally larger than they were 5 years ago because of the growth in market cap for the world and the growth in economic activity in the world.

And so we've always said that there's a real correlation to economic activity to our activity. There's a real correlation in market cap growth to our activity. Obviously, these things will ebb and flow, but we have lots of flexibility in the context of the way we manage the businesses. And these businesses, I think, will continue to be strong performers even in different environments. They just might not perform at this level all the time.

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

So we talked a little bit earlier about market share and market share opportunities. I just wanted to take a slightly different angle on that and ask the question about where you think you're punching below your weight if we could think about that being an opportunity from a regional perspective. So especially in Europe or Latin America, maybe Asia, you could speak to where you think you have opportunities in those regions.

I mean I'd point to a couple of things at a high level, Betsy. There's no question, one of the reasons why NN was really attractive to us is that in our Asset Management business, we've been punching below our weight across Europe, both in terms of the assets that we were supervising but also in our distribution capabilities and NN accelerates that. I still think there's more opportunity there.

I do think around some of the public portion of our GSAM business across the world, there's still opportunities for us to punch in a better way, even though at this point, we're one of the top 5 active asset managers. And so we continue to think about that as an opportunity.

I think there are opportunities for us around the Wealth Management business, in particular, in Europe, and we've been focused on that. I think there are wealth management opportunities for us in the U.S. as we move from simply managing money with ultra-high-net-worth clientele that have been our traditional PWM business to a more mass affluent structure and using digital technology and expanding the use of Ayco. China is another place where there's opportunity for us from a wealth management perspective. And as you've seen, we've announced our joint venture with ICBC, which we think is an interesting opportunity in that part of the world. And so those are a handful of things from a regionalized basis I would highlight.

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

I was wondering if you could just kind of mark-to-mark us on your tech successes or initiatives. As you mentioned, year-to-date growth in revenues is 2 to 3x that of expenses. So you're getting the higher marginal margin. Now some of that is due to the full market. You mentioned comp leverage, but then how much of that is due to technology?

So I guess one way to phrase this question is by area. So you have your new growth initiatives, you mentioned digital deposits of $100 billion, Transaction Banking positive $50 billion. So that would -- I think that's born in the cloud. And then you have your legacy trading activities, where I guess there's been a lot of electronification, then there's the rest of the company where I'm not really sure what the tech backbone is. So the question is how much has the tech backbone contributed to that higher marginal margin for each of the growth areas, trading and the rest of the firm?

Well, I'll start, Mike. And Stephen, I'm sure, will have some things to add here, too. At a high level, we're spending significantly on technology to expand the platforms that we operate on, to better connect to our clients and to enable us, obviously, to operate more efficiently. We're performing very well at the moment, but our commitment to continuing to uplift our broad background and to put more of our businesses into the cloud for a variety of reasons, which I'll highlight in just a second, I think, is something that we've been very focused on strategically and it continues, but we're in the middle of the execution path.

Historically, developers at the firm have used their own physical data centers to build and host technology. And cloud adoption really enables innovation by allowing talent that we have all across the organization to focus their time where it really matters and to be able to much more directly create services and applications that can directly service our clients' needs rather than doing what I call as undifferentiated kind of heavy lifting tech build that manage what was more traditional tech infrastructure.

The cloud really provides low-friction access to technologies such as big data, machine learning, analytics, which enables us to continuously deliver products to meet the growing demand that our clients have as they want to connect with us. And it's allowing us to accelerate some of the initiatives we have, and you highlighted some of them like Transaction Banking and some of the things we're doing on the Marcus platform. And so there's no question that there are real efficiencies for us that are coming out of that.

We know that the cloud is not for everything, and so there are some services. And I'll give you an example like high-frequency trading that are better served on-premise, and so we clearly operate in a hybrid environment. And we also choose our partners in kind of a multicloud or what we call a polycloud strategy so that we can take the best-of-breed offerings that each of these different technology platforms have and allow that to better leverage what we can do for our clients.

So overall, we're in this journey that's very, very intentional. It's aligned with our strategic objectives of delivering better services to our clients and operating the firm more efficiently. And I think we're getting real benefit from it in the execution of our strategy, but I think there's more upside in that as we continue to build the financial cloud, so to speak, for some of our principal businesses.

I mean, Stephen, would you add anything to that? Or do you want to quantify some things a little more?

Yes. The only thing I'd add was a bit of quantification. So Mike, if you -- you heard me say before, our noncomp expenses, so excluding litigation. So just looking at the core noncomp expense, year-to-date is up 11%. If you look at the gross expense that, that represents, about 1/3 of that increase is related to technology. So about 1/3 of the increase of noncompensation expense in the firm through the first 9 months relates to technology. And this is spent all across the firm. So it's both, in particular, initiatives like Consumer, TxB, Marquee, but equally, it's spent broadly on the broader uplift of platforms in and around the firm. Cloud-based engineering is one that David brought to your attention.

In all of these spends, we sweat the ROI of this investment. And so as an example, part of the uplift will enable us to create greater opportunity for automation, which will play out as a return across the whole of the firm. So I just offer that to you just to give you some sort of dimension, if you will, from a true expense line as to what David was otherwise describing.

And just a follow-up, maybe digging deeper on Transaction Banking. I've been a little skeptical, but you did get your 5-year target, as you said. And so if you think about the cloud, cloud-enabled, cloud-native or I think, in that case, born in the cloud, can you just define really what that means? Is that the nirvana state of being in the cloud, the way you have transaction banking? And to what degree has that contributed to you getting your $50 billion? And by the way, does that $50 billion include any deposits from Goldman Sachs itself?

So I don't believe that there are GS deposits in it. It's $50 billion of gross deposits. And as we've said, that's now become about 25% operational, so of value to us. But just to come back to your question about the cloud, so the TxB business was built entirely in the cloud. I don't know that I would necessarily conclude that, that is why it's been successful. I would conclude, however, that it is how it's been built on a very cost-efficient basis and built with a level of security that I think satisfies us and our client base, meaning I think it's a draw card in the context of it.

The reason, Mike, is kind of self-evident, which is that it's built in the cloud. As David noted, it's not built with multiple instances of the Transaction Banking platform across redundant data centers. It benefits without necessarily costing us to sort of improve security upgrades to sort of technology and the like. That is the benefit of sitting within the cloud itself.

So I can't tell you that I could draw a line to the deposits that have come in. I can tell you that we built it better, cheaper and on a more attractive basis to facilitate client attention and attraction to it.

The one thing, Mike, that I want to add very, very clearly, the reason our Transaction Banking platform is, I think, accelerating in its success is because the quality of the offering for our clients is differentiated and better meeting their needs than the existing offerings. And part of the reason, as Stephen highlighted, we could do that so quickly was because it's easier to build on the cloud and transition. But fundamentally, this is an example of us seeing an opportunity to build a digital platform that took friction out of an activity that was deeply embedded in our corporate clients. As a user of that activity, we saw that experience and we saw that there were ways that, that experience could be improved, and we've built a platform that delivers a better experience.

And that's why it's succeeding. That's why it's meeting targets and continuing to grow, and that's why we're very optimistic. Stephen laid out to you $1 billion of revenue. We're confident in that target. And this business has margin in it and will be a good contributor. And so we're very confident about how we'll continue to execute. But fundamentally, it's about the quality of the product we're delivering to our clients.

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

Just first, congrats. Best of luck to you, Stephen. And Denis, congrats to you also on the new role. Looking forward to working together.

Maybe we could start with the GreenSky acquisition. So the firm, a lot of investors see how the stock has performed since the IPO. Pointed to a spotty history in underwriting and the firm began exploring strategic alternatives in August of 2019. So could you maybe add your perspective on why this was the right franchise to connect to your growing consumer banking business and maybe what you think the market might not be appreciating or understanding about this company that led you to be interested in acquiring it?

Sure. I mean I'll start here, and I appreciate the question, Brennan. But first, it's a very different company as an independent public company than it is as a platform inside Goldman Sachs. And one of the big weaknesses of the company as an independent public company is it didn't have a funding model, and it had to fund differently inside Goldman Sachs, where we have funding and attractive funding that becomes a technology platform that allows us to connect to a very attractive base of customers that we can pull into the Marcus ecosystem.

I think the merchant network that they've developed, we have over 10,000 merchants and they developed over 15 years is extremely valuable. And then the work we did to try to have a point-of-sale merchant network and look at that, we think it would have taken us close to 10 years to develop a similar network. And so the ability to acquire that network bring a very, very high-quality customers. These are customers that own homes. These are customers that have high FICO scores, very, very attractive into Goldman Sachs. It allowed us to do something that fits seamlessly into our platform and allowed us to expand the point-of-sale activities that we were doing.

And so we feel very, very good about it. And we think that this acquisition will consistently deliver 20%-plus returns on the activity that it generates.

Great. Maybe following up on that, could you provide some context around the strategic priorities from here. You've done 2 recent acquisitions, smaller, bolt-on size, but certainly a bit of activity. When you think about the different businesses in which you want to grow, you've done a lot of these smaller bolt-ons, some in the wealth side with United Capital and Folio several years ago and NN and GreenSky more recently.

Going from here, is there any particular business that you think is quite compelling, given either some combination of ripe inorganic opportunities that the market might be underappreciating similar to -- or your -- the platform can be different within Goldman than it is as a standalone, the way it was with GreenSky? How should investors think about priorities and direction from here and how to stack?

Sure, Brennan. I'll bring you back -- I really want to bring you back and center you around what we said during our Investor Day. We laid out a strategy that said we would continue to invest in our core businesses to grow market share and increase their positioning. I think we've done that. There's still some opportunities to continue to do that. But we highlighted a handful of areas where we saw opportunities to grow and expand our competitive position while also increasing the mix of durable fee-based revenues into the business.

And when you look at those areas, it's Transaction Banking, it's Asset Management, it's Wealth Management and it's our digital consumer bank. And so as we look forward, I still think there are opportunities to grow all 4 of those areas. I think we can continue to grow them organically. But when there are opportunities to make an acquisition that can accelerate our competitive position and our growth in one of those areas, we're going to take a hard look at it.

As I've said before, the bar for us to do something very significant is extraordinarily high. I think there are still opportunities. There may be opportunities in the coming years for us to do things that can accelerate those areas, but we are focused on those 4 areas because those 4 areas diversify the durability of our revenues and allow us to continue to grow a more durable and consistent earnings stream. And so that's the frame that we'll continue to look at. I wouldn't point to anything more specifically.

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

I guess first question, just want to dig in a little bit on in Asset Management and the opportunity on the third-party alternatives, fundraising and then just the ability to continue to scale that both on kind of the customer side and product side. And when we look at some of the, I guess, stand-alone alternative manager peers, they've done a great job in recent years of expanding the product menu and then consolidating LP relationships where they're connecting on numerous products and so that effectively creates a network effect.

And so looking at Goldman, where do you guys feel like you are with LPs? And is the opportunity to add more LPs? Or is there opportunity to connect with more Goldman Sachs product? And then I guess on the product side alternatives, are there any areas where you feel like you could accelerate investment or those could be areas that could help you connect, I guess, with your LPs, existing LPs on more products?

Well, when we -- I appreciate the question, Devin. It's obviously something strategically we've been very focused on. But I'll go back to some of the things that we said at Investor Day that kind of geared or stored our focus on this.

We've been in these businesses for a long time, and we actually have something that I think is very differentiated in that we have a truly broad global product offering that is relatively built out and has been built out for a number of years. We have positions in private equity, in growth equity, in credit, in real estate, in infrastructure and we also have them globally around the world. And when you look at a lot of the freestanding firms, there are some that have that broad array, but very few have all the products on a global basis the way we're set up.

What was differentiated or different about our business and alternatives before we rolled it together and got it focused is, generally, our LP relationships came through our private wealth network, and we have raised an enormous amount of money through our private wealth network, including the partners of the firm. While we had some institutional LP relationships, we had not really been a large institutional funder into this business platform. And given our relationship with a lot of these institutions broadly from other activities, we knew that if we took a One GS approach at really taking a long-term view in building relationships with those institutional partners, we could grow our partnership with them.

So a big part of the growth opportunity has been adding new LPs to our ecosystem. And if you look at strategic solutions, which we raised last year, there were a number of -- probably a dozen new significant institutional LPs that the first time they were coming on to our platform was in that strategic solutions fund. So I think there's a big opportunity for us to continue to expand that. It's something we're very focused on. But the opportunity for us is less in product addition, although we are adding products. We've just raised the Horizon Fund, which is an ESG-centered funds, will allow us to allocate capital into certain climate technologies, and we'll add other product capabilities that we think are interesting. But our focus is on meaningfully using the Goldman Sachs platform and the broad institutional relationships we have to really meaningfully expand the list of institutional LPs that are partnered with us. And I think we have a lot of upside to run on that.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

Just one question, David, address to us how you're thinking about just digital assets. As we are seeing the entire ecosystem being built around digital asset custody tokenization, just give us a perspective because it feels like all of that would be right in Goldman's wheelhouse to capitalize as some of these things accelerate. So I would love to hear your perspective on, one, how you see just that entire ecosystem developing and the role Goldman can play in that.

Sure. So there's no question that activities that we're involved in are digitizing quickly. I think there's a meaningful acceleration in the disruption that the digitalization of financial services is occurring. There are places that, that digitization is allowing us to disrupt and accelerate our position. The two we've talked about a bunch today on this call that are happening because of digital infrastructure, our ability to do what we're doing in Transaction Banking is taking some of this digital disruption and using it in a different way. What we're doing in building a digital consumer bank is also relying on this.

The broader digital ecosystem, I think, is in early stages. I think we're a version 1.0. I think you'll continue to see a lot of disruption on traditional ways of financial services are delivered and consumed. I think big competitive platforms will continue to be a place where more financial services are intermediated. I think there are lots of complications around the regulatory structure and how the regulatory structure will ultimately manage some of this as the technology allows for more disruption. But I think we're very early in the game. And I think it is a big opportunity for the firm, and the firm continues to be focused on it.

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

I was hoping you could just elaborate on what drove the increase in RWAs from the regulatory guidance this quarter, please?

Sure. So we had about a $42 billion increase in RWAs. About half of that related to the changes in the methodology that we're using in the computation of the RWAs, and that was the byproduct of just routine and ongoing discussion with regulators. And so that plays through in the third quarter ratio, will play through on the forward. But that's really the source of about 50% of the RWA lift. The other 50% is obviously in the context of the overall business and risk and exposure that's attending there.

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

Stephen, can you share with us -- you mentioned in the Transaction Banking, you've got to the $50 billion in deposits, which is ahead of schedule, and you're still confident you're going to reach the $1 billion in revenues, back in the Investor Day when you gave us those numbers. Were those numbers linked, meaning were they supposed to kind of be achieved around the same time? And then second, when do you think you'll reach that $1 billion target?

Sure. So the targets were set at the same time though, bear in mind, the environment then and now is quite different in the context of interest rates. So we've seen Fed funds come down from the time of Investor Day, I don't know, I want to say about 150 basis points, maybe a little more. The consequence of that is that the value of deposits, the economic value of deposits is not as rich now as we had imagined back at Investor Day. But equally in the context of an expectation of rising interest rates, we'll see a return to the value of those deposits otherwise modeled out. And therefore, on the forward rate curve, our view is that we'll be able to achieve that $1 billion revenue target.

I'd point out that of the $50 billion, more of them are operational. That's sort of step one to achieving the value of that. And that has been a big quarter-on-quarter increase from about 14% the last quarter.

And I think more broadly, in Transaction Banking, about 2/3 of the revenue from the time we modeled it through now is correlated to deposit intake with the balance around FX and other fees. And so as we see interest rates come back, the value of those deposits will as well.

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

So since there are no more questions, I'd like to take a moment to thank everyone for joining the call. On behalf of our senior management team, we hope to see many of you in the coming months. If additional questions arise in the meantime, please do not hesitate to reach out to Carey and the Investor Relations team. Otherwise, please stay safe, and we look forward to speaking with you on our fourth quarter call in January. Thank you.

Ladies and gentlemen, this does conclude the Goldman Sachs Third Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect.