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    Goldman Sachs Group Inc (GS)

    Q3 2024 Earnings Summary

    Reported on Jan 6, 2025 (Before Market Open)
    Pre-Earnings Price$522.75Last close (Oct 14, 2024)
    Post-Earnings Price$538.80Open (Oct 15, 2024)
    Price Change
    $16.05(+3.07%)

    What went well

    • Goldman Sachs has a strong position in private credit, managing $140 billion in private credit assets, and is well-positioned to capitalize on the continued growth in private credit, particularly in leveraged finance.
    • Private Banking revenues grew by 10%, driven by strong organic flows in the high single-digit range, as Goldman Sachs invests in lending to ultra-high-net-worth clients, an area where they see significant growth opportunities.
    • Goldman Sachs is on track to achieve mid-teens ROE, through continued strength in their Global Banking and Markets business, progress in Asset & Wealth Management, and narrowing their consumer footprint. They see tailwinds in investment banking activity, as M&A volumes and equity volumes are still below 10-year averages, providing room for growth.

    What went wrong

    • Regulatory uncertainty surrounding potential Basel III revisions may adversely impact Goldman's capital allocation and profitability. The CFO acknowledged they cannot predict the timing or impact of regulatory changes on their capital position, which may affect future capital returns to shareholders.
    • Despite some improvement, Goldman's investment banking revenues remain below 10-year averages, with M&A volumes 13% below and equity volumes 27% below historical averages. This lag may delay the firm's goal of achieving mid-teens ROE on a recurring basis.
    • Intensifying competition in trading businesses may pressure Goldman's market share and profitability. The firm's trading market share appeared to peak in 2022 and has since been choppy, with potential signs of competitors regaining ground.

    Q&A Summary

    1. Path to Mid-Teens ROE
      Q: What needs to happen for Goldman to achieve a 15% ROE?
      A: David Solomon explained that to reach a mid-teens ROE, Goldman Sachs needs continued execution over time. This involves leveraging their Global Banking and Markets business, which has shown strong performance over the past five years. They also aim to improve margins and returns in Asset & Wealth Management, bringing it to mid-teens returns in the next few years. Additionally, narrowing the consumer footprint will reduce drag on returns.

    2. M&A Outlook and Sponsor Activity
      Q: Could there be an M&A super cycle due to sponsor dry powder?
      A: David Solomon noted that while M&A volumes are still 13% below 10-year averages, there's potential for increase due to sponsor activity. Sponsors have been slower to deploy capital than expected but should accelerate over the next 6–24 months, which could boost M&A volumes above historical averages.

    3. Capital Allocation and Buyback Strategy
      Q: How are you approaching buybacks and capital allocation at current valuations?
      A: Denis Coleman stated that while they prioritize organic growth opportunities, especially in areas like acquisition financing, they remain committed to sustainably growing the dividend and believe it's important to return capital to shareholders through buybacks, even at higher valuations.

    4. Private Credit Opportunities
      Q: How does Goldman plan to approach private credit growth?
      A: David Solomon highlighted that Goldman Sachs has a unique and differentiated credit platform with $140 billion in private credit assets. They have strong origination channels across their businesses, positioning them well to capture growth as private credit continues to expand.

    5. Return Impact from Noncore Activities
      Q: What's the drag on returns from noncore activities?
      A: Denis Coleman indicated there's an approximate 80 basis point drag on ROE from consumer-related activities and highlighted the potential capital relief from reducing historical principal investments and consumer exposures.

    6. AWM Margin Expansion Outlook
      Q: How high can Asset & Wealth Management margins go?
      A: Denis Coleman noted they've reached their mid-20s margin target and see opportunities to drive margins higher through scaling revenue, improving the mix of alternatives, and operational efficiencies. While competitors have margins above 30%, Goldman aims to balance margin improvement with long-term growth investments.

    7. Trading Business Competitive Landscape
      Q: Are competitors affecting your trading market share?
      A: David Solomon stated that while market shares fluctuate quarterly, over the last five years, Goldman has taken a step up in market share. He doesn't see fundamental changes affecting their leading position despite competition.

    8. Equity Capital Markets and IPO Outlook
      Q: What's the outlook for ECM and IPOs with sponsor re-engagement?
      A: David Solomon mentioned that equity activity has picked up, though volumes are still 25% below 10-year averages, with IPOs even lower. He expects activity to accelerate, especially with sponsors increasing their participation.

    9. Wealth Management Adviser Growth
      Q: How are you investing in adviser growth in wealth management?
      A: Denis Coleman emphasized a sustained investment in advisers over multiple years to grow their premier ultra-high net worth business. They believe investing in adviser footprint is an attractive opportunity for long-term value.

    10. RWA Impact of Loan Growth vs. HPI Reduction
      Q: How does loan growth affect RWAs compared to HPI reduction?
      A: Denis Coleman explained that reducing HPI, which has higher capital density, and increasing asset and wealth loans, which have lower density due to being heavily collateralized, is capital efficient and improves return on RWAs.

    11. Performance Fees Outlook
      Q: When will you reach the $1 billion performance fee goal?
      A: Denis Coleman stated that with $4 billion of unrecognized gains, they expect to move towards the $1 billion run-rate target over the next several years as monetization activity improves with market conditions.

    12. Consumer Business and Apple Card
      Q: What's happening with the Apple Card and consumer exit?
      A: David Solomon mentioned they're continuing to narrow their consumer footprint, including running and improving the Apple Card, but didn't provide specifics on exiting or taking charges.

    13. Private Banking Growth Drivers
      Q: What's driving strong growth in private banking?
      A: David Solomon attributed the growth to a strategic focus on lending to ultra-high net worth clients, moving from an underinvested position to offering competitive products, which strengthens client relationships.

    14. Alternative Asset Management Fee Rates
      Q: What's impacting fee rates in alternative asset management?
      A: Denis Coleman explained that fee rates are mix-dependent, with some assets like OCIO offerings having lower fees compared to Goldman Sachs funds. They focus on scaling the business for efficiency and returns.

    15. GM Card Sale Timing and Financial Impact
      Q: When will the GM Card sale close, and what's the impact?
      A: Denis Coleman stated the sale is expected to close in Q3 of 2025. Until then, they will continue to incur operating losses of approximately $50–$60 million per quarter associated with the business.

    16. Electronic Trading Contributions
      Q: How significant is electronic trading revenue today?
      A: Denis Coleman noted that they use a multichannel approach, integrating both voice and electronic trading across equities and FICC. Electronic trading is a key component, optimizing market-making and client solutions.

    17. Capital Allocation and Regulatory Uncertainty
      Q: How are you handling capital amid regulatory uncertainty?
      A: Denis Coleman said they maintain a 90 basis point capital buffer to support client opportunities and unexpected developments, including regulatory changes. They adjust activities as needed based on regulatory feedback.

    18. HPI Revenue Outlook as Portfolio Shrinks
      Q: How will HPI revenue trend as the portfolio shrinks?
      A: Denis Coleman acknowledged that as they reduce the balance of historical principal investments, associated revenues will decrease. However, they will still generate revenue from co-invest positions retained to grow their third-party fund management business.

    19. Trading Business Outlook and Regulatory Environment
      Q: How do trading results affect regulatory perceptions?
      A: David Solomon stated that while it's hard to predict regulatory responses, Goldman Sachs adapts to regulatory environments. Their markets business remains strong due to deep client relationships and investments that have made it more durable and resilient.

    20. Competitors in Private Credit
      Q: Who are your main competitors in private credit?
      A: David Solomon explained that competition varies by activity. In leveraged finance, they compete with banks like JPMorgan; in direct lending, with firms like HPS and Ares; and in investment-grade lending, with players like Apollo.

    21. Private Credit Benefits for Clients
      Q: What are the benefits of private credit for clients?
      A: David Solomon highlighted that clients seek capital structures that meet their specific needs. Goldman Sachs is well-positioned to offer a range of solutions, including syndication, underwriting, distribution, and direct lending, tailored to client requirements.

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