Earnings Call, Investor Day, Conference Presentation, Panel
Fixed Income Investor Relations - Goldman Sachs 2020 Investor Day
- Strategic Funding Shift: Goldman Sachs is increasing the proportion of unsecured funding derived from consumer deposits rather than wholesale debt to lower costs and reduce credit sensitivity.
- Replacing $10 billion of wholesale debt with deposits is estimated to save approximately $80 million annually in interest expense, dependent on rates and yield curve shapes.
- Over 90% of consumer deposits (Marcus platform) are federally insured, making this a less credit-sensitive funding source.
- The firm targets a long-term evolution to a 50-50 mix of debt and deposits, currently at 40% unsecured funding from deposits.
- Deposit Growth Targets: The firm aims to raise at least $10 billion annually in consumer deposits across the U.S. and U.K., with a broader target of $100 billion in total deposit growth over the next three years across all channels.
- Total deposits currently stand at $190 billion ($60 billion from consumer channels).
- Growth drivers include transaction banking, the Marcus consumer platform, and expanding wealth management relationships.
- The strategy prioritizes "sticky" deposits, defined by contractual features, insurance coverage, balance size, and relationship length.
- Marcus deposits have grown more than fivefold since 2016 and are viewed as highly sticky due to 90%+ insurance coverage.
- Asset-Liability Management (ALM): The firm intends to modestly shorten the weighted average maturity (WAM) of its wholesale debt from the current 8 years to better align with a shifting business mix toward lending and fee-based revenues.
- Collectively, the initiatives to diversify funding and optimize ALM are expected to drive interest expense down by $1 billion over the medium term.
- The firm maintains a conservative approach, currently holding a Global Core Liquid Assets (GCLA) pool significantly in excess of internal stress models and regulatory requirements.
- A future potential strategy involves recalibrating the GCLA to extend duration and shift composition to improve yield; a 10 basis point improvement would add $200 million in annual revenue.
- Liquidity and Risk Metrics:
- In Q4 2019, the firm held an average GCLA of $237 billion and eligible High-Quality Liquid Assets (HQLA) of $229 billion.
- The firm reported an average Liquidity Coverage Ratio (LCR) of 127% for Q4 2019.
- Internal stress testing (Modeled Liquidity Outflow) is more binding than regulatory LCR requirements; reductions in LCR in the future will be contingent on sustained deposit growth and stable fee revenues.
- LIBOR Transition: The firm is executing a transition away from LIBOR, targeting completion by the end of 2021.
- Goldman Sachs has appointed a Chief LIBOR Transition Officer and established a centralized program office.
- Current exposure includes $40 billion in vanilla unsecured debt and $9 billion in preferred stock referencing LIBOR beyond 2021.
- Recent actions include issuing a $1 billion SOFR-linked floater and three fixed-to-floating preferred stock deals maturing or switching in 2024-2025.
- The firm notes it has no extensive legacy book of consumer assets referencing LIBOR, with most exposures located in derivatives subject to ISDA protocols.
- Capital and Debt Issuance:
- Net issuance is expected to be lower than in 2019, with maturities continuing to outpace new issuances in 2020, though the approach will become more dynamic in 2021 and beyond.
- The firm is not setting a specific forward issuance target for 2020 but is focused on reducing the WAM of the funding portfolio.
- Recent capital management included calling one-year US dollar notes in December and cleaning up the Series L preferred stock over the past year.
- The firm is awaiting final Secondary Capital Buffer (SCB) rules to inform 2020 CCAR cycles and potential capital optimization.
- Credit Quality and Outlook:
- 80% of High Fixed Income (HFI) loans are booked within the firm's bank entities.
- Institutional loan portfolios are highly secured with modest Loan-to-Value (LTV) ratios, resulting in 2019 net charge-offs of 52 basis points.
- Consumer loan portfolios (excluding the unseasoned Apple Card) saw 420 basis points in net charge-offs in 2019.
- The firm emphasizes prudent underwriting and recession scenario planning despite a general economic outlook not anticipating a recession.
- Sustainability and Green Bonds:
- The firm is interested in issuing green bonds but has not made a commitment yet; they are evaluating the certification and monitoring requirements to ensure a "best-in-class" approach.
- Any future issuance would align with the broader $750 billion sustainability-linked financing program announced earlier in the day.
- The firm is studying client structures, such as Pepsi's asset allocation framework and Apple's focus on financing new assets, as potential models.
- Geographic and M&A Strategy:
- The firm is currently focused on expanding retail deposits in the U.S. and U.K., citing unfavorable deposit markets in Europe and Japan due to interest rate environments.
- While transaction banking will serve multinational corporations, the firm is not currently looking to expand retail lending outside these two regions.
- Regarding M&A, the firm values deposit platforms that can be acquired without a deposit premium and free of associated assets (as in the 2015 GE transaction) but currently relies on organic growth through its Wealth, Retail, and Institutional platforms.
- Interest Rate Positioning:
- Management expects to be in a "benign" part of the interest rate cycle but continues to monitor Fed policy and global economic drivers.
- The firm's deposit pricing strategy is competitive but avoids being "top of the market" to attract only rate-sensitive, flighty deposits.
- Rate movements are managed dynamically, but business performance is primarily driven by overall economic shape and client activity volumes.