Earnings Call, Conference Presentation
Global Markets - Goldman Sachs 2020 Investor Day
- Goldman Sachs' Global Markets business is navigating a regulatory and technological transition, with Jim Esposito (25 years tenure), Ashok Varadhan (22 years tenure, 6 years as leader), and Mark Nachman leading the division.
- The business aims to become the "preeminent global markets client franchise with industry-leading returns," currently holding the number-two ranked institutional client franchise.
- The firm's strategy is not contingent on market volatility or improved market backdrops; it relies on internal execution and resource discipline.
- The industry is experiencing a shift toward scale, where barriers to entry are high and barriers to exit are low, causing competitors to retrench or exit certain lines.
- Goldman Sachs and two peers now hold 47% of the industry wallet, an increase from 43% two years ago, as clients seek global reach and holistic solutions.
- Regulatory capital requirements have constrained system-wide liquidity and leverage, favoring well-capitalized firms capable of warehousing risk.
- Technology is driving automation, lowering market access costs, and facilitating a shift from active to passive investing.
- Goldman Sachs is expanding its financing business to generate more net interest income and improve client returns through high-quality collateral financing.
- The firm is opening up its SecDB risk analytics platform to clients via the "Marquee" platform, a strategic pivot from keeping these tools internal.
- Reported revenues in Global Markets have been flat for five years despite a 30% decline in the overall industry wallet over the last decade.
- The firm reduced market risk-weighted assets by 40% and its capital footprint by 20% while migrating from long-dated risk intermediation to flow business.
- Financing activity now constitutes 30% of revenues, up from 22%, with secured financing characterized by lower volatility and shorter duration.
- 95% of cash inventory and half of derivative contracts mature within less than one year, allowing for frequent capital redeployment.
- A five-point action plan includes optimizing resources, closing client franchise gaps, expanding financing efforts, combining financial acumen with engineering, and aligning front-to-back workflows.
- The firm targets tangible returns above 10% and Return on Tangible Equity (ROTE) exceeding 11%.
- $300 million in operating expenses has already been removed, with an additional $700 million in identified savings to come, representing roughly 6% of total operating expense.
- $200 million in interest expense savings were achieved in 2019, with another $250 million projected over the next three years.
- An additional $2 billion in capital efficiency gains are identified, though capital is now viewed as a redeployment tool rather than a reduction target.
- Current Return on Equity (ROE) was 7% in 2019, with 125 basis points burdened by litigation reserves; ROTE is approximately 50 basis points higher.
- Operating expense savings are projected to boost returns by 150 basis points, with capital redeployment and client initiatives adding another 100 basis points.
- A $1.2 billion revenue gap separates Goldman Sachs from the top-ranked bank in the institutional franchise.
- The firm is tracking over 1,000 unique client gaps; closing these is expected to generate more than $500 million in incremental revenues.
- A revenue gap of approximately $1.4 billion exists relative to U.K. peers in Fixed Income and Commodities (FIC) financing, where Goldman generated 19% of FIC revenue versus a 32% U.S. peer average.
- Goldman Sachs is building a new technology stack to serve systematic quant clients, targeting a >99% straight-through processing rate across 50 global markets.
- Top-ranked banks generated roughly $1 billion more in revenue from quant clients last year than Goldman Sachs, a gap the firm aims to close.
- In corporate bond trading, Goldman has built real-time pricing for over 32,000 credit QSIPs in a market where 75% of tickets are electronic.
- In commodities, Goldman provides clients with the same liquidity canvassing technology used by its own traders in an 80% electronic market.
- In cash equities, Goldman traded well over $2 trillion in principal liquidity in 2019, serving as the top provider for passive equity investors.
- Trade operations were reorganized in early 2019 to bring operational professionals into the division, creating a single point of contact for clients.
- API workflow integration via Marquee will soon be offered to allow clients to automate trade workflows and reduce their own costs.
- Marquee empowers clients to access Goldman's risk analytics, content, and execution services, leveraging the firm's 25 years of risk "DNA."
- A case study of a large investment-grade acquisition demonstrated a four-time multiplier effect on advisory fees by bundling bridge financing, permanent capital, and risk management.
- Goldman Sachs emphasizes a competitive advantage derived from being attached to the world's preeminent investment banking franchise.
- The division has experienced senior trading departures but attributes this to a healthy evolution toward a next generation of traders equipped with technology and regulatory knowledge.
- Diversity efforts have increased women's representation in campus hires from one-third to nearly 50% in the last two years.
- 93% of incoming analyst offers are accepted, and the firm retains 90% of its top performers.
- Approximately two-thirds of the projected return growth stems from instilling further resource discipline, placing that portion of growth within the firm's direct control.