Earnings Call, Conference Presentation
Global Markets - Goldman Sachs 2020 Investor Day
- The firm aims to build a preeminent global markets franchise with industry-leading returns, targeting an ROE exceeding 10% and an ROTE exceeding 11%, with the latter driven by factors including the 2000 Spear Leeds acquisition which adds approximately 50 basis points to the 2019 7% ROE benchmark.
- Financial efficiency initiatives are projected to eliminate $300 million in operating expenses, realize another $700 million in identified savings, and generate $200 million in interest expense savings in 2019 with an additional $250 million over the next three years, alongside $2 billion in further capital usage efficiencies.
- These efficiency gains are expected to account for about two-thirds of the projected return growth, while interest expense savings alone are forecast to boost returns by 150 basis points, and capital redeployment and client initiatives are expected to add another 100 basis points.
- The firm has identified a $1.2 billion revenue gap relative to the top-ranked bank and is tracking over 1,000 unique client gaps, the closure of which could yield more than $500 million in incremental revenues.
- A detailed plan is in place to materially increase Fixed Income and Commodities (FIC) financing revenues, with most new activity expected to consist of investment-grade equivalents or high-quality collateral, while the firm expects to capture intermediation share from less capitalized firms acting as risk warehousers.
- Revenue growth in this sector is expected to be supported by the firm's pivot to electronic execution capabilities, a new tech stack designed to serve all transaction channels, and the ability to achieve a straight-through processing rate greater than 99% once build-outs are complete.
- The strategy includes leveraging the Marquee platform to unlock world-class data, risk analytics, and execution services, alongside API workflow integration that will soon allow clients to reduce their own costs, with the firm currently offering green shoots of progress from its early 2018 implementation phase.
- The firm expects to make material inroads with systematic quant clients over the coming years and anticipates that large systematic clients will diversify prime brokerage balances due to a desire for deeper relationships.
- Resource discipline and optimized scale are expected to push tangible returns above 10%, with the firm planning to close institutional client base gaps while remaining mindful of the current credit cycle.
- Market dynamics are characterized by high barriers to entry and low barriers to exit, with the top three firms increasing their wallet share from 43% to 47% in the past two years, a trend the firm expects to continue as value accrues to scale players.
- Despite reported global markets revenues being basically flat over the past five years, the firm notes the industry wallet has declined by 30% over the last decade, and the current revenue stability provides capacity for long-term planning.
- The medium-term plan is expected to take the business to above an 11% ROTE, with all described discipline achievable without revenue degradation while improving client experience and competitive ability.
- The firm expects the renewal of the one Goldman Sachs strategy combined with IBD footprint expansion to provide a tailwind for generating industry-leading returns, with a reinforced strategy expected to yield more examples of a multiplier effect in the future.
- Personnel initiatives include a goal for women to comprise 50% of campus hires, up from one-third two years ago, alongside a 93% acceptance rate for analyst offers and a 90% retention rate for top performers, driven by the belief that the best people want to work in this business.
- The transition period involves significant regulatory and technological changes that the leadership describes as creating opportunities rather than relying on a better market backdrop or higher volatility levels.
- Executing on focus areas designed to align client front-to-back workflows and automate processes is expected to enhance client returns, improve the overall client experience, and position the firm for higher share and higher returns.