Goldman Sachs Q1 Earnings Conference Call: Full Transcript

Operator:

Good morning and my name is Denis and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs First Quarter 2016 Earnings Conference Call. This call is being recorded today April 19th 2016. Thank you.

Mr. Holmes you may begin your conference.

Dane E. Holmes: Investor Relations:

Good morning this is Dane Holmes Head of Investor Relations at Goldman Sachs. Welcome to our first quarter earnings conference call. Today's call may include forward-looking statements.

These statements represent the firms believe regarding future events that by their nature are uncertain and outside of the firms control. The firm's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements.

For a discussion of some of the risk and factors that could affect the Firm's future results, please see the description of risk factors in our current annual report on Form 10-K for the year ended December 2015. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release. Particularly as it relates to our investment banking transaction backlog, capital ratios, risk-weighted assets, global core liquid assets, and supplementary leverage ratio. You should also read the information on the calculation of non-GAAP financial measures that posted on the investor relation portion of our website at www.gs.com, this audio cast is copyrighted material to Goldman Sachs Group Inc. and may not be duplicated reproduced or rebroadcast without our consent.

Our Chief Financial Officer, Harvey Schwartz, will now review the Firm's results. Harvey?

Harvey M. Schwartz: Executive Vice President and Chief Financial Officer:

Thanks, Dane, and thanks to everyone for dialing in. I'll walk you through the first quarter results and I'm happy to answer any questions. Net revenues, were $6.3 billion.

Net earnings $1.1 billion and earnings per diluted share $2.68. Net earnings to common included a $161 million benefit related to the successful tender of our APEX securities. The tender added $0.36 per diluted share.

The first quarter of 2016 was challenging, it started with renewed uncertainty about the global economic outlook, with the possibility of our recession even being raised. These concerns included growth prospects from China, oil prices, a strengthening U.S. dollar and multiple geopolitical events to name a few. All of these came into focus during an eventful first quarter.

These concerns translated into significant price pressure at the beginning of the quarter across both equity and fixed income markets.

The dollar declined by 6% in the first week, this is the worst start in its nearly 90 year history. The index ultimately reached at low point in mid-February declining 10%. Equity markets and other geographies even more material declines during the quarter, with the Shanghai down as much as 25% and then -- down as much as 21%. Credit risk also wind significantly into a quarter particularly for high yield and energy related issuers.

Global Central Bank activity was front and center again during the quarter, after raising rates in December for the first time in more than 9 years, the market heavily debated the federal reserve's future actions.

In the Eurozone, European Central Bank took additional stimulate measures well beyond with initially expected by the market and finally the Bank of Japan moved interest rates into negative territory. With all of these factors at work, it didn't surprising net of resulted in a difficult operating environment for our clients and by extension constrained opportunities in each of our business segments. Within investment banking for example, industry wide equity underwriting volumes decline by 57% year-over-year. Performance was challenged for many of our ICS clients for example nearly 80% of the largest active US equity mutual funds under performed their benchmarks in the quarter. As you would expect, with the markets flat to down worldwide, our equity investing business was negatively impacted, and finally incentive fees declined during the quarter due to limited harvesting opportunities.

With that as a back drop let's now discuss individual business performance in greater details.

Investment banking produced first quarter net revenues of $1.5 billion 5% lower than the fourth quarter as we saw lower client activity across M&A and equity underwriting. Our investment banking backlog decreased since the end of the year, but it's still up relative to a year ago. Breaking down the components of investment banking in the first quarter, advisory revenues was $771 million a 12% declined relative to the fourth quarter reflects a decrease in a number of completed M&A transactions. Year-to-date, Goldman Sachs ranked first in worldwide announced M&A.

We advised on a number of important transactions that were announced during the first quarter including, Syngenta's $43.6 billion cash tender offer from ChemChina; Valspar's $11.3 billion acquisition by Sherwin-Williams, and ADT's $12 billion acquisition by Apollo.

We also advised on a number of significant transactions that closed during the first quarter, including BG Group's 47 billion sterling acquisition by Royal Dutch Shell; BT Group's 12.5 billion sterling acquisition of EE Limited; and Petco Animal Supplies $4.6 billion sale to a consortium of investors.
Moving to underwriting, net revenues were $692 million in the first quarter up 4% sequentially as a pickup in debt underwriting more than offset a slowdown and equity issuance. Equity underwriting revenues, were $183 million this was down significantly compared to the fourth quarter due to a decrease in offerings industry-wide. Debt underwriting revenues were up 16% to $509 million and benefited from strong investment grade issuance.

During the first quarter, we actively supported our clients financing needs, participating in Newell Rubbermaid's $8 billion financing to support its Jarden this is $4 billion loan in bond offerings to support its acquisition of Solera and $1.5 billion follow on offering.

Turning to institutional client services which comprises both our -- and equity businesses, net revenues were $3.4 billion in the first quarter up 20% compared to the fourth quarter. In a quarter we early adopted a new accounting standard for DBA which is now captured in other comprehensive income DBA for the current quarter less than material. The client execution net revenues were $1.7 billion in the first quarter up 48% sequentially as client activity improved in many businesses from weak fourth quarter levels. As I mentioned the operating environment across stay complex was quite difficult due to macro uncertainty and volatile markets.

This led to a challenging backdrop for our clients with weak investment performance and drove difficult marketing making conditions for the Firm's. The environment in the first quarter of 2016 stands and start contrast to the environment in the first quarter of last year. Consequently there was a substantial downward revenue pressure year-over-year. Interest rates and currencies were significantly lower.

Client activity and interest rates held up relatively well however activity within currencies declined compared to a strong first quarter of last year. credit also decreased significantly as market conditions remained difficult particularly in Europe. Commodities was weaker as client activity was muted with energy prices remaining low. Mortgages continue to be challenged as spreads wind for some products and client activity remained low.

And equities which includes equities client execution commissions and fees and security services, net revenues for the first quarter was $1.8 billion, up 1% sequentially.

First quarter results in equities, were roughly consistent with the back half of last year but significantly weaker compared to a robust performance in the first quarter of 2015. Net revenues declined 23% year-over-year and reflected the impact of a challenging environment for our clients and the firm. Equities client execution net revenues of $470 million were down significantly year-over-year.

Higher volatility and global equity market weakness at the beginning of the quarter impacted investor conviction and risk appetite. Commissions and fees were $878 million up 9% year-over-year as client activity increased in our lower touch electronic channels. Security services generated net revenues up $432 million, up 10% year-over-year on improved spreads.

Turning to risk, average daily volume in the first quarter was $72 million up slightly from $71 million in the fourth quarter. Moving on to our investing and lending activities, collectively these businesses produced net revenues of $87 million in the first quarter and equity securities marked downs on public investments entirely offset net revenues and private investments. Net revenues from debt securities and loans were $87 million. Revenues were driven by net interest income this was partially offset by increased provisions on our corporate energy exposures.

Investment management grew group for the first quarter net revenues of $1.3 billion, this was down 13% from the fourth quarter primarily as a result of lower incentive fees and management and other fees. During the quarter, management and other fees were down 6% sequentially to $1.2 billion due to a change in the mix of client assets and strategies. Assets under supervision increased $35 billion sequentially to a record $1.29 trillion primarily due to net influence into liquidity and long-term fee based products.

We have $16 billion of net inflows into liquidity products $10 billion of long-term net inflows primarily driven by fixed income and equity products and $9 billion of market depreciation. Now let me turn to expenses, compensation and benefits expense which includes salaries, bonuses, amortization and prior year equity award and other items such as benefits declined by 40% versus the first quarter of 2015. The significant reduction in compensation and benefits expense reflects the more challenging revenue environment and translated into compensation to net revenue ratios of 42%.

First quarter non-compensation expenses were $2.1 billion significantly lower than the fourth quarter and 6% lower than the first quarter of 2015. This is the lowest quarterly level since the second quarter of 2009. Now I'd like to take you through a few key statistics for the first quarter. Total staff was approximately 36,500 down 1% from year end 2015.

Our effective tax rate for the first quarter was 28% our global core liquid asset ended the first quarter at $196 billion, and our balance sheet and level three assets were $878 billion and $24 billion respectively. Our common equity tier1 ratio was 12.2% on the Basal III events approach. It was 13.4% using the standardized approach our supplementary leverage ratio finished at 6%, and finally we repurchased 10 million shares of common stock for $1.55 billion in the quarter. In conclusion the first quarter was obviously a difficult period for our clients the markets and our opportunity set.

While clearly we don't control the opportunity set, we proactively took action in key areas that we do control our cost structure --- and our capital.

In addition this is the first quarter while that we face significant headwinds across each of our business segments. Given that we operate in a cyclical industry it shouldn’t be surprising that there will be difficult quarters. That being said we don't create deep client relationships in the quarter we don't hire our people for a quarter and we certainly don't build businesses for our quarter.

Our success has been predicted on having a strong culture that promotes both a long-term perspective while simultaneously being very focused on managing to the current environment. That long-term focus has been the foundation to building a leading global investment bank and creating a superior results for our shareholders. As we look forward, we are committed to remaining nimble and efficient operators disciplined capital allocators and prudent risk managers. Our commitment to these principals has been and we will continue to be the basis for our performance overtime.

Thanks again for dialing in, and I am happy to answer your questions.

Question & Answer

Operator:

Ladies and gentlemen we will now take a moment to compile the Q&A roster. If you would like to ask a question during this time simply press star and then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. If you are asking a question and you're on a hands free unit or speaker phone.

We would like you ask that you use the handset when asking your question. Please limit yourself to one question and a one follow up question.

Your first question from a line of Glenn Schorr with Evercore ISI. Please go ahead.

Glenn Schorr: ISI:

Hi. Thanks very much.

Harvey M. Schwartz:

Hey, good morning Glenn.

Glenn Schorr: ISI:

Good morning, may be if you could talk about fixed income first. I am just looking big pictures revenues are little more than half the big banks and that was obviously not always the case. I am just curious, is it are there specific things about your business mix and client mix that doesn't compare as much versus the past and activity level thinks like credit being real slow right now and if you feel like any of the balance sheet reductions or volcker implementation has impacted the forward earnings power.?

Harvey M. Schwartz:

Obviously I don't have great transparency into the competitors footprints, I don't think that any of the any other things you mentioned so the balance sheet actions we taken they've been very surgical although meaningful they've been very surgical overtime and very properly executed I don't think those are issues and obviously all firms have adjusted to Volcker, so I don't think those are drivers I think when you look at the year-over-year obviously we had a very strong first quarter '15 relative to the peer side and I know revenues is the most transparent benchmark you have but when you look at the performance in the first quarter obviously we out performed in the first quarter of last year and obviously a much more challenging for us this quarter.

Glenn Schorr:

Okay. May be if we switch over to investing and lending I want to focus on the equity side specifically in some markets you had the markets go down and then comeback Asia than snap back so wonder if you could talk about the contribution of that in the quarter and then more importantly for the equity dynamic going forward like maybe size the portfolio fair value versus cost basis if there -- see there any marks in the quarter that don't repeat next quarter and then just if you can update us on what's left to sell down to get compliance?

Harvey M. Schwartz:

So okay that's multi part question, so if I miss anything correct. So the in terms of the INO balance sheet let's just start there. The INO balance sheet is $99 billion of that in terms of you spoke about equity roughly $15 billion of that is corporate equity.

In terms of the equity line, both private and public basically the public portfolio was down roughly $140 million during the quarter and now offset by private marks of those marks that were positive they were virtually all event related that's the language we were going to describe the fact that there is sale for a refinancing and then there were negative marks in the portfolio obviously also. So that's really the structure in terms of the course of the quarter. In terms of Volcker, because I think you're asking about the equity funds.

Glenn Schorr:

Correct.

Harvey M. Schwartz:

So in terms of both as it really as top of that we sort of the top of let's just say the Vodafone there is $7.5 billion in corporate funds you then have to take out approved local activities and you take out the public money in the way we've asked you to look at it was roughly $4.5 billion remaining and that money obviously sits alongside our clients in this funds. Is there anything you asked that I missed.

Glenn Schorr:

No that's perfect. Thank you.

Operator:

Your next question comes from the line of Christian Bolu with Credit Suisse. Please go ahead.

Christian Bolu: Credit Suisse:

Good morning, Harvey.

Harvey M. Schwartz:

Good morning, Christian.

Christian Bolu:

So you mentioned in the mix shift in asset management impacting revenues can you give a bit more color on this, and if you expect it to reverse going forward.

Harvey M. Schwartz:

So quarter to quarter and year-over-year as we work through obviously there are various clients segments we work with whether they are retail clients, private wealth, also institutional clients and what we are really seeing is a mix shift more to institutional mandates during the period that had an impact, I think longer-term obviously I can't predict the longer-term, we are looking to basically provide service to all those clients and best we can through loan cycle are you seeing obviously the positive inflows which are quite good. So if you ask me to think of the future I would point more to the flows and the assets mix.

Christian Bolu:

Okay, thank you. And then on the GE deposit that you got in just curious how we should think about we are kind of economics you can earn on that and anytime line for deployment?

Harvey M. Schwartz:

So the transaction closed on Friday, it went quite smoothly we are up and running under the GS its I would encourage you to think of this really as we described it which is this is all of our funding diversification in that sense we always look at diversify 20 basis is just an actual to look at for us in the financing and so we view it overtime but in terms of driving revenues it's really part of our liability management strategy.

Christian Bolu:

Okay, helpful and then a very quick modeling question for me tax rate was a bit lower than the quarter just curious how we should think about the go forward tax rate?

Harvey M. Schwartz:

Yes, so in terms of the go forward I guess I give you best estimate I think something similar to last year.

Christian Bolu:

Okay, great. Thank you very much Harvey.

Harvey M. Schwartz:

Thanks Christian.

Operator:

Your next question from a line of Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

Michael Carrier: Bank of America Merrill Lynch:

Hi thanks a lot. Yes Harvey may be first just on the revenue backdrop. I think just wanted to get your sense when you look at the January, February trends versus to March and April. Maybe areas where you're starting to see some improving trends I know in any given quarter it's kind of tough on like the market share standpoint but I feel like when revenues are weak it can't really down market share and when revenues rebound you kind of you can figure out who gained who lost, but just given some of the competitor dynamics just wanted to get a sense of your sort of see anything that in terms of the market share?

Harvey M. Schwartz:

So I want to make sure understand I answer your question completely. In terms of the quarter the way I would describe it is March was better than February and February was better than January. It's early in April so it's obviously pretty early in the quarter but I would say that it really feels like many of the factors that were impacting in the market in the first quarter particularly early on seem to we bated and although the market feels little fragile from all that.

It feels like for the most part that feels like that's behind us but we'll see how the year progresses. In terms of the longer term observation around the competitive dynamic, again in a quarter like this, hard to see it when our clients are experiencing such volatility and such stress but I think based on announcements and parts of the business where we are seeing client flows move engagement with clients is quiet good and we are getting good feedback so I think the quarter like we just had actually only makes the competitive forward look better but we'll see.

Michael Carrier:

Okay that's helpful and then just on I guess INL and investment management obviously INL you had some pressure in investment management just the like the performance fees weaker than expected when you look at what is happened through the quarter and the rebound in the markets I'm trying to just gauge on the parts of the business that are as simple as markets are up and so you should start to see some improving trends versus maybe like the INL you know you mentioned the provision on the debt side so how significant are how much follow through we are going to see on that could be maybe way on that part of the business and same thing on the incentives, on the incentive fees, performance fees and investment management I don't know if there is way to gauge, the types of products that generate performance fees how much for the absolute versus relative or what products are below in your hurdles?

Harvey M. Schwartz:

Yes so, as it relates to INL I mean just the level set obviously we created that disclosure to provide more transparency and that as you described it the most price sensitive asset parts of the balance sheet and so that's why provided that way so as I mentioned for example there are parts of the portfolio as you know that are public equity securities were again we may sit alongside our clients as those are monetized out of the fund there are restriction and lockup period. So that portfolio as I mentioned was negative roughly a $140 million during the course of the quarter and so there'll be some elements idiosyncratic movements sometimes that portfolio are outperformed when you look at history it is generally outperforms it maybe take a last 8 quarter including this quarter the entire segment I know segment has generated $11 billion in revenues. In terms of incentive fees, it's going to be specific obviously to performance which has been solid but obviously markets are going to have an influence on incentive fees also.

Michael Carrier:

Okay, thanks a lot.

Harvey M. Schwartz:

Thank you.

Operator:

You next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Harvey M. Schwartz:

Good morning, Matt. Matt are you there?

Matt O'Connor: Deutsche Bank:

Yes, can you hear me?

Harvey M. Schwartz:

Yes. Okay, we can hear you now.

Matt O'Connor:

Okay, sorry about that. Just a big picture question can you just a talk a bit about the disconnect between the markets the improvement that we're seeing there and what still feels like sluggish client activity maybe better than January, February. But here is the S&P up a couple percent year-to-date credit spreads have high and I guess the question is like is it a timing issue where we need more stability for activity to pick up in a bigger way or is it the underlying economies not strong enough just any big picture thoughts you have on that disconnect.

Harvey M. Schwartz:

So something I think you are certainly seeing a pick up if you look at IPOs I think there were something in the first couple weeks of April approaching 40 IPOs during the first couple of weeks so certainly elements of the market place which obviously slowdown very specifically. But I think you know after a tough first quarter like the whole market is experience I think that there may be a slow reaction function in terms of how () market participants engaged in market place but it feels like as I said before the most significant factors impacting the first quarter seem to abated at least for now.

Matt O'Connor:

Okay and then just kind of on an incremental basis like where do you feel like the engagement you mentioned the IPO is picking up I guess the time line usually you see trading pick up first and then M&A tends to lag or what do you think we are beyond IOPs in terms of how to pick up first is something we going to pick up an activity.

Harvey M. Schwartz:

I think generally I will agree with your statement of a very long period of time, but I think in terms of the M&A cycle that we are now well off a little bit from the levels of 2015. A level of dialog there feels quiet good as I mentioned our backlog across advisory equity and that is up year-over-year after a strong year. So the dialog in level engagement feels quiet good at this stage.

Certainly there was an element to the first quarter which had a bit of chilling effect for a period, but right now the dialog feels good. We'll see how it goes in the future.

Michael Carrier:

Okay and then just hopefully on the expenses obviously good cost control and tough revenue quarter you did mentioned about continuing to manage to a difficult revenue environment that continues but let me just expand on that we've seeing some things in the media about further cost cuts coming I think you can elaborate on the cost sides would be helpful.

Harvey M. Schwartz:

So obviously, we always have our eye on wage we can look to operate more efficiently. We've talked about a lot with difference in performance driven culture and the performance wasn't great in the first quarter and as a result you saw competition and benefits expense down 40% year-over-year. Again that's our culture and so you are going to see those adjustments.

In terms of other class initiatives I know there has been a lot of stuff in the press. I guess I would summarize I really summarized that as far as I would just say we're shareholders and we are doing things that you would expect shareholders to do.

Michael Carrier:

Okay. Fair enough. Thank you.

Harvey M. Schwartz:

Thanks.

Operator:

Your next question is from the line of Mike Mayo with CLSA. Please go ahead.

Harvey M. Schwartz:

Good morning, Mike.

Mike Mayo: CLS

Yes. Hi, on the CEO letter talks about the second changes versus cyclical changes and you guys have been steadfast saying that the market or simply in the cyclical a lot will recover. They haven't recovered that you've kept your infrastructure so at what point do you say may be the cyclical walls are more prominent and you need to take more dramatic actions and it looks like year-over-year your trading is the worst among the five big US wholesale banks.

Harvey M. Schwartz:

So I think I just want to I want to clarify one thing because I think one of that thing messages that maybe get mistranslated as it comes across as and that's just big fake because I think that's really what you're talking about and you talked about trading. We have expressed a commitment to fix what we mean by that very exclusively is we are committed to our clients and we are committed to providing superior returns over the cycle. Commitment does not mean in action and I think that's we gets a little bit confused in his message and actually as far as I can tell Mike all of our US peers they are committed to fig too but back movement acts for a second.

If you think about the things we've done over the last couple of years the since the middle of 2013 we taken IPOs balance sheet now 25% and fixed RWAs market and credit down 30. On the cost side we have been very focused on the capital side and on the cost side seems at the beginning of 2012 we have taken -- headcount down 10 and we have taken compensation down by more than 20%. So I wouldn't say that there has been any in action however, I would reiterate that we have been quite committed to our clients and committed the return. Now look this has been I admit it I agree with this is been a tough period and this is been long cycle.

But we have a long history of managing our business across the cycle in 2009 we didn't over invest in the top and we're going to be thoughtful about not under investing but we are certainly responding to the last several years of declined in industry revenue.

Mike Mayo:

I guess as a follow up I mean what else can you do, you've dance pretty well the last three to four years without revenue growth but it seems like you're getting to the end of what you can do and return on equity is now on the single digit range and I think consensus has in the single digit range for the year I know you would not want to see that so what are your other options?

Harvey M. Schwartz:

Well look I think you're right the point out there with four years running we're one of the very small handful of firms that have had double digit ROEs this is a quarter I certainly when sit here and tell you we're happy about this quarter but we will do what it takes overtime to make sure that we deliver for our clients and maximize the returns for our shareholders in a prudent way so we are quiet focused.

Mike Mayo:

Alright. Thank you.

Harvey M. Schwartz:

Thanks --

Operator:

Your next question from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck:Morgan Stanley:

Hi. Good morning.

Harvey M. Schwartz:

Good morning Betsy.

Betsy Graseck:Morgan Stanley:

Couple of questions on the fixed income line or the debt line on the INL. So in a typically I think the NII is around 225 a quarter and I know you posted 87 and you indicated the delta is largely due to energy I am just wondering so I take that to me in that's the reserve of the provision of the mark-to-market energy was around $138 million or is there more there?

Harvey M. Schwartz:

So, the NII was roughly $240 million and then within provisions and the majority offset about two thirds was in energy related .

Betsy Graseck:

Okay so that feels like it would probably double the reserve ratio that you had posted last quarter is that it was more than double is that a reasonable assumption or maybe if you can talk us through how you are thinking about that.

Harvey M. Schwartz:

No, it is not when you actually look at it I think the best way to look at this is for the funded portion of the non-investment grade portion of the energy portfolio it was high single digit last quarter and it remains high single-digit.

Betsy Graseck:

Okay, and that's because you either used some of the provision to you were off some of your exposure is that accurate or

Harvey M. Schwartz:

Well the exposure I just walk you through it.

Betsy Graseck:

Sure.

Harvey M. Schwartz:

So in oil and gas sector this period including funded unfunded investment grade and non-investment grade was $10.7 billion that's up from $10.6 billion in the fourth quarter, now let's just focused on non-investment grade, non-investment grade five that up from 4.2 in part obviously that's driven up by ratings down grade and actions by the rating agencies during the course of the quarter and the funded portion of that is 1.6 and that was up about a 100 million. So that you can kind of metrics back to all that and you can see the shift in the portfolio was a result of the rating agencies.

Betsy Graseck:

Got it and then just to () as the fully phased-in for the capital ratios the SLR?

Harvey M. Schwartz:

So on the fully phased-in ratios they are flat quarter-over-quarter advance as 11-7 and standardized as 12-9.

Betsy Graseck:

Alright. Thank you.

Harvey M. Schwartz:

Thank you, Betsy.

Operator:

Your next question comes from the line of Guy Moszkowski with Autonomous Research. Please go ahead.

Harvey M. Schwartz:

Hey, Guy.

Guy Moszkowski: Autonomous Research:

Hey. Good morning, so I am going to ask a question as really going to drill down on one that came a couple of minutes ago on the degree of commitment to second particular Goldman is obviously a leader in a point technology to traditional voice trading businesses and other things and you have been pretty in the past about how you transform equities and foreign exchange and cut headcount while picking up market share in the process it seems like fixed has really reached a tipping point recently because regulatory change and what's going on in the markets and yet the digitization process was maybe trickier in second so I was hoping you could give us some color on how much transformation you expect in the capital structure and the expense structure of fixed income for your business?

Harvey M. Schwartz:

Well first and foremost I say the thing that drives the strategy is not digitization in it of itself it's how we engage our clients, you're right point out that the equity business went to a pretty significant evolution while that evolution in historical perspective feel short it was a multi-year process that really begin in 1999 and it finished in the mid-2000 and continuous to evolve. I don't know necessarily I would agree with that were a tipping point no is that all opinion but it feels like when an evolution we're obviously clients are looking for efficiencies and we are looking for efficiencies but the reality is that a vast majority of the fixed income market is more of the -- lender self-adopt but to the extent to which we can deliver to our clients and drive efficiencies we are obviously very focused on it.

Guy Moszkowski:

So is it right for us to think that there is going to be a significant transformation in the cost structure and the capital structure that you applied to think over the next couple of years or would that be too dramatic.

Harvey M. Schwartz:

Well I think look you've seen some of the evolutionary steps we taken in terms of the balance sheet reductions and the risk-weighted assets that I talked about earlier. It may be the case that over periods of time depending on how much client activity there is but the extent to which it shifts to electronic channels like we've seen under the regulatory framework for top execution facilities those transition happened very, very quickly and we adjust very, very quickly.

Guy Moszkowski:

Okay, that's helpful in terms of perspective. Thank you very much.

Harvey M. Schwartz:

Sure. Thank you.

Operator:

Your next question from a line of Kian Abouhossein with JP Morgan. Please go ahead.

Kian Abouhossein: JP Morgan:

Yes, morning Harvey.

Harvey M. Schwartz:

Morning Kian.

Kian Abouhossein:

Just wondering on market share movements how you see that progressing confident we have clear strategies of reduction of some of the European IBs as well as Nomura now, how do you see that coming through in your numbers do you see that at this point and how you position to take part of this market share gains as others are retrenching.

Harvey M. Schwartz:

So as when I was talked about over the last couple of years I don't think we would have imagine a couple of years ago that the industry would be in a position where three of the largest firms were going to a change in leadership and that appears to be very, very significant change in strategy and that change in strategy is different for all of them some of them most geographically driven some so far some of that point resources back from certain businesses like derivatives to us it feels like the feedback is quite good. Obviously difficult to see that in a really tough first quarter but I would say on the ground of feedback is good and it continues to improve our position respect to how we're positioned I think we feel tremendously well positioned given our footprint.

Kian Abouhossein:

Okay, and in respect to your fixed income business. Looking at your volume looking at the war in commodities it declined a lot year-on-year also volatility must have gone up in the commodity space. I am just wondering it looks to me there has been a proactive reduction of war in the first quarter to understand that correctly and if that happen impact on your revenue impact in FICC just trying to put the picture together.

Harvey M. Schwartz:

Yes. So as I spoke about in the early remarks commodities were down year-over-year that really the all reduction you are really seeing are more reflection of the environment while there was volatility during the course of the period obviously in commodities client flows were pretty muted as people really were now bit taken back I wouldn’t say in shock but a bit taken back by the depressed energy prices and the movement down. It didn’t translate into lots of activity during the course of the quarter.

Kian Abouhossein:

And if I may just follow-up on that you see an improvement through March and April both in liquidity terms and in terms of a client activity in the space.

Harvey M. Schwartz:

Yes, as I said before March was better than February and February is certainly better than January. So I would say that's been in the general trends as I said before the fact that really would impacting the market was also nearly in the first quarter at least for now they seem to --.

Kian Abouhossein:

Thank you.

Harvey M. Schwartz:

Thank you.

Operator:

Your next question from the line of Jim Mitchell with Buckingham Research. Please go ahead.

Jim Mitchell: Buckingham Research:

Hey. Good morning.

Harvey M. Schwartz:

Good morning.

Jim Mitchell:

Just wanted to need to be -- but maybe just talk about take a little bit maybe just more strategically with regulators for returning your eyes to the buy side and potentially cracking down on leverage and forcing more liquidity. Do you worry that just sort of postpone any cyclical recovery in the investor class trading and then I guess as quarterly to that could you is it possible to sort of pivot towards more of the planes in our inflow businesses that can corporate driven flow businesses is that big in -- bank seem to be benefiting from in terms of stability. Is there opportunity set there to kind of crack there market share in those businesses.

Harvey M. Schwartz:

Yes. So I would say with respect to the liquidity dynamic if I had to rank factors and it's pretty hard quantify these things. I would say factors like conviction around the market because of the sharp decline in the oil price and obviously the negative interest rate environment and a big ship to as you said the buy side more than lots of asset I think those are had significant driver in the current environment as there is regulation given that banks are holding that inventory globally.

I think that underpinning all of that is that when you look at the client base regardless of how much velocity maybe in their current trading activities quarter-to-quarter the core needs in terms of their need liquidity our desire to provide it that remained. So I think the core of it is the same.

Jim Mitchell:

Okay and do you see any value and trying to sort of capture more market share in the corporate driven flow business.

Harvey M. Schwartz:

We intend to what we can try it means the ignore the last part of your question. I think you're right to say that obviously the big universal banks there are two or three times outsized they have a much bigger lending profile and a bigger retail commitment and so there were maturely participated in some flows that given their size we won't participate in. But the values really in servicing the client and the extent which we can provide value to the client obviously we want to make sure we are doing that.

Jim Mitchell:

Okay. That's helpful and just maybe one quick question on M&A activity and capital restructurings in the energy space, it's been a hot topic of are you, whether we see some significant pick-up in activity in that space as prices stabilize. Are you seeing that? Are you seeing sort of conversations and potential activity pickup there that we could see later in the year?

Harvey M. Schwartz:

So we saw, obviously, to the extent to which there were financings in the first quarter, they're obviously energy-related financing activity and we were very involved in that. I would say that, look, the space has been under extreme stress which emerged over a fairly short period of time, measured more in months than years, and so I think our expectation that there will be active dialogue across the industry whether or not that manifests itself immediately in the near term, we'll have to see, but obviously the industry is going through quite a bit in this price environment.

Jim Mitchell:

Okay, great. Thanks for your help.

Harvey M. Schwartz:

Thanks.

Operator:

Your next question is from the line of Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: UBS:

Good morning. Just a couple quick ones. On trading broadly, thinking about the importance of hedge funds to your trading business, should we temper our expectations for a bounce back here in your revenues, even if we see some market improvement, given the pressure that that client base has experienced this year?

Harvey M. Schwartz:

Yeah. So, look we think of all of our clients as important, but obviously, we've had a big commitment to the hedge fund industry across equities and fixed them for a long time. We're always rooting for their performance, and so to the extent to which they have improved performance, it may be a catalyst for increased activity. Because in periods like we went through in the first quarter obviously they have a tendency to reduce risk and it reduces trading philosophy over many months all the way may be for example on active day from time to time.

But I think sentiment seems to be improving but we are going have to say as I said before it's still a little fragile.

Brennan Hawken:

Okay. Thanks and then just one more follow-up on the backlog could you maybe help us out a little bit on number one, how we could see I think you've indicated in the press release that sequentially down quarter-over-quarter on the backlog. But I would have guess that there might have been maybe some extension from 1Q into 2Q, because so could you maybe help me understand that, and then also if you can give any color on some of the deal funding markets, and high yields markets and whether there has been some healing and improvement in the backlogs there given how stressed they were in 1Q. Thanks.

Harvey M. Schwartz:

Sure. So as I mentioned the backlog was down sequentially but it's up year-over-year, when you look at the across the business the advisory portion of backlog was down versus the very strong level at the end of the year, but that's up year-over-year, versus the end of the year as you would imagine given what happened to the equity market, the equity backlog is up and obviously we had a bit of an out performance it looks like versus the rest of industry and debt underwriting and that's down sequentially. In terms of the high yield markets, over the last couple of weeks still a bit selective but they seems quite strong one of the largest transactions with them just last week and so the markets are quite receptive to good solid transactions.

Are you there, Brennan?

Brennan Hawken:

Yes, sorry thanks appreciate it.

Operator:

Your next question is from the line of Steven Chubak with Nomura. Please go ahead.

Steven Chubak: Nomura:

Hi. Good morning.

Harvey M. Schwartz:

Good morning, Steve.

Steven Chubak:

So Harvey I appreciate the color that you are given on some of the factors that were impacting market liquidity and I know that's one of the state governance had recently spoken on the topic and suggested that the reduction in liquidity is the cost worth paying for to help the overall financial system and given the regulators willingness to sacrifice that liquidity to ensure improve safety and soundness. I am just wondering how that informs your strategy on balance sheet and inventory management.

How you consider the fact that there might not be any relief on the regulatory side in the context of your longer term strategy for the business.?

Harvey M. Schwartz:

So I think with the regulators are lot of credit over the last several years for making and our focus more on the U.S. Financial system including things like CCAR I think that the safety and soundness for large U.S. Banks and the whole system, they will drive a lot of credit for driving some of that obviously we made a lot of changes to our balance sheet even prior to the regulation but I think you have to give lot of credit for -- I think that all these good benefits which we all benefit from they come at some marginal cost it's very hard to measure that marginal cost.

I don't know I have yet to see a very good analysis that breaks down in great detail.

The impact of negative rates the fact that we had declining spreads for multiple years that increased asset holding from mutual funds compared to the shrinkage of bank balance sheet and come up with something that really does a great cost benefit analysis, I don't think we've seen that but I think we have to argue the benefits are pretty clear now as it informs our strategy we have an obligation to deliver to our clients and we have an obligation to make sure that we can play with the rule in the way that we can and most thoughtfully and so that's how we approach our strategy, in a extend there was demand for the balance sheet and client activity picked up and that demand was accretive to returns, we'll be happy to grow the balance sheet given the strength of our capital ratios but we just haven't seen that so we are not saying -- but I mean overtime the systems is going to have to balance liquidity means and I think that will happen it just may just take a while.

Steven Chubak:

Got it and I know you touched on some of the emerging system electronic trading platforms I am just wondering has that in fact translate into improve liquidity in certain product areas.

Harvey M. Schwartz:

Well I think if you back to history even we're in the recent regulatory changes that both clients and market providers participating and if you go back to sort of the information of trade were back into the early 2000 I think all of those vehicles and they may have always been challenges at the start whether it's trade reporting or trade whatever things like that I think overtime those generally have been at the margin maybe in all cases they contributed to increase liquidity I think so far the markets have adjusted I think as I said before very well and the regulators has done a very good job of introducing swap execution facilities and gradually implementing these things.

So I think the extend that those things have occurred it's been helpful. I think what most people talk about liquidate in the market place really relates to transacting corporate credit, and high yield credit and I don't know if the technological solution that it sort of a for that it's all very to spoke and that maybe an area that for a while the market struggles with but not just because of the regulation it's because all the factors I talked about before.

Steven Chubak:

Thanks Harvey, and one more just follow-up for me, I assuming you could actually provide some color just give the focus in the press on Brexit in terms of how are you thinking about the possible impact on your UK operations and maybe more specifically what strategies you are considering to maybe help mitigate the potential impact.

Harvey M. Schwartz:

So obviously we are paying very close attention to it whether we are monitoring it from a marketing and credit risk perspective or from a strategy perspective, as you know under the framework as we understand it's a multi-year transition to which price-- but we feel when we look at it again -- there is given there is a lot of uncertainty when you look at we feel like in terms of our physical commitments to the region that will well prepared, but again there will be a lot that lot of us learn to the extent to which the -- goes through on June 23rd but that will be a multi-year process.

Steven Chubak:

Understood Harvey. Thank you for taking my questions.

Harvey M. Schwartz:

Sure, thank you.

Operator:

Your next question is from the line of Matt Burnell Wells Fargo Securities. Please go ahead.

Matthew Burnell: Wells Fargo Securities:

Good morning Harvey thanks for taking my question. First in terms I don't want to focus on little bit on investment management revenue is obviously a bit weaker as you described guess I am curious is to how you are thinking about the pretax margin in that business over the relatively near term say the next 12 to 18 months its by my calculation it's been running in the low 20% range. Do you have designs even in a not so supported market environment to be able to improve that.

Harvey M. Schwartz:

So we are obviously always focused on running the business efficiently. We don't target a pretax margin for the business. So overtime you may see that move as we are investing in the business, as we are taking on different types of asset flow but we are look at across the whole business but we don't target it.

Matthew Burnell:

Okay and then just moving on to capital returns I notice that you issued some preferred this quarter I think in the last CCAR test your constraining factor in terms of stress test at least was the Tier 1 ratio the preferred issuance should help you with that does that help you in terms of thinking about future capital returns.

Harvey M. Schwartz:

So the preferred that you saw to this quarter was the exchange to preferred so we were neutral on the preferred this quarter.

Matthew Burnell:

Okay.

Harvey M. Schwartz:

But you are right you're right to point out that last year all the things you point out by last year are accurate. We utilize preferred the extent to which they are consistent with our capital plan and our objectives. Generally speaking as you have heard me say before we even as recently expensive securities and so we are not desire risk to use them beyond where we think they sort of -- in the capital structure.

Matthew Burnell:

Okay that's helpful and then just quickly lastly on energy, it sounded like the vast majority of the increase in the non-investment grade side was from downgrades were there any net draws on the exposure this quarter.?

Harvey M. Schwartz:

They were doing the quarter they want to material but I don't have that number of the -- my heads.

Matthew Burnell:

Okay. Thanks Harvey.

Operator:

Your next question is from the line of Eric Wasserstrom of Guggenheim Securities. Please go ahead.

Eric Wasserstrom: Guggenheim Securities:

Thanks Harvey I just want to a to follow up just to bit on the pipeline issue. Was there any clearly on M&D has there been any pipeline fallout because of change in political circumstances globally or here domestically because of the change in the treasuries stands on a version transactions.

Harvey M. Schwartz:

Well there is one large transaction in a marketplace which looks like impart in response to treasury actions is no longer in the marketplace we were participate in that but I would say that's a minimal factor in the stats of the backlog and so I will say these are small impacts.

Eric Wasserstrom:

Okay and so to the extent that macro conditions seem let's say broadly unchanged over the past several months. Does that continue to support what is generally a very high level of M&A or is the tight turning in some way in your view.

Harvey M. Schwartz:

So it feels like the fundamental conditions for I say its elevated level of M&A activity they all feel like they are still in place and those things are challenge top line growth slow very to a very moderate GDP growth globally until it all feels like it's still in place.

Eric Wasserstrom:

Thanks very much.

Harvey M. Schwartz:

Thank you.

Operator:

Your next question is from the line of Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan: JMP Securities:

Thanks good morning Harvey. Just want to ask the revenue question maybe another way maybe from the top down just when you think about asset productivity at the firm level or revenues per assets is it really all about increasing velocity here as client activity hopefully improves or other some things that you can point to around maybe remixing how the balance sheet is weighted overtime I know it's fluid but just try to think about the size really proactive opportunities to improve asset productivity by changing the balance sheet mix outside of just to pick up in client activity.

Harvey M. Schwartz:

So we really try never to drive balance sheet to different parts of the firm in a top-down way it really comes bottom-up and it comes bottom-up because it's in response to exactly what you're describing it's client activity. If our bankers need more capital more liquidity for their clients because they are financing M&A transaction but we can't obviously from the top we can't control that from the leadership of the and so it's really in response so I would say velocity broadly whether it's in M&A that financing the ICS businesses that really is the driving motor for the firm obviously we look to be as cost on efficient about our balance sheet as capital as we kind of made context of that but it really is about philosophy and activity level.

Devin Ryan:

Okay, that's helpful and then just the follow up on expenses if you guys think about just further steps that could be taken from here to reduce expenses if a backdrop remains challenging I know you're always evaluating those but we at a point where the focus is really on reducing cost or may be the footprint in low return areas that would reduce revenues but that still on the positive net impact or there still some costs in the system that can be removed that don't touch revenues I asked just because if you guys have already done so much on this front.

Harvey M. Schwartz:

Well thanks for acknowledging what we done over the last couple of years. Look we're net ROE focus and that we have had just talking to about that's driven impart by client levels of activity and so for example as you know at the beginning of the year we go through a firm wide review of resources and when you look at that over historical time periods that's resulted in about a 5% adjustment to resources in the firm. This year as we went through that exercise parts of the businesses that were more challenged like fixed income they elected to take more significant action and so they would have been greater than 5% during this period.

But they're just responding to the market environment and there have been demand for their services in the short run.

Devin Ryan:

Great. Thanks Harvey.

Harvey M. Schwartz:

Thank you.

Operator:

Your next question from line of Brian Kleinhanzl with KBW. Please go ahead.

Harvey M. Schwartz:

Hey Brian

Brian Kleinhanzl: KBW:

Just a quick question on energy that commodities overall what's I mean you mentioned during your comments that it was the client activity was low so the low energy prices but I think you've been clarified that was really the drop in energy. I just want to make sure how that -- you can still grow the business even at a low level of energy prices or was it really just because energy prices are low revenues going to low.

Harvey M. Schwartz:

Yes. It's a great question, its left the absolute price level it was more the shock in the nature of the decline, and so when you think about the precipitous nature of the decline and you go through the various client segment. So think about producers responding to that decline in prices and to be able certainly you didn’t seen much implemental addition to hedge portfolio activity.

On the consumer side, when you get those move down so quickly they tend to be a delay until you find some price stability and for investors I think the move was so volatile and it was difficult for investors to participate. We've certainly seeing some stabilizing in those flows and increased market participation over the last several weeks, but what we saw on the first quarter really not surprising in terms of client behavior.

Brian Kleinhanzl:

Okay, thanks, and then just one question I know before getting into the next quarters earnings we will have the CCAR results and in the last couple of years you have been I guess not shy about using the module with regards to CCAR can you going to outlay how you're think about capital returns as well as whether or not you are always be aggressive in your capital -- CCAR process. Thanks.

Harvey M. Schwartz:

So I wouldn't just to get a little -- on language I wouldn’t say that there is a shine as or lack of shine is or aggression -- we've very specifically and carefully go through our capital plan and we ask what we think is appropriate and so that the way I would describe that.

Brian Kleinhanzl:

Good. Thank you.

Harvey M. Schwartz:

Thank you.

Operator:

Your next question is from the line of Richard Bove with Rafferty Capital Markets. Please go ahead.

Richard Bove: Rafferty Capital Markets:

Good morning. I was wondering if we take as given its your balance sheet is in lean condition and you are the very best or among the very best in each one of the businesses in which you operate. We run up against the situation that the world is changed dramatically. So that we are now 9 years into Goldman Sachs not being able to come close to what it did in 2007.

Its revenues have been flat lining for let's say five years its earnings pretax earnings this year certainly last year half of what you did in 2007. When does Goldman say the time come for transformational change that we must do something radically different because we are getting nowhere we are just trading voter for 9 years now. The stock is going nowhere, earnings are going nowhere, revenue is going nowhere and yet with very best what we do. When do you start saying we've going to do something radically different we've going to change.

Harvey M. Schwartz:

So I guess I would say the couple things we are taking last couple of years you pointed out we have been $34 billion firm. However, we had changed during that time period we filled off $2.5 billion plus where the businesses and we replace those revenues. You see us low our asset management business over the time period when you look at our performance versus the Pierce Group and I thank you for acknowledging with the best.

We've continue to outperform the Pierce we are growing book value we've return $25 billion to shareholders over the past 4 years and so we have done many things we can't control what happens in terms of the environment. We don't believe negative interest rates are going to be here forever, we don't believe client activity is going to be low forever and you really have to look this over long periods of time. Look I go back book if you look at over the past decade we have grown it by three-fourth I think that's contributing value.

Richard Bove:

No actually I know sure we agree with you. I don't see anything wrong with Goldman Sachs, I see things wrong with the world and the Goldman Sachs position in the world is where things are wrong and what I am wondering is when do you think of about doing a massive merger of equals so when do you start thinking about and during new business clients which erratically different from the ones that you're in now under the understanding that you can't you can't get anything more from what you doing other than waiting for to come in and was when do you get control of your destiny as oppose to sitting here for nine years letting the world control where you are and what you're going?

Harvey M. Schwartz:

Yes so again into language I would agree with some of the things you're saying I certainly wouldn't be agree with your statement that we're sitting here waiting for the world to do it does, if we felt like there was a client segment or a transaction we can do that would benefit our shareholders and we could deliver to those clients. We would do it. We are open minded.

These are the reason why we are the leading advisory firm in the world. We would take our own advice.

Richard Bove:

Okay. Thank you very much.

Harvey M. Schwartz:

Thank you.

Operator:

Your next question from the line of Marty Mosby with Vining Sparks. Please go ahead.

Marty Mosby: Vining Sparks:

Thanks. Harvey we'll go from the strategic to the very tactical my questions here. We've heard this in the past in kind of the timing of the comp ratio year-over-year the expenses were right in line with revenues but if you look from sequential you had a 13% reduction revenues 29% increase in your overall compensation so, that combination really create a squeeze on your returns which if you would have adjusted for that would have raised to return on tangible common equity about 1.5%. 2% points this particular quarter.

So just was curious in the past as what's in your favor of this quarter really been.

Harvey M. Schwartz:

So look at this stage it's our best estimate Marty in terms of where we think the year ago obviously the performance was challenged in the first quarter and you saw competition benefit expense come down 40%, it's pretty meaningful.

Marty Mosby:

It was I am just saying sequentially the pattern is just throws you off and it creates the pressure on returns in a first quarter that's not strong but weak if you are all know average for the year and keep it kind of constant for the average than you will have a much more kind of just leveled out playing field that where you just have a dramatic shift between fourth quarter and first quarter so that definitely.

Harvey M. Schwartz:

Yes, I understand your point it really is our best estimate we are going to have seen how the year progresses.

Marty Mosby:

The other thing which I know is hard question to be able to answer, but kind of important when you sort of thinking about just what is the core earnings I am trying to take out some of the volatility that happens from quarter-on-quarter. The INL business gives you increased intangible booked value has been a contributor so nothing wrong with it but the volatility does create pressures and then also advantages in certain quarters. What is your just range and just kind of you not take on a recession but just kind of think about in general what would be the range of outcomes given you do have some NII in there and you would typically have some flow of deals and it could be a broad range I am just kind of thinking when you budget a plan for some normality what's your kind of aspect or what you think about there.

Harvey M. Schwartz:

So when we budgeting plan for it, it really is a process through which because of the nature again this is a long-term business or committing long-term capital, it really is gone under a very control process with the businesses request that capital. As you pointed out we had roughly $240 million of NII in there and now the majority of the balance sheet and this is been a transitional over several years. The balance sheet as transitioned more to debt and lending activities, but that is not something again that we drill top down that was driven by the clients and the opportunity set.

I just you have look at this over the long term as I said earlier including the first quarter its driven $11 billion of revenue over the last eight quarters, but you have to look at this for the long term, because it's going to be cyclical and is going to be volatility quarter-to-quarter.

Marty Mosby:

And the recent history zero this quarter to a $1 billion would be a kind of the range we have been seeing is that kind of what you would see.

Harvey M. Schwartz:

I would say this is been pretty extreme quarter you have to go back to the third quarter of 2011 or back to other periods where markets have been extremely volatile to see this kind of performance. But again it reinforces what we told already which is its price sensitive its call cyclical and quarter-to-quarter you really have look at it over the long term.

Marty Mosby:

And just for those pieces you put average and I&L and kind of average compensation ratio for the year and you really had 9.5% kind of return so that's the Bill said you'd have as you kind of role forward so thanks.

Harvey M. Schwartz:

That's your job.

Marty Mosby:

That's right.

Harvey M. Schwartz:

Thanks, Marty.

Operator:

And at this time there are no further questions please continue with any closing remarks.

Harvey M. Schwartz:

So everybody seems there are no more questions. I would like take a moment to thank all of you joining on the call. Hopefully I and other members seem many of you in the coming months if you have any questions come up please don't hesitate to reach out to Dane otherwise enjoy the rest of your day.

Thanks everyone.

Operator:

Ladies and gentlemen this does conclude the Goldman Sachs first quarter 2016 earnings conference call. Thank you for your participation. You may now disconnect.