Okay, so, up next, we have Denis Coleman, who is CFO of Goldman Sachs. Denis has been at the firm since 1996, and has spent time, I think, in both our London office and New York office. He's been CFO since 2022, but he's had a number of roles, in the firm, including co-head of the Global Financing Group, which I think was the last job you had before you took on, on the CFO role. So thank you very, very much for joining us. It's, it's a real pleasure to have you here, and hopefully, this is gonna be the first of, of many of these. So thank, thank you for, for, for being here. So I-- let's start off with your high-level views on the macroeconomic backdrop.
Obviously, there's still a very, very healthy debate around what the economic outlook is gonna look like, both in the U.S. and abroad. So maybe you can talk about what you're seeing from your perspective, and then maybe spend a couple of minutes talking about some of the biggest risks that are top of mind for you as you think about 2024.
All right. Thank you, Richard. Thanks to all of you for attending. The place is jam-packed. Appreciate everyone carving out time off to examine the format. But again, thank you very much for being with us. I guess, you know, our views on the macro, you know, continues to evolve. We've made a lot of progress in terms of moving towards consensus outlooks. You know, rate picture, a lot less variation around that. Inflation seems to be coming under control. This is true around the world. It's not just a U.S., a U.S. observation. We're seeing sort of less volatility across asset classes. We've seen some, you know, reflation in the equity markets, credit spreads tightening.
So I think some of the, some of the bands of variability around a number of the macroeconomic indicators have been, have been tightening in, and that's what's, you know, giving rise to the backdrop. I mean, I think that being said, there are a number of pockets of uncertainty, particularly geopolitically. When you look around the world, top of mind, always, you know, U.S.-China status. We have pockets of hostilities, Ukraine, Middle East, we still need to contend with. And then, you know, something that people are just starting to ask about, which I think will be topical for 2024, is just prospects of U.S. elections, elections around the world, how we'll navigate that. So there are certainly a lot of things that remain very much uncertain.
Our clients continue to see opportunities to change around their portfolios, adjust their risk profiles. And so while, you know, while I think it's a, it's a cleaner picture than it was earlier in the year, I think there are still pockets of nervousness across the client base, and there still should be good opportunities to help clients navigate that.
Okay, so maybe we can then talk a little bit about what all of that means for the outlook for the primary capital market businesses. So the M&A business in particular, but capital markets more broadly. Obviously, they've been running at very depressed levels over the last couple of years. So a few questions. I mean, the first is, look, how would you characterize the mindset of corporates and financial sponsors as we head into 2024? Are you expecting the primary markets to recover? And how helpful do you think this narrowing of economic outcomes is that you talked about in terms of getting those markets to reopen?
I think that, I think that's a really important factor. I also think some of the passage of time has been very important. You know, the advisory business, the M&A activity, it's always... It's a cyclical business. In certain respects, it could be, you know, procyclical, but there is a certain base level of activity that transpires around the world, whether companies are repositioning portfolios defensively, focusing on margin structure, portfolio component valuations, still gives rise to some activity. We did see some major, you know, natural resource sector merger deals take place earlier in the fall. Goldman Sachs was on both of those deals, given our merger franchise, and I think there are a lot of clients that have appetite and interest in doing something strategic. They've been holding themselves back a little bit.
Sponsor community, in particular, more cautious, given uncertainty with respect to debt capital markets accessibility, overall cost of capital. I think coming out of the summer, when we saw the equity markets reopen demonstrated access across a number of different companies, that reinvigorated people's belief set, that there were levels at which that types of transactions could clear. I think that basically met with the conflicts in October, and that sort of slowed down quite significantly. We also had seen a reopening of non-investment grade debt capital markets post this summer, but again, tempered by the overall macroeconomic backdrop. I think over the course of the fourth quarter, I think confidence is building.
As we look into 2024, turn of the year is often a good time of year for transactions to come to market this fourth quarter in terms of sort of various global macroeconomic events and geopolitical events, and then just calendar items. It's difficult to bring longer timetable, new issue transactions to the market, but I think we'll have a bit of a more clear runway in 2024. And I think the overall cost of capital for certain new transactions is now something that's sensible. So both, you can bring new issue debt transactions as an example, and you can also price you know, new acquisitions, and commit to capital, commit acquisition financings as well with that level of certainty.
So, I think has been more subdued on the second half of the post-summer period than the first half of the period, but the macroeconomic backdrop, I think, is more supportive for improved conditions moving into 2024.
So, just as a quick follow-up, you talked about debt capital market financing markets reopening a little bit. I mean, how would you characterize conditions in those markets today relative to, say, six months ago, in particular, the non-investment grade markets?
So I'd say at the higher end of the spectrum, they're open across the corporate space, financial space, sovereign space, even high quality, non-investment grade, open. But a lot of the activity, and we'll continue to see activity, because a lot of activity, especially in the non-investment grade debt capital markets, is maturity-driven. Ultimately, you have to do transactions. You can wait only so long before you need to be proactive about your capital structure. In certain places around the world, the quote, maturity walls are creeping in, and so that, I think, will be a bit of a defensive catalyst for some activity. And over the same period of time, credit spreads have tightened in quite a lot, that I think there's more offensive opportunities as well.
And so clients can construct transactions now, and then those might reveal themselves if they come to fruition moving into 2024.
Okay. So let's talk a little bit about what's happening today. So let's talk about the near term. Let's talk about Q4. You know, is there anything that you think is worthwhile updating us on, in terms of how the fourth quarter's shaping up? How's investment banking doing, and how's trading doing, so far in the fourth quarter?
Sure. So if you take, if you take the prior comments and sort of overlay it, overlay it on the business, some of the improved conditions, but also some of the residual uncertainty, means that we continue to see decent client engagement across FICC and Equities. If you took FICC and Equities as a whole, they're trending nearly flat, year-over-year. But the equities business itself is performing better year-on-year. Our equities business over the course of the entire year has been, has been a source of strength, so that, that continues, that continues to be the case. In investment banking, no surprise, it's sort of trending, you know, below, below trend at the moment. I think the franchise is very healthy. Our, our market share has remained very strong.
Number one in M&A, number one in equity, number two in high yield, but the level of activity more muted. But from a backlog and a client and a franchise positioning perspective, it feels pretty good in banking.
Okay. And then credit and real estate obviously have also been very much in focus over the course of this year. You know, could you maybe just share with us what you're seeing in terms of progression of delinquencies? Has there been anything new this quarter that you're monitoring-
Sure.
on those on credit and real estate?
Credit, always monitoring credit. I guess my observations on credit would be, particularly if we think about our card portfolio trending as we'd expect, credit normalization, seasoning of our portfolios. But we are seeing elevated charge-offs coming through. I think that's something we've been talking about. It's expected, it's what we've modeled, but we will see elevated charge-offs coming through. You'll see that in our provisions line. And then on real estate, you know, for us, it's been topical all year. We've been very, very active, combing through all of our real estate exposures across asset classes, across the firm. We have had a strategy reducing some of our historical principal investments. A lot of that is in the real estate space.
And so we've seen the impact of some of those sell- downs and marking those positions over the course of the year. It's come through the P&L so far, year to date. We continue to, you know, expect some level of ongoing impairments to our CIE portfolio. Probably not quite as high as Q3, but nevertheless, you know, some ongoing pressure there. But, you know, we've taken a lot of marks over the course of years. We went through in our third quarter earnings call, particularly as it relates to office and some of the commercial real estate exposures as well. So I think we've been, you know, proactive and very, very active in that space.
You know, it's getting close to a place where you can sort of work on shedding some of the old exposures, then maybe change your orientation with respect to deployment on the forward. So we're gonna get that, get that balance right, given exactly where all the prices have moved to in the environment.
Okay. And to round off the discussion about the quarter, let's talk a little bit about expenses. You know, maybe you can talk a little bit about some of the underlying expense trends, whether there's any one-offs that we should be aware of. And maybe talk a little bit about the competitive dynamic for talent and what that means as people think about, you know, you know, the compensation ratios specifically for the full year.
Okay. So we've been focused on expenses all year. We set forth some objectives to drive comp efficiencies, non-comp efficiencies. We made very, very good progress on both of those fronts. It's been a very interesting year for us. We've had a bunch of strategic activity going on that, you know, with respect to exits and narrowing of our focus. But the underlying core businesses of the firm have performed well. And we have very good market share and client standing in those businesses. So I guess on the comp side, our perspective will remain very much pay for performance, but recognizing the performance of some of those core businesses.
I would say on a, you know, comp and benefit expense basis, I'd expect us to be up low to single digits for the full year. But that would include the severance, expenses that we've been, you know, that we've been incurring over the course of the year and, and disclosing on our earnings call. I'd say in non-comp, we've had a number of work streams internally going after multiple categories of non-comp, trying to do whatever we can to mitigate some of the price pressure in a number of those categories. And again, you know, we're making progress towards our objectives in terms of non-comp efficiencies.
The only thing I would call out specifically, would be our FDIC special assessment, which we would expect now to be recorded in this quarter at approximately $525 million of pre-tax expense.
Okay, great. So let's segue and talk about strategy, and maybe you can just remind us of the key areas of strategic focus. Talk a little bit about the progress you think the firm has made, as well as just talk about the drivers that you think that will get the firm to the financial targets.
Okay. So, for us, we made a lot of, a lot of progress, strategically over the course of the year. We're really focused on growing our two big, client franchise businesses, GBM and AWM. You know, from a targets perspective, the GBM business is performing in mid-teens context for the third quarter. And that's with one of its major segments or major subcomponents, investment banking, you know, very much subtrend. So, you know, that business, the complexion of it, the composition, the sort of various different product verticals within it that are contributing this year versus last year, continues to demonstrate performance over multiple different environments... you know, contributions coming from different regions of the world, different products within the portfolio, and against the entire backdrop, ongoing opportunity to grow financing within that.
You know, the ongoing focus remains very much market share and driving financing. In Asset and Wealth, the strategy, grow the durable revenue streams, management fees, private banking and lending, and continue to move down on balance sheet exposures. Over the course of the year, that's what we've done in terms of execution. And that is really the focus going forward, driving those two particular businesses, bringing them both to mid-teen targets.
Okay, so let's talk about each of those, and let's start with Global Banking & Markets. You know, the firm's market share has actually grown pretty materially over the last few years. So maybe you can talk a little bit about where some of those gains have come from, but more importantly, from here, just given where the market shares are, where do you see the best opportunities to gain market share? And maybe within your answer, you can talk a little bit about the competitive dynamic and how that's been unfolding, in particular, in terms of competition from non-bank competitors in those markets.
Sure. So on the market share front, across global banking markets, we have been sort of very deliberate in putting out a lot of metrics that we track to hold ourselves to account on progress we're making and help people along. We first put out a stat on where we rank top three with our clients, for our top 100 clients. It was originally with 51 clients, now it's 79 clients, so that's a piece of progression that we've achieved. We then expanded the definition to look at making progress against the next 50 clients. So looking at 150 clients in total, and our standing that's top three with 150 is 123. So we're continuing to monitor and manage to progress top three against that 150.
And then we added a new metric, which is, where are we number one, with, with the same client base, which is a new way that we're looking at it. You know, not good enough to just be in the top three. Where are you number one, and then how can you close those gaps? And so on the top 150 clients, we're now number one with about 38 of those clients, about 25% penetration, but obviously a fair amount of room to grow. So those are the main metrics on the market share that we're attacking, and we think there's still incremental room to go.
Okay. So if we talk about just picking equity revenues for a minute, you know, those, I think, are running between 30%-40% ahead of where they were in 2019 for the industry. You know, do you think the banks are overearning in those businesses? And what's your view on whether those revenue levels are sustainable as we get further into the economic cycle and volatility potentially starts to normalize?
I mean, we've had a couple of very different years since 2019. I think there are reasons you can believe that the revenue wallet, if you will, can remain elevated versus 2019. There have been different, as I indicate, different contributors to the overall wallet over that period of time. It's not the same contributors each and every year. So having a big, broad global business, I think for us, has been really helpful in maintaining client engagement and market share. I think the other thing is our focus on growing financing is unlocking sort of an incremental addressable universe of wallet opportunity that we've been at for a number of years.
But in engaging in that type of activity with clients, we're finding, you know, virtuous benefits in terms of being able to do even more with those clients by providing them financing, which in some cases remains still a dear and coveted commodity. So I think the combination of driving the market shares and doing more financing to open up the addressable wallet will be beneficial.
Okay. And then Asset & Wealth Management, maybe you can talk... Just talk about the progress you think, Goldman Sachs has made in terms of achieving the strategic priorities and the targets that you set out for AWM. And, and maybe you can just talk a little bit about just the overall environment for things like, asset gathering and fundraising in, in the environment, as we head into 2024.
Okay. So, you know, for Asset & Wealth Management, there's a couple of components. We've identified our durable revenue streams, management fees, private banking and lending, which we are looking to grow in high single digits. You know, through three quarters, we had record performance in management fees, record performance in private banking and lending, and so we are continuing to drive that. The drivers of that include our position as really a premium ultra-high net worth wealth advisor, as well as having an asset management footprint that is a leading active asset manager. We have a top five alternatives franchise, and we're working on integrating those activities to drive top-line fees. I think when we had our Investor Day, we outlined, you know, an expectation of incentive fee contribution on average over the years.
Hasn't been huge contribution so far this year on the incentive fee line. That's something that could contribute on the forward and be part of our building blocks. And then in private banking and lending, we've also, you know, made some people changes and changed our strategic focus and orientation on that business. So I think that's a business that we continue to grow. Metrics across, you know, the balance of the activities in the segment. Our fundraising actually has been going very, very well. We were at 219 versus a 225 target through the third quarter. And that's a target that's an end of 2024 target.
So the fundraising has gone very well, despite what you might think of as a more difficult, a more difficult environment. And similarly, targets with respect to disposition of on-balance sheet exposures, pacing very, very well. It sold down about $9 billion to approximately $21 billion through the third quarter. Also, very much on pace for a $15 billion target that we'd set at the end of 2024. So across the board, marrying up our wealth franchise and the asset management platform, driving the durable revenue streams, changing the composition of the debt and equity investments, we feel very good that we're, that we're making progress.
We started providing information on what the margin looks like, both on a reported basis, and then if you take account of certain of the dispositions around Marcus lending and HPIs, just to give people a sense for the progress towards the mid-20s margins that we laid out there. So we feel good about the progress that we've made in 2023. Put a lot of the exposures behind us, and we feel good about it moving into 2024.
So let's talk about private credit a little bit. I know it touches the firm, I guess, in a variety of ways. So, you know, how would you describe Goldman Sachs' positioning within private credit? What do you think the key opportunities are for the firm going forward? How much of an opportunity do you think it really is, you know, if interest rates actually do start to come down? And are there any concerns that you have, from a risk perspective, around this very rapid growth in the private credit markets?
I mean, private credit is a very, very popular topic. Goldman Sachs has been in that business for a very, very long period of time, with over $100 billion of assets in that space. I guess the last several years have been very favorable in terms of the overall interest rate environment. There's been a lot of AUM growth within that space. And I think there will continue to be opportunities to grow AUM in private credit, and we think there'll be good opportunities for us to continue to grow our AUM in private credit. I guess from the firm's perspective, we have that big, large size, well-established, track record private credit business. We also have a world-class debt underwriting business inside of the investment banking business.
And so when we go out and we approach clients who are looking for some type of debt solution, we're able to offer an underwritten solution or a direct invested solution. So quite a lot of optionality, and clients recognize that they can avail themselves of other opportunity. That's an attractive way for us to—for them to engage with us. Also, as you see a recovery in strategic activity, given the confidentiality around certain of those transactions, having committed you know debt capital as part of those transactions, also very synergistic, both with our underwriting as well as the investing parts of the business. As you mentioned, this business is one which fits right between Global Banking & Markets and Asset & Wealth Management.
There are opportunities for us to deliver solutions to clients, which they can effectively source from one segment or the other. But I think the firm's setup is very good. I think the growth prospects in private credit for us, in particular, are good. We are mindful, of course, of credit underwriting, and the outlook. We've had a good track record, historically. Actually, the whole industry, it'll be interesting to see how the whole industry responds in an elevated rate environment. I made reference earlier to, you know, maturity walls. This is all relevant to non-investment-grade debt, really. That presents a risk, it also presents an opportunity. So depending on how your portfolio is positioned, you'll be sort of closer to the risk piece, or you'll be closer to the opportunity set.
Okay, so let's talk again a little bit more about strategy. You obviously announced the sales of PFM, GreenSky. Can you just remind us of the strategic rationale for those sales, and perhaps talk a little bit about what else you're working on in terms of further narrowing the strategic focus of the firm?
So I think in the last year, we've made a lot of progress. As you highlighted, selling down the Marcus lending portfolio, announcement to sell GreenSky, which is on track for closing in the first quarter of next year, and then selling the United Capital business, PFM, which we did, I think, in part to refocus, redouble our efforts on the higher components of our wealth spectrum. In terms of other components, people will have seen an announcement GM's made that they're exploring a potential new issuer under the card program. You know, away from that, we'll continue to be focused on, you know, just the overall client experience across the portfolio and operating as, you know, as well as we possibly can.
Okay, so let's talk about capital. Basel III, very, very much in focus. The proposal came out earlier this year. You've had a few months to spend some time digesting it. You know, so what are your latest views in terms of the potential impact? I think there is this view that it's probably not gonna get implemented as was written, you know, in the initial proposal. So maybe you can talk a little bit about what you think could change in terms of the final proposal, if you have a view. But maybe also talk about how you're adapting the businesses to some of the significant changes in the capital requirements, especially from the FRTB components and operational risk components of the proposal.
Fine. So that's obviously extremely, extremely top of mind. We've been very, very engaged, from an advocacy perspective. My take is that people have been listening. I do expect there will be changes. I think the focus of the advocacy has been to highlight deltas between the U.S., rest of world, focus on regulated banking sector versus the unregulated sector, and perhaps most importantly and most impactfully, trying to bring forth an understanding what the overall implications on the, on the U.S. economy could be by this scale of increased, capital, you know, across the system. I think that is... I think that's starting to resonate, requiring people to ask the question of what, you know, what can be cut back? What can be, what can be tailored?
I've, you know, in my opinion, there's a number of areas that could be, that can be cut back. And we don't know what those will be or what the magnitude will be. We do know what we should be doing to be prepared, and we've been doing a lot of work over a long period of time in anticipation of this potential rule. So we've been making the kinds of investments in models, technology, to make sure that we understand the framework, particularly under the new construct.
Look at the, you know, the profile of our exposures that consume capital, look at their duration, just be more thoughtful about how we price longer-dated versus shorter-dated exposures, and then look across the firm to understand which of the particular products and areas do we believe that we would have pricing power under different under different scenarios, and then what would that type of engagement be, and how should we think about the overall mix of businesses? And so, you know, in, in absence of the, of the final rule, we're simply preparing across each of the various various stripes to be, you know, to be as ready as we can be, as when it's finalized.
Do you think the market is starting to reprice certain businesses to the Basel III proposal, or is the uncertainty around the ultimate implementation meaning that people are waiting to see what happens?
It's very micro, but there are... Given the timetable for implementation and the nature of different types of products that we have, we have to think now about some of the longer-dated activities and make sure that they're, you know, and if you don't have the opportunity to reprice them structurally, then you need to be thinking about that now. That is some of the things that, you know, we've been able to communicate through advocacy. There's very obvious, sort of politically charged components of the rule that are more illiquid and longer-dated types of commitments that banks make, and those decisions are gonna be made over the next period of months, quarters, and years.
And so, you know, the uncertainty around the rule is certainly gonna require people either to adjust their level of activity or think very carefully about the pricing, because certainly those, those long-dated things in different scenarios, you would, you would price them very, very differently.
Okay. So let's talk a little bit about technology and AI. AI is another area that there's a lot of focus on it at this conference. You know, if you were to take a step back, I mean, what do you think the revenue and cost opportunities from AI could be, you know, both for Goldman Sachs but also for the banking industry over a longer-term time frame, so let's say five to 10 years? And if you think nearer term, do you think AI is predominantly a cost opportunity, or do you think there's revenue opportunities as well in the nearer term?
I mean, so, so first, taking a step back, you know, we've spent a lot of time over the last several years in machine learning, AI. It has applicability across the firm to different activities. Some of those are as simple cost efficiencies, documentation, processes, but it can be option pricing models. There's, there's different ways you can see the intersection. Generative AI, relatively more new. We have dedicated professionals that are, are working on, you know, a suite of different proposed, you know, opportunities, and looking at what the potential value unlock might be. Those value unlocks are both offense and defensive. They're on the cost side, they're on the revenue acceleration side. On the, on the cost side, some of the most obvious things is basically enhancing developer productivity.
So, coders, the interaction with generative AI can drive significantly more efficient coding efficiency, and you can apply that technology across a number of the processes inside the firm, but there are also more offensive applications as well. You can think about how various client-facing professionals think about lead sourcing, idea generation, based on how the machine learning works and what it can put at the fingertips of those outwardly facing client professionals. It can inform investment processes. So I think we don't know the extent to which AI can impact the total picture. It's definitely very, very interesting. We're spending a lot of time on it. We're also focused, frankly, on governing the way in which it's rolled out, users, the data sets, et cetera.
So as it grows, as we learn and explore different ways to apply it, both defensively and offensively, you know, in our opinion, doing so in a very controlled, well-governed manner is also very important, given the overall nascency of this technology.
Okay, so I think we're almost out of time. So to wrap things up, you know, maybe you could just spend a couple of minutes on what you want the key kind of message to be, you know, from this, and also maybe just spend a couple of minutes talking a little bit from your perspective about what you think is most misunderstood from an investment perspective when it comes to Goldman Sachs stock.
Okay. So thank you, thanks for that, Richard. I think the story at the time being is very simple. The focus is on the two big businesses, Global Banking & Markets, Asset & Wealth Management. Global Banking & Markets has been performing. Our standing with the client franchise has been enhanced over the last several years. The mix of revenues between intermediation and financing continues to improve. We continue to invest in further growing the financing component of that business. We think there is upside as the investment banking portions of the business come back in and contribute. You could have variation in the FICC and Equities line, all the while having investment banking come back online. Investment banking is an attractive business within that overall, within that overall segment.
Then Asset and Wealth, I think, is perhaps the answer to your question and one of the most, you know, misunderstood or not as well-understood components of the firm. We have a very, very large global asset management firm, public, private, across all asset classes. We have an extremely high-quality, premium, ultra-high net worth business embedded in Asset & Wealth Management. If you look at the building blocks towards mid-teens returns, it's driving the durable revenue streams, high single digits, moving down the balance sheet exposures, and a contribution of incentive fees coming through the numbers over the next couple of years. That combination of factors can drive those margins into the mid-twenties and ultimately bring the ROEs up towards the target. For us right now, it's really simplified focus, and it's all about execution.
This past year, we put a lot of things behind us. Those decisions were made in an effort to set ourselves up to take advantage of the opportunity set in a very focused fashion for 2024 and 2025.
Okay. With that, Denis, thank you so much for joining us.
Thank you.
Hopefully we'll see you next year. Thank you.
Thanks, Richard.