Goldman Sachs Group Inc. Management Discusses Q3 2010 Results - Earnings Call Transcript

Goldman Sachs Group Inc. Management Discusses Q3 2010 Results - Earnings Call Transcript
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Goldman Sachs Group Inc, (

GS

)

Earnings Conference Call

October 19, 2010 11:00 am ET

Executives

Dane E. Holmes - Investor Relations

David Viniar - Executive Vice President and Chief Financial Officer

Analysts

Howard Chen - Credit Suisse

James Mitchell - Buckingham Research

Mark Lane - William Blair and Company

Mike Mayo - CLSA

Guy Moszkowski - Bank of America Merrill Lynch

Richard Staite - Atlantic Equity

Roger Freeman - Barclays Capital

Steve Stelmach - FBR Capital Markets

Douglas Sipkin - Ticonderoga

Jeffrey Harte - Sandler O’Neill

Glenn Schorr - Nomura Securities

Matthew Burnell - Wells Fargo Securities

Ed Najarian - ISI Group

Kian Abouhossein - JPMorgan

Michael Carrier - Deutsche Bank

Chris Kotowski - Oppenheimer

Carole Berger - Soleil Securities

Presentation

Operator

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Good morning. My name is Rachel, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Third Quarter 2010 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer period. Also, this call is being recorded today, Tuesday, October 19, 2010. Thank you.

Dane Holmes

Thank you, Rachel. Good morning, everyone. This is Dane Holmes, Director of Investor Relations at Goldman Sachs. Welcome to our Third Quarter Earnings Conference Call.

Today's call may include forward-looking statements. These statements represent the firm's belief regarding future events that by their nature are uncertain and outside of the firm's 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 risks 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 fiscal year ended December 2009.

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 and global core excess, and you should also read the information on the calculation of non-GAAP financial measures and the impact of Basel III that is posted on the Investor Relations portion of our website, www.gs.com.

This audio cast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, David Viniar will now review the firm's results. David?

David Viniar

Thanks Dane. I'd like to thank all of you for listening today. I'll give a brief overview of our third quarter results and then take your questions. Third quarter net revenues were $8.9 billion. Net earnings were $1.9 billion and earnings per diluted share were $2.98. Our annualized return on common equity was 10.3%.

Our performance in the third quarter resulted in a year-to-date annualized return on common equity of 13.2%, excluding the impact of the U.K. bank payroll tax and SEC settlement. Our book value per share has grown 8% to $127.08 year-to-date.

Many of the market concerns that were most prevalent in the second quarter of 2010 continued into the third quarter, with our client base remaining focused on the macroeconomic outlook, particularly in the United States and Western Europe. Markets were also focused on the implications of global financial regulation, specifically implementation of Dodd-Frank Act and Basel III.

Consequently, investment conviction among institutional asset managers remains low, and while CEO confidence seems to be improving, it remains fragile. These factors, combined with the seasonal dynamics of the third quarter, negatively impacted activity levels within many of our businesses.

While we experienced modest improvement in activity levels in September, third quarter activity levels for many of our businesses were at or below second quarter levels. For example, NYSE, NASDAQ and LSE average daily share volumes declined significantly compared with the second quarter, down 27%, 20% and 18%, respectively.

On September 12, the Basel Committee on Banking Supervision announced its capital framework generally referred to as Basel III. This announcement represented an important step in providing greater clarity on global regulatory capital requirements. Ultimately, the Board of Governors of the Federal Reserve System will determine how the capital framework will be implemented for financial institutions in the United States. Understandably, our shareholders have been interested in how this development could impact our business.

While there are many aspects of Basel III that still require rule-writing and many rules that require significant guidance and interpretation, we wanted to provide our best estimate of our position on the Basel III with the caveat that these numbers and assumptions could and almost certainly will change.

At the end of the third quarter, we had a Basel I, Tier 1capital ratio of 15.7%, and a Tier 1 common ratio of 13%. We estimate that our current robust capitalization positions the firm to exceed requirements under the Basel III framework.

If we calculate Basel III requirements with actual second quarter numbers as of June 30, 2010, our estimated Tier 1 common ratio would be nearly 8.8% before considering any mitigating actions. This assumes risk-weighted assets of approximately $750 billion and Tier 1 common of approximately $59 billion. The principal drivers of the increase in total risk-weighted assets are higher credit risk-weighted assets for private equity investments in DVA and higher market risk-weighted rated assets for securitization and correlation risk exposures.

If we assume contractual roll off of our correlation portfolio, expected duration of our mortgage securitization book, coupled with 2.5 years of forward earnings at the 2010 consensus estimates, our Tier 1 common ratio would increase to 11% by the end of 2012. Of course there are many additional steps that we can and will take to further increase our capital ratios.

We also continue to maintain significant excess liquidity, which average $173 billion during the third quarter. While we are awaiting more clarity on rules for the liquidity coverage ratio under Basel III, the concept is very similar to how we manage liquidity with our Global Core Excess and internal liquidity model. We estimate that our current Global Core Excess will comfortably exceed requirements under the new rule set.

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