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Shareholder Letter 2015
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   Goldman Sachs 2015 Annual Report 1 As the year progressed, increasing concerns about China, the first rate hike from the U.S. Federal Reserve in nearly a decade, slowing global growth and falling commodity prices — especially in oil — began to emerge. We faced these headwinds, and lower client activity across many of our businesses suggested that our clients and peers also faced their share of challenges.In addition to the impact of the operating environment, our 2015 financial performance was negatively affected by the resolution of our most significant outstanding legal exposure relating to our securitization, underwriting and sale of residential mortgage-backed securities (RMBS) from 2005 to 2007. In January 2016, we announced an agreement in principle with the RMBS Working Group,* under which we will pay a $2.39 billion civil monetary penalty, make $875 million in cash payments and provide $1.80 billion in consumer relief.Despite these factors, our strong and diversified client franchise allowed us to produce relatively stable net revenues in 2015. The firm generated net revenues of $33.82 billion, marking our fourth consecutive year of roughly $34 billion in net revenues. Net earnings were $6.08 billion and diluted earnings per common share were $12.14. Return on average common shareholders’ equity (ROE) was 7.4 percent for 2015, which would have been 3.8 percentage points higher excluding the provisions we recorded during the year related to the RMBS Working Group settlement. Fellow Shareholders: A s many of you know first hand, 2015 was a tale of two halves: the first half of the year featured a strong operating environment, but headwinds emerged, particularly during the second half, and these headwinds persisted into early 2016.The first two quarters of 2015 were marked by heightened demand from our corporate clients for strategic advice and financings, strong client activity across our Equities franchise and growing demand from our Investment Management clients for our products and services. These factors culminated in record first-half results in Investment Banking and Investment Management, as well as the best first-half performance for Equities in six years. *  On January 14, 2016, the firm announced an agreement in principle, subject to the negotiation of definitive documentation, to resolve the ongoing investigation of the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group). The agreement in principle will resolve actual and potential civil claims by the U.S. Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration (as conservator for several failed credit unions) and the Federal Home Loan Banks of Chicago and Seattle, relating to the firm’s securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007. For additional information, see the firm’s Form 8-K filed with the U.S. Securities and Exchange Commission on January 14, 2016.  2  Goldman Sachs 2015 Annual Report Letter to Shareholders In this year’s letter to our shareholders, we cover a wide array of topics, including an overview of our financial profile, a review of our strong and diverse client franchise, as well as our thoughts on the forward outlook, particularly how we are thinking about navigating these uncertain times. Financial Profile As we manage our financial profile, our strategy is predicated on carefully delineating between structural and cyclical factors affecting our businesses. Accordingly, in 2015, we continued to adjust our franchise to address structural changes in the regulatory environment, and we will continue to do so as needed. From a cyclical perspective, it certainly feels like the cycle has been prolonged, particularly as interest rates in many parts of the world remain at — or even below — zero, and growth and deflation concerns, among other worries, have persisted.It is important to remember that cycles do turn, even if the timing of such inflections may be difficult to predict. As we look to deliver value to our shareholders over the long term, our focus continues to be on managing to both the structural and cyclical forces we see at play, while remaining flexible enough to capture future growth opportunities.Our efforts in this regard have yielded solid results. Over the past four years, we have diversified our franchise while holding net revenues steady. We have increased our capital and liquidity, decreased our risk, and have stayed focused on efficiently and prudently managing our resources — all while helping our clients to execute their long-term goals and strategic objectives. Over the same four-year period, we returned approximately $25 billion in capital to our shareholders, increased dividends per common share by 44 percent and reduced our basic share count by 14 percent.In response to structural changes resulting from new regulations, since the end of 2007, we have reduced our balance sheet by approximately one-quarter, while nearly doubling common shareholders’ equity — cutting gross leverage by more than 60 percent — and tripling our liquidity position to almost $200 billion. These measures have strengthened our long-term financial safety and soundness. Lloyd C. Blankfein Chairman and Chief Executive Officer (right)  Gary D. Cohn President and Chief Operating Officer (left)    Goldman Sachs 2015 Annual Report 3 Also as a result of structural changes, we have embraced opportunities to sell businesses and investments that were not core to our client franchise and were no longer the best use of shareholder capital relative to the returns. The loss in net revenues due to these sales has been offset by growth in our Investment Banking and Investment Management businesses. Last year, these two businesses accounted for 39 percent of our net revenues, compared to only 30 percent in 2012. Investment Banking was approximately one-half the size of Fixed Income, Currency and Commodities Client Execution (FICC) four years ago; today, our business mix is more balanced.This does not mean we are moving away from FICC. Rather, we remain committed to meeting the needs of our clients, while managing to structural and cyclical headwinds. For example, we have reduced risk-weighted assets within FICC significantly over the past four years, largely in response to structural changes resulting from new regulations.On the cost side, we have continued to find ways to improve our operating efficiency. Headcount across the firm is up 11 percent over the last four years, largely to meet regulatory compliance needs. However, through a combination of shifting to a greater percentage of junior employees and relocating some of our footprint to lower-cost locations, we have managed our expenses well.More specifically, we have increased the number of analysts, associates and vice presidents at the firm by 17 percent since the beginning of 2012, while our partner and managing director populations have decreased by two percent. Approximately 25 percent of our total staff is now in lower-cost locations such as Salt Lake City, Dallas, Irving, Warsaw, Singapore and Bengaluru. As a result, while total staff levels are up over the four-year period, overall compensation and benefits expenses have declined by approximately $270 million.Looking ahead, we will continue to pursue ways to be more cost effective by assessing our expense structure while ensuring we meet the needs of our clients. Whether we are adjusting to structural or cyclical dynamics, we will carefully balance our expense management efforts against our ability to capture future market share and growth opportunities. Investment Banking Our leading Investment Banking franchise allowed us to capture significant market share in 2015. The business achieved its second-highest net revenues in 2015, driven by a strong environment for mergers and acquisitions (M&A). Industry-wide volumes for announced M&A transactions increased by more than 45 percent in 2015, while the firm’s volumes increased by approximately 80 percent. We ended the year ranked first in global announced and completed M&A, with completed M&A volumes that were more than $350 billion higher than our next-closest competitor — a record gap since the firm went public.By most measures, 2015 was a robust year for M&A. However, volumes as a percentage of market capitalization are still below prior-cycle peak levels. We see this as a sign that there is still some room to run for M&A activity, particularly when equity markets show signs of sustained stabilization. We also see consolidation opportunities in sectors such as industrials, energy, mining, food, media and telecommunications.While total underwriting revenues declined in 2015, we performed relatively well in the context of softer equity and debt markets in the second half of the year. We finished 2015 ranked first in global equity and equity-related and common stock offerings. Similar to the dynamics we see in the M&A market, we believe there may be pent-up demand among our corporate clients to tap into public equity markets when conditions improve, particularly given that private financing conditions have generally tightened. A decline in debt underwriting net revenues in 2015 was largely due to a drop in leveraged finance activity.  4  Goldman Sachs 2015 Annual Report Letter to Shareholders Institutional Client Services In the wake of balance sheet restructurings in the U.S. and elsewhere, we remain one of the few financial institutions with leading global franchises in both FICC and Equities. We view this as critical to the long-term success of our Institutional Client Services business. We expect our ability to offer our clients a broad suite of services to be a key competitive advantage in the years ahead.Over the course of 2015, within FICC, lower levels of client activity in credit and mortgage products were partly offset by stronger client activity and a more favorable backdrop for macro products, particularly in interest rates and currencies.Equities benefitted from a better market environment, posting solid results for the year. Clients continued to place significant value on the integration of our various services across Equities — electronic, cash, derivatives and prime brokerage — as well as our global footprint, all of which was reflected in our performance in these areas.Moving forward, addressing structural changes in our Institutional Client Services businesses, such as risk- based capital rules, will remain a central focus for our management team. At the same time, we will look for ways to advance our franchise in the evolving landscape. Competitor retrenchments in the wake of structural developments should provide an opportunity for us to capture market share over the longer term.As it pertains to cyclical trends in Institutional Client Services, we continue to carefully scale our business relative to the environment, but have also chosen to remain targeted in our efforts. Our business is highly correlated to economic growth, and when a better opportunity set eventually presents itself — and it will — our strong, deep and broad client franchise should position us well to respond. Investing & Lending Our Investing & Lending business enhances and expands our client relationships. It creates synergies for our broader client franchise because it enables us to extend credit or to invest alongside our clients. From a broader perspective, by participating in Investing & Lending in a disciplined manner, we engage in the capital allocation process, which allows corporates and individuals to put capital to work to generate broader economic growth.Over the past several years, the composition of Investing & Lending has changed significantly. Since the beginning of 2012, we have seen lending increase threefold, primarily to private wealth management and corporate clients. Our corporate loan portfolio is well diversified, with no one sector representing more than one-quarter of the portfolio. Our private equity portfolio similarly reflects the diversity of our global client franchise, comprising more than 800 different investments globally across a broad spectrum of industries. In some cases, we invest in private companies alongside our clients. In other cases, we invest in public equity or in real estate, or we deploy capital to seed new funds.While the nature of our investing may change over time due to regulatory changes, and net revenues can fluctuate from quarter to quarter based on price movements, we evaluate the performance of our Investing & Lending portfolio over many years. On that basis, these activities have been strong contributors to returns over the last four years. Investment Management Our Investment Management business is one of only a few such franchises globally that can meet the needs of a broad spectrum of clients across many products and regions. We serve investors of all types, including retirees in need of mutual funds, entrepreneurs who have sold their companies and pension fund managers who need help with asset allocation. With this in mind, we built
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