Investment Banking Powerhouses in 2016 goldman sachs (GS 0.37%) It launched a consumer banking business that collects deposits, offers online investment capabilities, and issues personal and credit card loans.
The goal was to diversify Goldman’s earnings and make them more permanent. Goldman has a great investment banking business, but the market doesn’t appreciate it because earnings can fluctuate from year to year. Consumer banking returns are more consistent and tend to draw higher multiples from the market.
But nearly six years after launching its consumer-facing business, Goldman pivoted and backtracked significantly from its consumer banking ambitions. Here’s what went wrong:
Poor performance
Goldman’s commitment to consumer banking apple When general motorspoint-of-sale lending through its acquisition of GreenSky, and Marcus, a digital platform that accepts deposits and offers online investment capabilities.
Image Source: Getty Images.
For years, the business looked promising, growing deposits significantly and lending rapidly. In September 2021, Goldman bought his GreenSky for $2.24 billion when the technology’s valuation was near a record high.
Consumer-facing business revenues tripled from 2020 to 2022, but costs also fell from $630 million in 2020 to about $1.26 billion in the first nine months of 2022. million dollars. Build an allowance for bad debts. In 2022, as credit began to normalize, Goldman’s credit loss on his card fell below the industry as a whole and higher than its peers.
During the first nine months of 2020-2022, Goldman’s consumer banking business reported losses of more than $3 billion. Some of Goldman’s biggest investors weren’t too fond of the idea of a consumer-facing business, and in the third quarter of 2022, Goldman’s CEO David Solomon said he expects the bank to significantly expand its business. announced that it would scale back and focus on existing customers.
what went wrong
On Goldman’s fourth-quarter earnings call, an analyst asked Solomon specifically what went wrong with the consumer banking push. Solomon replied.
This is a common mistake in banks, especially in consumer lending. Banks growing too fast could mean they aren’t paying enough attention to their underwriting activities. Following rapid growth, bad debt losses have also increased rapidly. actually, wall street journal recently reported that the Federal Reserve is investigating Goldman to see if it has good controls in place as it grows its consumer-facing business.
But Solomon also attributes the disappointing consumer results to a tougher regulatory environment in recent years that has prevented banks from scaling as much as they would like.
One of them is the current Expected Credit Loss (CECL) accounting method introduced in early 2020, which requires banks to book lifetime losses on loans as soon as they reach the balance sheet. This tends to lead to increased upfront credit supply, especially on the consumer lending side.
“I think at the beginning of 2022 it became clear that we were going too far. [which] It was affecting our execution. I think there are probably places out there that don’t have all the talent needed to perform the way we wanted them to,” Solomon added.
restore trust
I think banks should be given the leeway to try new things to improve their bottom line and earn a higher reputation in the market. I also think it’s good that Solomon looked at the results, listened to what investors had to say, and decided to change course instead of trying to push forward with a strategy that clearly wasn’t working.
But I think this puts a strain on banks. Not only have significant resources been invested in consumer banking over the past six years or so, but now there are potential regulatory issues and management may lose credibility.
Goldman Sachs is still Goldman Sachs, with sales and trading operations with some of the world’s leading investment banks, but now management has set the bar much higher for moving forward. We need to offer new strategies to win back investors and achieve higher valuations.
Bram Berkowitz has no positions in any of the mentioned stocks. The Motley Fool invests in and recommends Apple and Goldman Sachs Group. The Motley Fool recommends the following options: Apple’s March 2023 $120 Long Call and Apple’s March 2023 $130 Short Call. The Motley Fool’s U.S. headquarters has a disclosure policy.
