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Goldman Sachs Might End Up Regretting Apple Card Partnership

By Evan Niu, CFA - Aug 14, 2019 at 6:23PM

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A looming recession could force Goldman to eat some Apple Card losses.

As the issuing bank for Apple's (AAPL 2.54%) first direct foray into the credit card industry, Goldman Sachs (GS 3.14%) could get stuck holding the bag in the event of an economic downturn, which is appearing increasingly likely thanks in part to President Trump's trade war with China. Some analysts had already predicted that Apple Card could be unprofitable for the famed investment bank, even before factoring in recent macroeconomic concerns.

Investors panicked today when the yield curve inverted, historically seen as a leading indicator for recessions. The last time that the yield curve inverted was in 2007, prior to the Great Recession.

Jennifer Bailey on stage

Apple Pay chief Jennifer Bailey introduces Apple Card in March. Image source: Apple.

A recession may be on the horizon

Nomura analysts led by Bill Carcache released a research report to investors today (via CNBC), estimating that Goldman is spending approximately $350 per user in customer acquisition costs. It will then take four years just to break even with that up-front investment, according to Nomura's estimates.

If the U.S. economy gets hit with a recession before that time frame, Goldman could rack up credit losses, particularly since it is reportedly approving subprime borrowers. If net charge offs for the Apple Card reach 8%, Goldman could start to incur losses associated with the offering, according to Carache. Credit card charge offs, which represent how much of outstanding loan balances banks estimate won't be collected, hit a seven-year high of approximately 3.8% for the industry earlier this year.

Managing Apple Card on iPhone

Image source: Apple.

Goldman has been aggressively expanding into consumer lending in recent years, launching a new Marcus subsidiary back in 2016 for that purpose. In other words, the bank has very little experience in managing consumer lending portfolios, which have different risk profiles than what Goldman is used to.

"As a new entrant, Goldman Sachs does not have the historical data or experience that lenders obtain when underwriting through a credit cycle," Carcache wrote in the note. "By definition, credit businesses are cyclical, and we would expect Goldman Sachs to face its fair share of volatility in the next recession."

That Goldman had no legacy credit card business that could get cannibalized by Apple Card was one reason it became Apple's bank partner for the card (which uses Mastercard's payment network). Citigroup, which has a large existing credit card business, had reportedly passed on the opportunity over profitability concerns.

Apple's favorable terms for the card, which has no virtually no fees and offers relatively low interest rates, will limit Goldman's potential to make money. Carcache added, "The Apple Card portfolio may generate lower revenues and face higher loss content relative to the industry average."

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