More Cracks Are Emerging in Goldman Sachs' Consumer Banking Division. Should Investors Be Worried?

Not long ago, Goldman Sachs' (GS -0.23%) consumer banking efforts led by its digital bank Marcus received lots of praise for its ability to quickly bring in lots of new customers and deposits.

The small but growing consumer bank was seen as a key way for the longtime investment banking powerhouse to diversify and stabilize its earnings. But in recent months as interest rates have been ascending rapidly and the economic outlook has deteriorated, the unit has started to run into problems.

Recently, media outlets reported that the consumer bank has lost about $4 billion since launching in 2016. Reports also surmised that Marcus' checking account launch might be delayed, and now even more cracks are beginning to show. Should investors be worried?

Credit card losses are higher than peers 

As part of its consumer offerings, Goldman has offered various credit card programs to customers, including the Apple card. Goldman also acquired General Motors' credit card portfolio and now offers various GM Rewards card programs. 

According to a recent research note from analysts at JPMorgan Chase, Goldman's credit card net charge-off rate, which looks at debt unlikely to be collected as a percentage of total loans, ticked up to 2.93% in the second quarter -- the highest among its peers.

Source: Financial statements and regulatory filings

One thing to keep in mind here is that Goldman is doing a lot of subprime credit card lending. According to a recent regulatory filing, 28% of Goldman's credit card loans at the end of the second quarter were made to borrowers with FICO scores below 660. Goldman also saw loans that were past due more than double between the end of 2021 and the end of the second quarter of this year.

Additionally, credit card balances this year have risen by about $2 billion as a result of the company's acquisition of GM's credit card portfolio. Goldman noted that it has taken a $185 million provision against the GM portfolio, which, if it has $2 billion in balances outstanding, represents a roughly 9.25% allowance for loan losses, and that is very high.

A lot of Goldman's peers, like JPMorgan and American Express, aren't lending to this many subprime borrowers, so their loss rates should be lower by design. I would compare Goldman's credit card trends to the likes of Wells Fargo, Capital One, and Synchrony. 

Wells Fargo has only recently begun to ramp up credit card lending, but of its $41.2 billion of credit card loans, roughly 27% had a FICO score below 680. About 23% of Synchrony's portfolio is nonprime, and roughly 30% of Capital One's credit card loans in the U.S. have been issued to borrowers with FICO scores below 660.

Should investors be concerned?

I certainly don't feel great about seeing Goldman's charge-off rate not only growing but also above all of its peers, including the ones that are heavier in subprime lending. But Goldman has been ramping up its consumer banking business quickly, and when growth comes at the expense of credit quality, it always ends badly.

But right now I am not overly concerned about Goldman specifically. Wells Fargo is an even newer player in credit cards than Goldman, so its loan book may not be fully mature yet. Synchrony is showing a slightly better but similar loss rate with an even smaller amount of its borrowers in the subprime category, and Capital One has been in this business for quite a while, so I would expect them to be better on assessing credit risk.

I am more concerned about the subprime market, in general. This is the area showing more cracks right now and the cohort of consumers that is likely the most impacted by the end of stimulus benefits and things like enhanced unemployment benefits. If the economy tips into a more severe recession, this segment could get hit hard. So yes, I am keeping an eye on Goldman -- but also on all credit card lenders in the subprime business.