Market conditions are harsh, and the volatility across assets has many companies rethinking their business strategy. Companies are becoming more critical of unprofitable parts of their business. Goldman Sachs (GS +2.01%) is the latest example.
In its third-quarter earnings call, Goldman Sachs announced it would be scaling back its consumer products. These products would drive Goldman's next growth phase -- but became a money pit for the firm instead. For Goldman Sachs, now is the time to reorganize and focus on its more profitable products. Here's what it means for the stock.
NYSE: GS
Key Data Points
Goldman's ambitious consumer banking plans
Traditionally, Goldman Sachs has relied on investment banking, helping companies raise money through initial public offerings (IPOs), debt offerings, or advising companies on mergers and acquisitions (M&A).
Investment banking is a great business when the market conditions are right -- like last year when hot IPO and M&A activity drove record earnings for the bank. This year, due to market volatility, companies are hesitant about going public and making deals.
Goldman Sachs understands the cyclical nature of investment banking and has worked to diversify its revenue streams through other businesses. One of these businesses was its consumer-facing bank, known as Marcus.
The company has spent years -- and billions of dollars -- building up this business. It first acquired General Electric Capital Bank's online deposit platform in 2016. Other major moves include adding General Motors' credit card portfolio for $2.5 billion in 2020 and the buy now, pay later (BNPL) company GreenSky for $2.2 billion last year.
Marcus racked up losses for the investment bank
Goldman saw its consumer banking business as a path to bigger profits but faced mounting losses on its journey. In June, Bloomberg reported that the consumer banking unit lost $4 billion since its inception and was on pace to lose another $1.2 billion in 2022.
Lately, Goldman's biggest struggle has been the cost of acquiring new customers for its platform as interest rates go up. The bank plans to reframe Marcus from a banking-for-all consumer product to a banking product targeting more affluent customers it already has relationships with through its wealth management business. According to CEO David Solomon, this shift should "meaningfully lower" customer acquisition costs while letting the bank play to its strengths.
Goldman Sachs will reorganize its business from four divisions down to three and will move Marcus into its asset and wealth management division -- aligning it with its plan to appeal to high-net-worth individuals.
Meanwhile, its other businesses, like GreenSky, Apple, and GM credit cards, and its digital corporate cash management business will fall under a new division called Platform Solutions. This is the investment bank's third major reorganization since Solomon took over as CEO in 2018.
Image source: Getty Images.
It wasn't all for nothing
While its consumer banking business hasn't taken off the way it hoped, there is a silver lining -- Goldman has a stronger deposit base than ever before. The bank has over 15 million customers, $110 billion in deposits, and $19 billion in card and loan balances.
According to Solomon, it "was clear we needed deposits" following the 2008 financial crisis and that they "are hugely valuable." These deposits give Goldman a more stable funding source than its pre-2008 business and can help it better ride out difficult investment banking conditions.
CEO David Solomon: the world faces "significant headwinds"
The bank is cutting its less profitable businesses and looking to onboard its existing wealthy clients -- which should help it cut down on expenses and improve profitability. However, investment banking is still struggling this year as IPO and M&A deals have slowed to a crawl. Goldman's net revenue has dropped 21% from last year, while its diluted earnings per share are down 45% through the year's first nine months.
Solomon told analysts that the world faces "significant headwinds" due to high inflation, rising interest rates, and geopolitical uncertainty. This could explain why the bank is tightening its belt and focusing more on what works. While I think this is the best strategic move for Goldman Sachs, I'll be avoiding the stock for the time being until those headwinds die down and economic conditions improve.
