Toward the end of last year and at the start of this year, the investment banking powerhouse Goldman Sachs (GS +0.11%) indicated that it was planning to significantly scale back its consumer banking ambitions, which it formally began six years ago.
That's after Goldman reported more than $3 billion of losses in the unit between 2020 and 2022 and as credit quality in its consumer lending portfolio began to deteriorate.
I think many assumed this step back would soon lead to a quick exit or wind-down of Goldman's consumer banking operations. However, at Goldman's recent investor day, CEO David Solomon sent somewhat mixed messages to the market. The big question for Solomon is whether Goldman is in or out of consumer banking.
Goldman plans to improve the consumer business
Goldman's consumer banking business includes its digital deposit-gathering platform Marcus and the associated lending products it used to offer through the platform, its credit card partnerships with GM and Apple, and its point-of-sale lending capabilities made possible through Goldman's $2.2 billion acquisition of GreenSky in 2021.
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Toward the end of last year, Goldman reorganized its business units, putting asset and wealth management (AWM) back together and moving the consumer banking operations into its platform solutions business. Goldman also said it would end its Marcus lending business, focus on existing Marcus customers, and place greater focus on AWM to achieve a rerating and higher multiple for the stock.
I think many took all of these announcements as a clear sign that Goldman is planning to outright get out of consumer banking. But the end may be further away than some had imagined. At investor day, Stephanie Cohen, Goldman's global head of platform solutions, said that the bank is considering "strategic alternatives" for its consumer platforms. But she also spent a good amount of time discussing new capabilities in Goldman's card partnerships and the improvement of the GreenSky business.
Cohen said Goldman is currently working with Apple to launch a savings account for customers who have the Apple card, as well as on enhanced capabilities of the GM card. However, Solomon said later in the call that Goldman has no plans to add additional card partnerships. Then Cohen touted the capabilities of the GreenSky acquisition and talked about how the growth had accelerated once it was integrated into Goldman. Cohen added that it will probably take another year before revenue net of provision for credit losses is positive, and that breakeven pre-tax profitability isn't expected until 2025.
It's not totally clear
The discussion of "strategic alternatives" for the consumer business, which one would think meant some kind of sale or exit, and the discussion of breakeven profitability resulted in many questions from analysts trying to understand the ultimate end game for the consumer business.
Solomon said that the bank still sees value in the technology it's built and the partnerships it has formed. Now, the goal is to make sure the performance of its consumer businesses does not hurt the company financially.
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He said: "So I want to be clear. I think we've been clear. We will make progress on that. We're not going to let the drag that existed from those platforms continue. I think the statement I made this morning was a very clear statement."
But despite the number of times Solomon said the word "clear," he would even acknowledge later in the call that there was no clear end game for the consumer business at this time.
"I know that everybody wants a very straightforward, simple answer as to exactly what that means and what that could look like but there are lots of different ways that we could do things strategically that could enhance the operation or something might not ultimately fit strategically," he said.
There may not be a great solution right now
Given the fact that many of Goldman's large investors were supposedly never big fans of the consumer business and its struggles, Solomon may actually want to exit the business sooner than later. However, he simply may not be able to.
Loan losses are likely going to rise as credit quality normalizes, so there may not be a lot of bidders for a business like GreenSky right now. Considering the price and time when Goldman bought GreenSky, it would likely have to sell the business at a loss under current market conditions. Furthermore, Goldman's credit card business is currently being investigated by the Consumer Financial Protection Bureau (CFPB) and other government agencies.
Goldman could still just wind both businesses down and take the losses, but maybe Solomon does see better value in pressing on until market conditions improve.
I think Solomon has been clear that the bank no longer plans to grow consumer banking or try to use it to achieve a new valuation, but the more surprising part is the time it could take to exit these businesses. The longer the consumer business lingers, the harder it will be for the market to move on.
