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Goldman Sachs faces hard sell for its consumer assets

By:
Reuters
Updated: Mar 2, 2023, 13:21 UTC

By Saeed Azhar NEW YORK (Reuters) - Goldman Sachs Group Inc is embarking on a tough sales pitch to investors for assets in its troubled consumer business, which has dragged on earnings and may lack appeal for potential buyers.

Goldman Sachs CEO David Solomon speaks during the Goldman Sachs Investor Day at Goldman Sachs Headquarters in New York

By Saeed Azhar

NEW YORK (Reuters) -Goldman Sachs Group Inc is embarking on a tough sales pitch to investors for assets in its troubled consumer business, which has dragged on earnings and may lack appeal for potential buyers.

In an unexpected move, Chief Executive Officer David Solomon said on Tuesday the bank is looking at “strategic alternatives” for the consumer business, a signal of a possible sale.

Solomon and other executives declined to give more details about the process when they were questioned by shareholders and analysts at the company’s investor day.

Goldman still holds $100 billion in deposits from its Marcus consumer banking business, $4.5 billion in personal loans, credit card partnerships with Apple Inc and General Motors Co, and merchant lending platform GreenSky for $2.2 billion.

The deposits business under Marcus remains a core business and is not under review, a source familiar with the matter told Reuters.

Analysts are assessing which of the remaining businesses are up for grabs, and what price they would fetch after underperforming for Goldman.

Solomon had championed Goldman’s foray into consumer banking since taking the reins at the Wall Street powerhouse in 2018. The consumer operations largely failed to gain traction against well-established consumer banks and lost billions of dollars due to credit provisioning.

Observers have been critical of the bank’s foray onto Main Street, which was aimed at diversifying its earnings from the more lucrative mainstays of trading and investment banking.

Goldman has not specified what options it’s pursuing, but apart from outright asset sales, the bank could also recruit more investors or agree to new partnerships, a senior investment banker, who asked not to be named, said.

Those interested could be traditional banks, or Goldman could seek partnerships with certain insurance or private equity shops, the banker said.

Goldman Sachs declined to comment beyond what it told investors on Tuesday.

Goldman shares fell almost 3.8% on Tuesday after the investor gathering. Shares ended down nearly 1% on Wednesday afternoon.

“Consumer banking businesses are incredibly hard to build,” said Chris Kotowski, an analyst at Oppenheimer & Co. “The incumbent brick-and-mortar banks that everyone thought were dinosaurs actually have a unique and hard to replicate value proposition with checking accounts, cards, a branch near home and one by the office.”

Last year, Goldman folded Marcus into its newly formed asset and wealth-management unit. It also created a Platform Solutions unit to house the credit card partnerships, the GreenSky business and transaction banking.

While Platform Solutions made up only 3% of Goldman’s revenue in 2022, it accounted for about 64% of the $2.72 billion the bank set aside last year for potential credit losses. The firm has also stopped personal loans under the Marcus brand and will probably wind down the $4.5 billion portfolio in the coming months, analysts said.

Greensky, a platform for home improvement loans, was acquired by Goldman in March 2022 for $2.24 billion. Spending by homeowners on refurbishing their properties boomed during COVID-19 pandemic lockdowns. However, the tailwinds for that market have started to abate. Lowe’s Companies Inc on Wednesday forecast annual sales below expectations amid a decline in the home improvement market, echoing similar commentary from peer Home Depot Inc last week. If Goldman sold GreenSky, it would probably get a much lower price than the $2.2 billion it paid to buy the company last year, said Ebrahim Poonawala, an analyst at Bank of America.

But taking a loss on any sale would be offset by an advantage — removing the distraction of that business, he said. Mike Mayo, an analyst at Wells Fargo, wrote in a note that the key question about Goldman’s consumer business is: “who would be willing to buy it, and at what price?” Analysts are also skeptical of Goldman’s projection that its platforms division would break even on a pre-tax basis by 2025. JPMorgan analysts are projecting a pre-tax loss of $2.4 billion in 2023, $1.7 billion in 2024 and about $800 million in 2025.”We still do not bake in pre-tax profitability in our model, which goes out to 2026,” Betsy Graseck, an analyst at Morgan Stanley, wrote in a note.

Goldman Sachs said in an email “we presented our path to reach pre-tax breakeven by 2025 at our Investor Day and we look forward to providing regular updates on our progress.”

(Additional reporting by Nupur Anand and David French in New York and Mehnaz Yasmin in Bengaluru; Editing by Lananh Nguyen and Anna Driver)

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