The legendary investment bank's return to its roots could bring good tidings for this budding fintech stock.
April 29, 2023
Goldman Sachs (NYSE: GS) released mixed first-quarter 2023 results last week, delivering stronger-than-expected earnings ($9.87 per share, adjusted, vs. estimates for $8.10 per share) despite lower-than-anticipated net revenue ($12.22B vs. estimates for $12.79 billion).
Perhaps most eyebrow-raising was the fact that partly to blame for Goldman’s top-line shortfall was a whopping $470 million hit related to the partial sale of its Marcus loans portfolio — specifically about $1 billion in loans sold in total, or roughly a quarter of its overall personal loan balances — as well as the transfer of the remainder of its portfolio to “held for sale” status. Goldman also confirmed its exploring the sale of its consumer-focused GreenSky home improvement loans business, just over one year after closing on its $2.24 billion acquisition of the fintech company.
To be fair, that $470 million hit was nearly offset by a $440 million reserve reduction in provision for credit losses on the same tranche of loans. And Goldman’s continued move away from consumer banking should come as little surprise; though the storied investment bank has worked for eight years trying to expand beyond its flagship offerings to corporations and the wealthy, earlier this year management revealed it had accumulated a whopping $3 billion in losses from its consumer banking initiatives since 2020. That revelation prompted bank regulators to explore whether Goldman’s consumer business had sufficient safeguards in place as it continued to scale.
This raises the question: If Goldman Sachs — a long tenured fixture in the banking world — has had trouble successfully making money in retail banking and lending, does that portend trouble for others — in particular smaller fintech players — trying to disrupt the same space?
Before I elaborate, I’d be remiss if I didn’t admit that was a leading question posed with up-and-coming fintech (and national bank charter holder) SoFi Technologies (NASDAQ: SOFI) in mind. SoFi, for its part, has enjoyed explosive growth in both deposits (up 46% sequentially last quarter to $7.3 billion, and up 7X in 2022 since receiving its National Bank Charter early last year) and consumer lending (where adjusted net revenue and contribution profit climbed 45% and 66%, respectively, in 2022). Importantly, that incredible deposit growth helps diversify SoFi’s sources of funding, lowers its cost of capital, improves operating leverage and, as a result, helps drive even higher lending growth by enabling SoFi to offer superior rates and fee structures to members.
Of course, SoFi hasn’t technically turned profitable based on generally accepted accounting principles (GAAP)…yet: Though its SoFi Bank entity did achieve GAAP net income of $30 million in Q4 2023, SoFi’s consolidated businesses incurred a GAAP net loss of just over $320 million last fiscal year — the collective results of its three core segments in Lending (student loans, personal loans, and home loans), the Technology Platform (encompassing its Galileo and Technisys banking-as-a-service platforms), and Financial Services (checking, savings, investment brokerage services). That said, SoFi management did tell investors back in January that the company expects to achieve GAAP profitablity on a consolidated basis by the end of 2023.
So, rewinding back to the first half of this article: With Goldman effectively giving up on the prospect of actually making money in retail banking, how and why might it be reasonable to expect SoFi to still be able to achieve such a feat?
For one, unlike SoFi — which has blossomed from its roots as a student loan refinancer and has a mission of helping consumers “get their money right” — Goldman wasn’t built with retail banking in mind. The company has thrived for decades on the back of its bread-and-butter investment banking and trading businesses, and consumer banking has long felt like little more than an afterthought there.
Moreover, as interest rates climbed and inflation has soared, the consequential slowdown in deal-making activity only served to validate and accelerate Goldman executives’ decision to wind down those troublesome consumer-centric businesses and refocus on its roots. Even then, however, during Goldman’s quarterly conference call with analysts last week, CEO David Solomon insisted that they “believe GreenSky is a good business and is performing well [but] given our current strategic priorities, however, we may not be the best long-term holder of this business.”
Solomon added that, similar to SoFi — whose personal loans business caters to high-income borrowers with high credit scores — GreenSky saw “first-quarter originations in [its] core home improvement loans up over 25% year-over-year and a weighted FICO on total originations of over 780.” If anything, GreenSky’s relative strength in this difficult market should portend similar strength in SoFi’s lending unit. (And wouldn’t it be something, by the way, if SoFi emerged as a potential suitor in the GreenSky sales process?)
Interestingly enough, even as Goldman winds down its own branded retail banking offerings, it simultaneously deepened its partnership with Apple by launching a savings account for Apple Card users that yields 4.15% annually — a rate SoFi effectively one-upped to 4.2% a few days ago for its own checking and savings clients with direct deposit. Ironically, with echoes of the aforementioned benefits of SoFi’s rapid deposits growth, Solomon lauded Goldman Sachs’ “exciting” move as “introduc[ing] another source of deposit funding for the firm.”
In any case, we can look forward to the latest perspective on SoFi’s progress when it releases its own first-quarter 2023 report on Monday (May 1) before the market opens. But if Goldman Sach’s comments on its remaining consumer banking offerings are any indication, I suspect SoFi shareholders will be more than pleased with its results.
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