Goldman’s (GS) Apple Card has a surprising mortgage problem

Goldman’s (GS) Apple Card has a surprising mortgage problem


America’s weakest borrowers are starting to miss payments and default on their loans, and it shows in one surprising place: Goldman Sachs.

While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans was 2.93% in the second quarter. It is the worst among major US card issuers and “much higher than sub-prime lenders,” according to a September 6 note from JPMorgan.

In fact, Goldman’s card customer profile is similar to that of issuers known for high-risk mortgage offerings. More than a quarter of Goldman card loans went to customers with a FICO score of less than 660, according to filings. It could expose the bank to higher losses if the economy experiences a downturn, as expected by many forecasters.

“People are losing their jobs and inflation is at its highest level in 40 years; it will affect mortgage group More because they live from paycheck to paycheck,” Michael Taiano, a senior director of credit rating agency Fitch, in an interview. “With Goldman, the question would be, were they growing so fast in a late cycle period?”

This dynamic comes at a sensitive time for CEO David Solomon. Under pressure to improve the bank’s share price, Goldman’s loss-making consumer operations attracted money Addresses Some investors and insiders were outraged. The investment bank began its foray into consumer finance in 2016 to diversify from its traditional strengths into Wall Street trading and advisory activities.

But the journey has been bumpy, marked by shifting leadership and staff departures, missed product deadlines, confusion over brands, regulatory investigation, and mounting losses.

Goldman Sachs CEO David Solomon performs at the Schimanski nightclub in Brooklyn, New York.

Trevor Honeycutt | Reuters

Solomon will likely face questions from managers about the consumer business at a board meeting later this week, according to people familiar with the matter. People said there was internal opposition over who chose Solomon to lead the core business, and insiders hope he will appoint stronger managers in their place. Some feel as though Solomon, who moonlights as a DJ on the international festival circuit, has been too open-minded, putting his own brand above his bank brand, some said.

viral hit

Goldman’s credit card business, on which Apple Card has been anchored since 2019, has arguably been the company’s biggest success to date in terms of gaining retail lending scale. It’s the largest contributor to the division’s 14 million clients and $16 billion in loan balances, a number Goldman said will nearly double to $30 billion by 2024.

But mounting losses threaten to distort that picture. Lenders consider bad loans “discounts” after a customer has defaulted for six months; Goldman’s net discount rate of 2.93% is double the 1.47% rate in JPMorgan’s card business and higher than Bank of America’s 1.60% rate, despite being a small portion of the volume for these issuers.

Goldman’s losses are also higher than the losses Capital One, the largest sub-prime player among major banks, which had a discount rate of 2.26%.

“If there is one thing Goldman is supposed to be good at, it is risk management,” said Jason Mikola, a former Goldman employee who now advises the industry. “So how do they have discount rates similar to a mortgage portfolio?”

Apple Card

Spitting distance

After the 2008 financial crisis caused by disorderly lending, most banks have switched to servicing the wealthy, and competitors including JPMorgan and Bank of America tend to focus on higher-tier borrowers. The exception among the major banks was Capital One, which focuses more on mortgage offerings then Buy HSBC’s US card business in 2011.

Capital One says 30% of its loans were to clients with FICO scores below 660, the range that contains semi-premium and subprime users. That’s within walking distance of Goldman’s client share of less than 660, which was 28% as of June.

Meanwhile, JPMorgan said 12% of its loans were to users below 660, and Bank of America said 3.7% of loans were related to FICO scores below 620.

JPMorgan analyst Vivek Juneja wrote last week that after a period in which borrowers backed by pandemic stimulus checks repaid their debts like never before, “new entrants” in the industry are the ones “showing much faster weakness” in credit metrics.

“Goldman’s net credit card change ratio has risen sharply in the past three quarters,” he wrote. It happens “even though the unemployment rate remained very low at 3.7% in August, similar to 2019 levels”.

Losses escalate

This forced the bank to set aside more reserves for potential credit losses in the future. The consumer business is on track to lose $1.2 billion this year according to internal forecasts, Bloomberg mentioned in June. Solomon told analysts in July that the bank’s “vast majority” of consumer investment this year is tied to building loan reserves, thanks in part to new regulations that force banks to pre-load their loss reserves.

That number could get worse if the recession forces them to allocate more money to bad loans, executives have admitted.

The difficulties seem to confirm some of the skepticism Goldman had when it beat popular card players to win an Apple Card account in 2019. Rivals said the bank may struggle to reach profitability with the fee-free card.

“Credit cards are a hard business to break into,” said Taiano, director of credit rating agency Fitch. “Goldman is already facing bigger losses because its business book is new. But when you deal with worse unemployment, you exacerbate that trend.”



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