At Goldman, acquisitions seen as way to boost consumer lending

Key Points
  • The bank's relatively new venture originated $3 billion in consumer loans through the end of the first quarter, Goldman Sachs says.
  • "It's a good number and suggests that they're on track for their growth initiatives," says Devin Ryan, managing director and equity research analyst at JMP Securities.
  • Goldman is traditionally known for investment banking, wealth management and trading, but moved into consumer lending with its online bank in 2016.
The Goldman Sachs booth on the floor of the New York Stock Exchange
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Goldman Sachs could use small acquisitions to build its consumer lending business, which has just reached the $3 billion mark in new loans after more than a year in operation, the bank's chief financial officer said on Tuesday.

On Sunday, Goldman announced the acquisition of personal finance tracking app Clarity Money, which is expected to add more than 1 million additional customers to the Marcus consumer lending business. Martin Chavez, Goldman's CFO, said the bank is "open-minded" when it comes to other, similar acquisitions.

"You can expect to continue to see us making investments" built around that digital app and that digital experience," Chavez said.

"I'd expect that we're highly likely to continue with bolt-on acquisitions," he said.

Goldman has traditionally built its businesses from within, though on rare occasions, it has bought companies that already have the technology it needed. Nearly 20 years ago, for example, it paid $6 billion to acquire the Wall Street trading firm Spear Leeds & Kellogg.

More recently, it agreed to buy Genesis Capital, a firm that finances real estate developers, and it bought the online deposit operation of GE Capital Bank, including $16 billion of deposits.

In the case of Clarity Money, the bank developed a view that what they needed to build Marcus already existed "in a great form" and so acquiring it made sense, versus building a similar platform, Chavez said. The app allows users to track their spending, cut down on subscriptions, and find deals on credit cards.

Marcus has made $3 billion in new consumer loans since it started in October 2016 through the end of the first quarter, Chavez said on a conference call Tuesday. The business, named after one of the bank's founders, Marcus Goldman, offers no-fee, fixed-rate and unsecured personal loans.

"We are pleased with the progress we are making on strategic initiatives within our consumer franchise," Chavez said. "Our long-term vision for Marcus is to create the leading platform for millions of consumers to take control of their financial lives."

In September, Goldman outlined a plan to add roughly $5 billion in growth, which included increasing its lending operations. Marcus is one part of that push.

"There is demand for the product, and they're growing at a good pace," said Devin Ryan, managing director and equity research analyst at JMP Securities. "It's a good number and suggests that they're on track for those growth initiatives."

The bank beat Wall Street expectations handily in first-quarter, and investing and lending was particularly strong. Revenue from investing and lending rose 43 percent, to $2.09 billion, beating the $1.46 billion consensus analyst estimate from FactSet. On a quarterly basis, that number rose 26 percent. This segment includes GS Bank USA as well as Goldman's private investment stakes and investments in high-growth tech companies.

Some analysts on the investor call flagged the potential for credit quality and delinquency issues in the Marcus portfolio.

In Goldman's recent 10K, the firm also noted these risks. But Goldman periodically measures delinquency status, expected cash flows and other risk factors for the loans, Chavez said.

"We continue to emphasize creditworthy customers and the credit quality of our portfolio is performing in-line with expectations," Chavez said in response to a question about Marcus customers' credit-worthiness.