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 A creative strategy taking shape inside the bank calls for it to
partner with small brokerages and wealth management firms to lend
money to their clients, many of whom have far less wealth than
what's in the typical Goldman private bank account.
The idea is for Goldman to reach a big set of borrowers, in the U.S.
and possibly abroad, without having to acquire them through a merger
or build relationships one by one, people familiar with the
initiative said. The plan is still in very early stages and may not
be active until next year, the people added.
The strategy is unusual not just for Goldman, but across Wall
Street, since most banks simply lend to their own customers. It also
carries more risk because it may be harder to vet borrowers or the
assets they post as collateral.
The bank is looking to earn money from a broader borrower base as
profits from traditional businesses like bond trading have slowed
down. In April, Goldman completed a deal to buy $17 billion worth of
online deposits from GE Capital Bank to expand its reach on Main
Street.
"Growing the lending business to a broader client base helps to
offset some of the pain that has been happening on the trading
side," said Steven Chubak, an analyst with Nomura.
Bankers involved with the Goldman plan say they are not upending its
business model of catering to the uber wealthy. The typical client
in Goldman's U.S. private wealth unit has an average account size of
around $50 million. Those customers are where Goldman remains
primarily focused, said the bankers, who were not authorized to
speak publicly.
Lending to wealthy individuals and corporate clients represented
less than half of the balance sheet within Goldman's investing and
lending business segment at the end of 2010, but that percentage is
now more than 75 percent.
The new strategy will target clientele who are lower on the economic
totem pole. Sources would not detail a wealth threshold for
borrowers Goldman will reach through third parties, but said they
are likely to be "mass affluent" – which is broadly defined as those
with less than $1 million in investable assets.
They declined to give details on how its partnerships with
brokerages will work in terms of fees, underwriting or collateral.
Goldman already has relationships with outside investment managers
where it sells its own mutual funds, structured notes and
alternative investments. Loans would be an additional offering,
people involved in the strategy said.
A Goldman spokesman declined to comment.
HUNT FOR PROFITS
Goldman reported a 6.4 percent annualized return-on-equity in the
first quarter, the lowest level since the second quarter of 2012
when adjusting for one-time items. In its heyday, Goldman produced
returns above 30 percent. The measurement is important, because it
shows how well the bank uses shareholder capital to produce profits.
Goldman's return has slumped because businesses like trading are
struggling to generate the type of earnings they once did. That's
partly because of weak markets, but also because financial
regulations introduced since the financial crisis limit the
businesses banks can engage in, and require them to hold much more
capital.
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These new rules are pushing Goldman and its closest rival, Morgan
Stanley <MS.N> to move further into traditional lending. It is still
a relatively new concept for the two, which became bank holding
companies at the height of the financial crisis in 2008, and have
only focused on lending in recent years.
In addition to the third-party initiative, Goldman also wants to
wants to do more "margin lending," which allows clients to borrow
against a percentage of their assets, and do more lending abroad.
Later this year, it plans to offer consumer loans online through a
new effort led by former Discover Financial Services' <DFS.N>
executive Harit Talwar.
Goldman's moves mimic Morgan Stanley's in that both are trying to
lend more, mostly through the wealth channel, and that many of the
loans are backed by investment portfolios of stocks and bonds.
But their strategies differ in that Morgan Stanley is lending to its
own clients, after having bought the Smith Barney brokerage business
from Citigroup Inc <C.N> years ago in a transformational deal.
Goldman does not currently have ambitions to acquire any kind of
large brokerage or depository bank, sources said, and hence it is
pursuing loan growth through third-parties.
Goldman has already tripled loans to its own private wealth
management and corporate clients over the last three years,
according to regulatory filings. It had $45 billion in loans
altogether at the end of 2015.
That loan book soaked about half of the deposits it had at the end
of 2015. The GE deal added another $16 billion in deposits, likely
depressing that ratio. By comparison, Morgan Stanley lends out
around 55 percent of its deposits and has said publicly it was
targeting to grow that percentage to 70 percent.
There is danger in being too aggressive in expanding a loan book
when there is tough competition for good borrowers, as there is
today. Goldman's strategy may carry additional risk: because
borrowers are not in-house, the bank may have to rely on other firms
to vet credit histories and assess asset values.
It is unclear how Goldman plans to manage those risks.
(Reporting by Olivia Oran in New York; Editing by Lauren Tara
LaCapra and Edward Tobin)
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