America’s weakest borrowers are starting to default on their loans by defaulting on their payments, and it’s showing up in a surprising place: Goldman Sachs.
Goldman’s credit card loan loss rate reached 2.93% in the second quarter while competitors like Bank of America enjoyed record or near-record repayment rates . According to JP Morgan’s Sept. 6 report, this is the worst among major U.S. card issuers and “well ahead of subprime loans.”
Goldman’s card customer profile actually resembles that of issuers known for their subprime products. More than a quarter of Goldman’s card loans are offered to customers with FICO scores below her 660, according to filings. Banks could suffer bigger losses if the economy goes into recession, as many forecasters expect.
“People are out of work, inflation is at its highest level in 40 years, and the subprime cohort is living paycheck to paycheck,” Fitch Ratings senior director Michael Taiano said in an interview. It will have a bigger impact because it is there,” he said. “The question with Goldman is whether it grew too quickly late in the cycle.”
This dynamic comes at a delicate time for CEO David Solomon. Under pressure to improve the bank’s share price, Goldman’s loss-making consumer business drew headlines and sparked the ire of some investors and insiders. We started expanding and diversified from our traditional strengths in Wall Street trading and advisory activities.
But the road has been bumpy, marked by leadership changes and staff turnover, missed product deadlines, confusion over branding, regulatory scrutiny, and rising losses.
Goldman Sachs CEO David Solomon performs at the Szymansky Night Club in Brooklyn, New York.
Trevor Honeycutt | Reuters
Mr. Solomon is likely to take questions from board members about the consumer business at a board meeting later this week, according to people familiar with the matter. There is disagreement internally over who Mr. Solomon has named to head his major businesses, the people said, and insiders want Mr. Solomon to appoint a stronger manager. Some feel that Solomon, who moonlights as his DJ at international festivals on his circuit, is too extroverted, prioritizing his personal brand over the bank, according to sources. It says.
Goldman’s credit card business, powered by Apple Card since 2019, was arguably the company’s biggest success in terms of growing retail lending scale.The division’s 14 million customers and $16 billion in loans. Goldman said it was the largest contributor to the balance, which will nearly double to $30 billion by 2024.
However, increasing losses threaten to spoil the situation. A lender considers a bad debt “written off” when a customer defaults on his six months of payments. Goldman’s 2.93% net credit loss ratio is twice his 1.47% for JP Morgan’s cards business and higher than his 1.60% for Bank of America, but these issuers’ Part of the scale.
Goldman’s losses are also larger than those of Capital One, the largest subprime player among the big banks with a 2.26% write-off rate.
“If there’s one thing Goldman is good at, it’s risk management,” said Jason Mikula, a former Goldman employee who is now an industry consultant. “So how do you get a payoff rate that matches the subprime he portfolio?”
The biggest reason is that Goldman’s clients have been with the bank on average for less than two years, according to people familiar with the matter.
Charge-off rates tend to be highest during the first few years a user has a card. Those losses should moderate as Goldman’s customer pool ages and struggling users drop out, the people said. The bank relies on a third-party data provider to compare its metrics to similar cards of the same vintage and has been pleased with its performance, the people said.
Other banks have also tended to seek debt collection more aggressively, improving their competitors’ net credit losses, the people said.
But another factor is that Goldman’s largest credit product, the Apple Card, targets a wide range of countries, including those with low credit scores. Early in the rollout, some users were stunned to find that their card was approved even though their credit history had been checked.
“Goldman has to play on a broader credit spectrum than other banks, and that’s part of the problem,” said a former executive at the New York-based bank. “There’s no direct-to-consumer sales yet. AppleCard and he’s got a GM card and you’re looking at Americana.”
After the 2008 financial crisis, undisciplined lending led most banks to serve the wealthy, while competitors such as JP Morgan and Bank of America focused on higher paying borrowers. tends to assign The big bank exception is Capital One, which has focused more on subprime offerings after acquiring HSBC’s U.S. cards business in 2011.
According to Capital One, 30% of the loans are for customers with FICO scores below 660, a band that includes near-prime and sub-prime users. That’s a distance comparable to Goldman’s percentage of his under-660 customers (28% of him as of June).
Meanwhile, JP Morgan said 12% of its loans were to users with scores below 660, and Bank of America said 3.7% of its loans were associated with FICO scores below 620.
JP Morgan analyst Vivek Geneja said last week that credit indicators for industry “new entrants” fell after unprecedented debt repayments by borrowers bolstered by the coronavirus stimulus package. “It’s weakening much more rapidly,” he said.
“Goldman’s credit card net change rate has risen sharply over the past three quarters,” he wrote. That’s happening even though the August unemployment rate remains very low at 3.7%, similar to 2019 levels.
This forced banks to set aside more reserves for potential future credit losses. Bloomberg reported in June that its consumer business is expected to lose $1.2 billion this year, according to internal estimates. Mr. Solomon said in July that the “large majority” of banks’ consumer investments this year have been linked to building lending reserves, thanks in part to new regulations that force banks to front-load loss reserves.
Management acknowledged that figure could be even worse if the recession forced them to secure more money for deteriorating loans.
The difficulty seems to confirm some of the skepticism Goldman faced when it beat established card players to win an Apple Card account in 2019.
“Credit cards are a tough business to get into,” said Tyano, director of Fitch Ratings. “Goldman is a young business and is already facing big losses. That trend will get worse.”