Goldman Sachs answers investor demands on consumer bank

By Abhishek Manikandan and Lauren Tara LaCapra
Updated
The ticker symbol and logo for Goldman Sachs is displayed on a screen on the floor at the NYSE in New York

By Abhishek Manikandan and Lauren Tara LaCapra

(Reuters) - Goldman Sachs Group Inc <GS.N> unveiled details about its consumer business for the first time on Tuesday and will start disclosing its results regularly as part of a broader reporting-line shuffle, responding to long-standing requests for more transparency from analysts and investors. The changes are part of Chief Executive Officer David Solomon's efforts to get Goldman in line with rivals like JPMorgan Chase & Co <JPM.N> and Citigroup <C.N> that have bigger consumer businesses and share more information with investors.

Goldman's consumer business, which includes Marcus and the bank's credit card, generated $822 million in revenue over the four quarters ended Sept. 30, representing 2.4% of the bank's total revenue during the period.

Since Goldman launched the online retail bank in 2016, analysts have repeatedly asked for more details about its credit quality and growth on earnings calls.

Some have also sounded alarms about potential risks, worried that Goldman might be expanding into consumer lending ahead of a recession, with little experience in the business.

Executives have typically said they are duly cautious about credit quality, and that the consumer business was not yet big enough to warrant routine disclosures.

Goldman set aside $302 million for potential consumer credit losses in the first nine months of 2019, compared with $338 million for 2018 and $123 million in 2017, according to its 8-K filing with the U.S. Securities and Exchange Commission.

As the business grows, the Wall Street bank will naturally have to boost credit provisions. Goldman reported $5.5 billion worth of consumer loans as of Sept. 30, up 22% from year-end.

Goldman unveiled Marcus as part of a broader strategy that initially planned to generate $5 billion in fresh annual revenue by entering new businesses and growing existing ones.

TRADING WOES

The bank had little choice but to change, due to huge declines in trading, which was once its main profit engine. Goldman has since backed off the revenue goal, intending to replace it with other metrics at its investor day later this month, Reuters reported in November. (https://reut.rs/32y3xdi)

Its new consumer reporting line will include details about not only Marcus, but also wealth management — another area the bank is trying to expand. Goldman already has a sizable private bank that caters to the ultra-rich, but wants to start offering more services to individuals with fewer assets as well. (https://bit.ly/39IGu45)

Over the four quarters ended Sept. 30, Goldman generated $5.1 billion in revenue from that segment, $822 million, or 16%, of which came from the consumer portion. The broader segment generated $540 million in pretax profit, representing less than 5% of total earnings.

The other major change Goldman announced in a filing, which was sent out late on Monday but was made public on Tuesday, is its decision to get rid of a reporting-line segment called "Investing & Lending," which detailed revenue from those activities across various businesses.

Goldman created that segment as part of another reporting-line shuffle in 2009. It aimed to clarify what the bank earned from activities with its own balance sheet, after a sweeping financial-regulatory law banned proprietary trading.

But investors and analysts have complained that the reporting line was a volatile black-box, and discounted its importance to Goldman's overall profitability. Revenue from that line will now be distributed across different segments. (http://reut.rs/10ToRoR)

NEW UNITS

Goldman will now have four reporting lines: Investment Banking, Global Markets, Asset Management and Consumer & Wealth Management. Previously its results were segmented into Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. The trading business, which was previously housed in Institutional Client Services, will now be part of Global Markets.

Some analysts applauded the changes.

"The new reporting structure appears more centered around its different client segments and should help drive increased accountability in how it executes on its relatively new strategy," Barclays analyst Jason Goldberg said.

Goldman is expected to unveil the new targets and metrics at its first-ever investor day on Jan. 29. It is expected to report fourth-quarter results on Jan. 15.

The investment bank's shares were up nearly 1.2% in morning trade.

(This story corrects time period to four quarters in paragraph 3 and 12)

(Reporting by Abhishek Manikandan in Bengaluru; Writing by Anirban Sen; Editing by Saumyadeb Chakrabarty and Sriraj Kalluvila)