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

on Sep12
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Goldman's Apple Card faces mounting credit losses

The weakest American borrowers are starting to miss payments and default on their loans, and that is showing up at a 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 hit 2.93% in the second quarter. That’s the worst among big U.S. card issuers and “well above subprime lenders,” according to a Sept. 6 note from JPMorgan.

The profile of Goldman’s card customers actually resembles that of issuers known for their subprime offerings. More than a quarter of Goldman’s card loans have gone to customers with FICO scores below 660, according to filings. That could expose the bank to higher losses if the economy experiences a downturn, as is expected by many forecasters.

“People are losing their jobs and you had inflation at 40-year highs; that will impact the subprime cohort more because they are living paycheck to paycheck,” Michael Taiano, a senior director at Fitch Ratings, said in an interview. “With Goldman the question will be, were they growing too fast into a late-cycle period?”

The dynamic comes at a sensitive time for CEO David Solomon. Under pressure to improve the bank’s stock price, Goldman’s money-losing consumer operations have drawn headlines and the ire of some investors and insiders. The investment bank began its foray into consumer finance in 2016 to diversify from its traditional strengths of Wall Street trading and advisory activities.

But the journey has been a bumpy one, marked by leadership turnover and staff departures, missed product deadlines, confusion over branding, a regulatory probe and mounting losses.

Goldman Sachs CEO David Solomon performs at Schimanski night club in Brooklyn, New York.

Trevor Hunnicutt | Reuters

Solomon will likely face questions from directors about the consumer business at a board meeting later this week, according to people with knowledge of the matter. There is internal dissent about who Solomon has picked to lead key businesses, and insiders hope he puts stronger managers in place, the people said. Some feel as though Solomon, who moonlights as a DJ on the international festival circuit, has been too extroverted, putting his own personal brand ahead of the bank’s, the people said.

A viral hit

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

But rising losses threaten to mar that picture. Lenders deem bad loans “charge-offs” after a customer misses payments for six months; Goldman’s 2.93% net charge-off rate is double the 1.47% rate at JPMorgan’s card business and higher than Bank of America’s 1.60%, despite being a fraction of those issuers’ size.

Goldman’s losses are also higher than that of Capital One, the largest subprime player among big banks, which had a 2.26% charge-off rate.

“If there’s one thing Goldman is supposed to be good at, its risk management,” said Jason Mikula, a former Goldman employee who now consults for the industry.  “So how do they have charge-off rates comparable to a subprime portfolio?”

Apple Card

Spitting distance

Mounting losses

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