(Fortune) - In 2019, Goldman Sachs made a splash by announcing what it called a “game-changing” credit card with Apple. Five years later, the partnership appears to have fizzled and Apple is reportedly looking for a new card partner. If this goes forward, it will stick Goldman with a large bill and see the bank eliminate one of its three business lines entirely, according to a star analyst.
For context on Goldman's potential business pivot, it's helpful go back nearly ten years ago. That's when the firm, known for advising high net worth individuals and for its storied investment bank, decided to diversify. In 2016, it launched Marcus by Goldman Sachs, an online bank that offered personal loans and savings accounts. Goldman then added credit cards to its consumer mix, including partnerships with GM and Apple.
This was the bank’s attempt to target the so-called "mass affluent." Goldman, however, wasn’t very good at going downstream and its consumer business, by August 2022, was still operating at a loss. Later that year, Goldman stepped back from consumer banking and reorganized.
Goldman's response included combining asset and wealth management into one segment, and putting investment banking, global markets and trading into a second segment. (Goldman moved Marcus Invest and Marcus Deposits, which offers users high-yield savings accounts, to the asset and wealth management business.)
The bank’s third unit, called platform solutions, housed transaction banking, Goldman’s consumer partnerships (mainly credit cards with Apple and General Motors), as well as its specialty lender GreenSky. Stephanie Cohen, one of the most powerful women at Goldman and former cohead of its consumer and wealth management business, was put in charge of platform solutions. Cohen resigned from Goldman in March while the bank that month completed the sale of Greensky to a consortium led by Sixth Street.
Goldman now appears to be exiting its card partnerships. In November, the investment bank reached an agreement with GM for them to begin a process to find a new issuer for the card, a person familiar with the situation said. GS is currently expected to transfer the GM card business to Barclays. Also in November, Apple decided to pull the plug on its credit card partnership with Goldman, according to the Wall Street Journal. JPMorgan Chase is in talks with Apple to take over the technology company’s credit-card program, the WSJ reported this week.
If JPMorgan succeeds, the sale would make strategic sense and likely lead Goldman to eliminate platform solutions, according to a flash note this week from Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities. Shutting down platform solutions would allow Goldman to fully focus on its two core businesses: GBM (global banking and markets); and AWM (asset and wealth management), Mayo said.
"To us, the reported sale in the WSJ (not confirmed) of the GS Apple cards portfolio ($17B) would be a strategic positive and help it move further ‘back to the future,’” Mayo said. The issue, however, is the exit cost which if it exceeded $1 billion would seem negative, he wrote.
Mayo noted that the sale would reflect another “black eye” for Goldman’s failed consumer strategy, especially if the disposal cost is too high. There are some positives. If the investment bank exited both Apple and GM card partnerships before year end, it could remove cards from the 2025 federal stress test, Mayo said. “On balance, GS implies that cards are approaching breakeven, meaning a sale seems TBD (to be discussed),” Mayo wrote in the note.
According to the WSJ, Apple has held talks with several possible buyers for the card business including Synchrony Financial and Capital One, while its discussions with JPMorgan began earlier this year and have advanced in recent weeks. JPMorgan, however, doesn’t want to pay the full-face value of the roughly $17 billion in outstanding balances in the Apple credit-card program, the story said.
Mayo said in the note that he’s heard exit cost estimates from about $500 million to as high as $4 billion, with the analyst saying he would be in the low end of that range with a 3% to 10% discount to face value. “In our view, a payment from GS to JPM above $1 billion could be viewed negatively if GS really believes it is moving the portfolio toward breakeven, and in context of premiums often associated with card portfolio sales,” Mayo said.
There won’t be much left in platform solutions after the GM card is sold and Goldman offloads the seller finance portfolio. Transaction banking isn’t a big line item and could be moved to GBM, Mayo said. Last week, David Solomon, Goldman CEO, said the investment bank expects to take a $400 million hit from the transition of the GM cards business and other small retail ventures.
News of Goldman’s $400 million projected loss caused shares to decline 4% but the stock has since rebounded, adding nearly 4% to $503.48 in afternoon trading Thursday. JPM’s stock has dropped some from their 52-week high of $225.48 but was up by nearly 2%, or $3.10 to $210.63.
Mayo has “overweight” ratings for both JPMorgan and Goldman. His price target for JPM is $225 while for Goldman it’s $550.
By Luisa Beltran
