Goldman Sachs (NYSE:GS) is well-known as a leading investment bank — but that’s not all this incredible institution does, and it isn’t where its largest growth potential lies. In this Fool Live video clip, recorded on June 23, Fool.com contributor Matt Frankel, CFP, discusses one big part of Goldman Sachs’ business that too many investors are overlooking.
Matt Frankel: So, Goldman Sachs. Everybody knows Goldman Sachs. Here’s just a rundown. I’m not going to read this word for word, but everyone knows Goldman Sachs as the smartest guys on Wall Street. They are well-known for being their investment bank. Before the financial crisis, they were only an investment bank. It wasn’t until the 2008-2009 financial crisis, as part of the big bailout package, they became a bank holding company. So they were just an investment bank. They have the No. 1 share in M&A and equity offerings, They are the No. 1 IPO underwriter, things like that. They have a massive trading operation. Goldman Sachs has bond traders, stock trading — that’s the largest component of their revenue, and this is a big company. Just to give you an idea — and this is not the biggest part of their business — they manage over $2 trillion of client money.
The business has been really strong lately. Goldman thrives in times of big volatility. You could really argue that the past couple of quarters have been very, very volatile in the stock market. I know I’ve been kept on the edge of my seat watching some of this. I’m one of the ones who writes those 10% Market Movers articles, and it’s been the busiest time for me ever. Goldman thrives in volatility, and a lot of the reason is that trading is much more active in volatile times. Their first-quarter revenue was the highest ever — investment banking had a lot to do with it. A lot of equity offerings. They were the underwriter on hundreds and hundreds of SPACs that came onto the market earlier this year.
Their profitability has been incredible. Banks are usually happy with about a 10% return on equity. Theirs was 31% in the first quarter. That’s incredible for a bank. That’s their highest since 2009, which like I said, that was a very volatile time, so they did really well.
What everyone’s missing is Goldman Sachs’ consumer banking potential, which is a relatively small and new area of the business. You’ve probably heard of Marcus, the savings and loan platform — they do personal loans, things like that. That started about five years ago. It’s been massively successful. Their deposit base is over $50 billion, I believe. Don’t quote me on that exact number.
And then they recently got into credit card lending, and I can’t think of a bigger way to really dive into credit card lending than becoming Apple‘s (NASDAQ:AAPL) partner. That was their first credit card venture. That’s pretty amazing that that’s their first. They recently took over GM‘s (NYSE:GM) credit card business as the card issuer. It’s growing pretty fast, like you see right there, 32% year over year. It’s still about 2% of the bank’s total revenue. Look at that last bullet right there, comparing it to Bank of America (NYSE:BAC). Goldman Sachs’ consumer banking revenue was just a tiny fraction of what some of these big banks are generating.
Now, Goldman Sachs is not going to be one of the big four consumer banks overnight. They’re not going to be JPMorgan Chase (NYSE:JPM) tomorrow in terms of consumer banking, or in 2022 or whatever, but they have massive long-term potential. I think one thing that everybody’s missing is that within the next decade or so, Goldman could be in that big bank conversation.
Here’s one thing I’ll leave you with here. There is no such thing in the banking industry as a brand name as recognizable as Goldman Sachs and the cost structure of an online bank. Goldman doesn’t have any branch networks to pay for, or things like that. They have the same cost benefits of a SoFi (NASDAQ:SOFI), but with the brand name that’s more recognizable in many ways than all the big banks like Bank of America, JPMorgan Chase, Citigroup (NYSE:C). So that combination just doesn’t exist anywhere. I think it’s a big competitive advantage the market’s overlooking. They have big ambitions. They’ve mentioned things like mortgages, checking accounts. They’ve already launched a robo-advisory service for consumers. They have big ambitions in consumer banking, and I think everybody is really overlooking it.
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