Goldman Sachs An ad for Marcus.
- Concerns have been raised about the number of subprime customers Goldman Sachs' online lending business Marcus has lent to.
- UBS says concerns are "overblown" and Marcus is the right long-term move for Goldman.
- UBS also sees a rebound for Goldman's FICC business which could provide a short-term boost to the stock price.
UBS thinks fears about Goldman Sachs' lending business Marcus are overdone.
The Swiss investment bank said in a note sent to clients this week that Goldman has become a "battleground stock", with bulls and bears largely arguing over the health of Goldman's new online consumer lending business Marcus.
"We believe concerns over Marcus are overblown," analyst Brennan Hawken and team wrote.
Goldman launched high-interest online savings accounts in the US in early 2016, letting people save from as little as $1. It followed that up with a digital lending operation under the brand Marcus in October 2016. Marcus crossed $2 billion in loans last November.
While the loan book is still relatively small within Goldman's overall business, analysts have started to voice concerns about the fact that at least 10% of Goldman's loans are to subprime customers. This has led to concerns that the bank could see higher than forecast losses on its loans, given that most economists believe we are coming to the end of the current credit cycle in the US.
UBS writes: "While we certainly can understand the concerns about where we are in the credit cycle, it has become quite clear that GS needs to make a strategic shift, as earnings growth has been weak and volatile. Therefore, a shift to banking-oriented earnings does make sense, and if GS waited for the perfect point in the cycle to launch a platform, the opportunity to grow may not be as robust."
While there may be short-term losses, Hawken and his team believe there are "long-term strategic merits of
building up this business as a means to stabilize and diversify GS's earnings power."
What's more, when the credit cycle does tighten UBS believes Goldman can "capitalize on its superior funding model to capture attractive share as competitors are forced to pull back."
UBS also expects Goldman to see a recovery in its fixed income, currency, and commodities business, which could provide a short-term bump to the stock price. But UBS remains neutral on the stock as "we are still struggling to get more constructive longer term."
