Retail banking: Goldman pockets UK risk
US bank enters UK retail just as BoE raises alarm on consumer credit.
The announcement that Goldman Sachs plans to enter retail banking in the UK next year coincided nicely with news that unsecured debt in the country totalled £202 billion pounds ($274 billion) in July, its highest level since 2008 and an increase of almost 10% year on year.
On September 25, the Bank of England’s (BoE) Financial Policy Committee described the UK consumer credit market as a pocket of risk. Timing is everything: should Goldman be concerned?
Goldman’s plans so far involve accepting retail deposits, not making loans. It is expected to start lending to UK consumers in due course through its Marcus brand, which was launched in the US 18 months ago. Marcus has been involved in over $1 billion-worth of loans since its inception.
The bank has announced its aim to find $5 billion in new revenues over the next three years – Marcus is very much a part of that plan. (Its 40% slump in fixed income, currency and commodities revenues in the second quarter of this year is a genuine concern.)
The UK has so far been a fertile source of revenue for its challenger banks. A May 2016 report by KPMG pointed out that the larger challenger banks were making a return on equity of 9.5%, versus the 4.6% of established players.
The smaller challengers were making triple that: 17%. Goldman will be competing head on with the challengers on savings accounts: last year, the smaller challengers were offering depositors an average 108 basis points, while the larger challengers were offering 73bp. The established big five banks offer around 36bp.
GS Bank provides a large and stable deposit base for Goldman’s US lending initiative, and deposit taking in the UK should do the same. Ring-fencing, which comes into effect in January 2019, will not apply unless Goldman racks up more than £25 billion in deposits.
In the US, Goldman has so far targeted its online lending operation on prime and super-prime customers – and it will presumably take the same approach in the UK.
The warning bells ringing at the BoE should not, therefore, be too much of a worry.
Indeed, the bank recently invested £100 million in UK consumer lender Neyber, which was set up five years ago by two Goldman alumni, so it does not seem to be too concerned by the numbers coming out of Threadneedle Street.
To succeed in this space, lenders need two things: a low cost of capital and a low cost of operations. Goldman certainly has the former. What it does not have is a lot of online consumer acquisition experience or strong consumer finance DNA. And its cost of operations might struggle to match some of its smaller online-only competitors.
However, as concerns grow over due diligence and performance at some UK online lenders, there should be plenty of room for Goldman to clean up in this sector in its usual fashion.