Here's why analyst Richard Bove thinks the return of 'the Goldman Sachs of old' is the right move

By Steve Gelsi

Odeon Capital analyst praises bank for 'shrinking back to what it knows works and where it does have leading positions'

While Goldman Sachs Group Inc. has drawn criticism from inside the bank and elsewhere for retreating from its consumer banking business, Odeon Capital banking analyst Richard Bove said the marquee investment bank may be better off without it.

By shedding its GreenSky consumer lending unit and ending its credit-card partnerships with Apple Inc. (AAPL) and General Motors Co. (GM), Goldman Sachs (GS) is returning to its roots, said Bove, who reiterated a buy rating on the stock on Thursday.

"The company was embarked on a program which I thought, and think, was correct," Bove said in a research note. "It was unable to execute, however. So, it has shrunk back to the Goldman Sachs of old. What is positive about this is that the Goldman Sachs of old is exactly the right structure for the economy that I see developing."

Goldman Sachs has an opportunity to use its leading positions as a trading firm, asset manager and investment bank to help companies and countries restructure operations to survive, acquire and use new technologies, and operate across borders, Bove said.

"Having followed Goldman for decades, it strikes me that this company is at the beginning of a new corporate era where it can utilize its best skills and where these skills are dramatically required," Bove said. "If it executes properly, then it is likely to be unusually successful."

Goldman Sachs stock was up by 0.3% on Friday, as bank stocks continued their rise from November.

Goldman Sachs stock has fought back from losses this year to trading about flat for 2023. Along with JPMorgan Chase & Co. (JPM), the bank is a component of the Dow Jones Industrial Average DJIA, which is up 8.7% in 2023.

Bove's comment came after The Wall Street Journal reported Tuesday that Apple has formally proposed an exit to its entire consumer partnership with Goldman Sachs including a savings account that launched earlier this year, as well as the four-year-old credit-card program between the two companies.

Also read: What Apple Card users need to know about Apple's potential breakup with Goldman Sachs

Citing people familiar with the companies, the WSJ also reported that Goldman told Apple earlier this year it wanted to offload the partnership.

American Express Co. (AXP) and Synchrony Financial (SYF) have been mentioned as potential buyers of the credit-card units, but the companies have not commented.

Goldman has already told employees in its platform solutions unit that it's moving toward a process to find a new issuer for its General Motors credit-card program, The Wall Street Journal reported on Nov. 8. A Goldman Sachs spokesperson declined to comment on the Apple report.

Goldman also announced the sale of its GreenSky consumer lending business for a reported sum of about $500 million, after paying $1.7 billion for the business in 2021. The buyers are a group led by Sixth Street, with credit-card company CardWorks, as well as KKR & Co. Inc. (KKR) and Bayview Asset Management.

Pacific Investment Management will buy existing GreenSky loan balances, with financing from CPP Investments.

In January, Goldman Sachs said it laid off 3,2000 people and disclosed $3 billion in losses since 2020 in its platform solutions unit, which houses its consumer banking business. The losses include higher operating expenses and cash diverted to cover potential losses on loans.

In the wake of these moves, Goldman Sachs Chief Executive David Solomon has drawn criticism from partners at the firm, including former Chief Executive Lloyd Blankfein, as reported over the summer.

Goldman made the right move to attempt to build up its consumer business with an eye on steady, recurring revenue compared to the more lumpy, cyclical business of investment banking and trading, Bove said.

But it ran into internal "hubris" that caused it to invest too much too quickly and try to enter too many businesses at once including middle-market lending, an internet bank, a personal lender, a credit-card company and asset manager, Bove said.

Goldman ignored a playbook of successful rivals in the financial technology space to sell only one product and slowly enter niche markets.

The firm never learned the lesson from Harvard University professor Clayton Christensen - start small and limit expenditures while offering disruptive innovation, Bove said.

"The companies that succeeded did the exact opposite of what Goldman attempted," Bove said.

Bove said he hopes Goldman Sachs will do a better job addressing this opportunity than it did in the past few years.

"The old world of the past 40 years is gone," Bove said. "The new world requires a variety of capabilities. Ones that Goldman Sachs has."

Apple is proposing to cease the partnership within the next 12 to 15 months, the Wall Street Journal reported, citing people familiar with the matter. The end of the collaboration between the tech and banking giants could mean changes for Apple Card users and for people with Apple's high-yield savings accounts, called Apple Savings.

-Steve Gelsi

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12-02-23 1159ET

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