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Goldman debating how quickly to grow Marcus loans as credit cycle matures

Goldman Sachs Bank USA CEO Stephen Scherr said the company is debating the pace of growth for its consumer loan product, but that he expects originations in 2019 will increase relative to 2018.

Scherr, the incoming CFO of Goldman Sachs Group Inc., said some press reports have noted that market conditions were causing the company to cut consumer loan growth targets for its online product, Marcus. Scherr said the company is still considering what level of growth it should pursue in 2019.

"The debate is about the pace and size of that increase," he said during an Oct. 16 earnings conference call.

He added that the stage of the consumer cycle will impact Goldman Sachs' growth decision. When Goldman launched Marcus in 2016, Scherr said the company was aware that it could have been late in the credit cycle, but he said it has not seen any material evidence that the outlook has turned for the worse.

Still, Goldman Sachs' third-quarter results included a provision for loan losses of $174 million, and about one-third of that is related to Marcus, Scherr said. He added that the reserves are commensurate with loan growth. The company held $4 billion of Marcus personal loans on its balance sheet at quarter-end, up from $3.1 billion as of June 30.

"As we take growth up and you're in that growth cycle, you're going to take more reserves," he said. "And at some point, you'll hit a level of stability where your reserves will, in fact, level off because you've leveled off in terms of a static position in terms of loans on the book."

During the earnings call, an analyst asked if Goldman Sachs was pulling back from its 2020 target of $1 billion in revenue and $14 billion in outstanding loans from the Marcus platform. Scherr said Goldman can pursue multiple avenues to "hit that target in 2020," but that the company will not grow the business to reach the goal if the environment is unfavorable.

"We will watch it carefully but not grow against a gale wind," he said. "We don't see that wind yet, so we'll continue to grow."

He added that the company is continuing to gain traction with the platform and noted that it raised more than $2 billion in U.K. online deposits after launching the product a few weeks ago. U.S. retail deposits topped $26 billion at the end of the third quarter. Scherr said the platform has helped diversify the company's funding, which was a goal from the start.

"The opportunity for us to sort of engage in retail deposit gathering as a substitution for the predominance of wholesale funding I think holds out enormous strategic value for us," he said. "And it's now sort of playing through that way."