Why This is the Best Time for Goldman to Buy LendingClub

November 21, 2016

In an effort to begin marketing products to main street, Wall Street stalwart Goldman Sachs (NYSE:GS) just this year purchased $16 billion in consumer deposits from General Electric (NYSE:GE) to support their peer to peer lending strategy.  Clearly they see consumer lending as an opportunity worth pursuing.  The effort is being spearheaded by Harit Talwar, a former executive of Discover Financial (NYSE:DFS), who was hired as a partner last year by Goldman to spearhead the
move into online lending, part of a broader effort to open up new sources of revenue as current sources stagnate.  The company’s trading division has been slowed by tougher regulations and volatile markets.  If the Republicans repeal Dodd-Frank and reinstate Glass-Steagall as they’ve discussed throughout the election cycle, a new set of headaches could open up for big banks.  Reinstating Glass-Steagall is one of the few things on which Republicans and Democrats both agree.  Such a move could potentially cause Goldman to have to spin off its consumer banking division, which it was forced to open as a condition of receiving bailout funds during the 2008 financial crisis.  The fledgling bank may not have enough traction to successfully navigate those waters on its own.

Goldman’s long awaited lending platform, named Marcus in honor of one of Goldman’s founding partners Marcus Goldman, has been building out since early last year.  The business will offer unsecured personal loans of up to $30k to prime borrowers looking to consolidate debt and to those frustrated with the fees and complexities of other lenders.  Marcus is offering fixed-rate loans at interest rates between 5.99% and 22.99% for terms of two to six years.  These loans will lack typical fees such as origination costs and will offer flexible payment dates.  While Goldman has zero experience serving the middle class, the small-scale startup consumer business could prepare the company to expand in the future.
Goldman is not the first big bank in the online lending space.  JP Morgan (NYSE:JPM) began a pilot program in January to lend money to its millions of small business customers via the OnDeck platform.  Chase, JP Morgan’s primary banking unit, will fund the loans which will carry Chase’s brand with OnDeck taking a behind-the-scenes role.
This is an excellent time for Goldman to pursue an online P2P lender such as LendingClub for several reasons.  LendingClub is currently trading at historically low levels because of scandals relating to its ousted founder.  While the loan volumes for the questionable loans were very minimal, the company’s share prices have not fully recovered since the scandal broke in May.  Additionally, Goldman Vice-Chairman Mark Schwartz indicated on the company’s most recent conference call that the company would consider any option or transaction or client segment that would benefit the firm’s shareholders.  And Mr. Stephen Scherr, CEO of the firm’s banking unit, specifically stated that Goldman is looking broadly at businesses where it could use its technology to provide a cheaper banking product.  Behind the scenes, Goldman has been debating how far it wants to go to expand its new retail offerings and if it eventually wants to end up with something that looks more like a full-service online bank.  The company is looking to diversify its revenue streams as its own revenues have declined by more than a third since the first half of 2010, and 2016 Q1 was the worst quarter in four years.  According to Mr. Schwartz, “We’re open-minded.”  Indeed, we do know that the company has mulled a potential takeover of LendingClub.

Goldman has grumbled that upwards of $4.6 billion of big-bank profits could be lost to digital upstarts, which it expects to capture 15% worth of the $843 billion worth of outstanding consumer loans within a few short years.  Goldman has already borrowed a few LendingClub employees, most notably Darin Cline, a former senior vice-president of operations at LendingClub.  With LendingClub expected to start turning a profit by the second or third quarter of 2017, the company’s share prices so low, and an overhang of a new version of Glass-Steagall, we see this as the ideal time for Goldman to make a move on LendingClub.
Disclosure:  We are long LC.  We do not have a financial relationship with the company.