Goldman Sachs (NYSE:GS) doubled up on its efforts to grab a larger share of the U.S. deposit market by increasing interest rates offered by its savings accounts from 1.05% to 1.2%. While the investment bank’s push into retail banking services seems unusual, the move makes sense in the long run given the systematic decline in revenues across the securities trading industry since the economic downturn. Additionally, Goldman’s retail deposit base also acts as a stable source of relatively low-cost funding for its business model – and a larger deposit base can help the bank weather a sharp decline in short-term funding options during adverse economic conditions.
Goldman offers its online-only deposits through its GS Bank subsidiary, and reports these deposits as part of the liquidity products managed by its asset management arm. As Goldman Sachs can leverage higher interest revenues from its Marcus online lending platform, and can also fall back on its investment research expertise to achieve higher returns on its assets under supervision compared to peers, the bank can afford to pass on more of these gains to small depositors in the form of higher savings rates.
Goldman’s move is in line with our expectation that the bank will continue to grow its offerings in the traditional loans-and-deposits banking space to complement its strength in investment banking. We maintain our $225 price estimate for Goldman’s stock, which is slightly ahead of the current market price.
Over recent years, Goldman Sachs has taken a series of steps to grow its presence in the U.S. retail banking industry. One of the factors behind this move was increasing pressure from the Federal Reserve for the bank and Morgan Stanley to rely more on deposits rather than volatile short-term funding options to fund their overall operations – especially after these once-independent investment banks had to be converted to bank holding companies in the wake of the 2008 economic downturn. At the same time, the foray into loans-and-deposits offerings should help these two banks lower the overall risk profile of their business model, given that their primary money minting units – their securities trading desks – have notoriously volatile revenues.
Goldman marked its entry into core retail banking operations in mid-2015 with its acquisition of GE Capital Bank. The bank closed the deal last April, and soon began offering online-only savings accounts to anyone with a dollar to spare. With the funding side of the loans-and-deposits model in place, Goldman then went on to launch its online-only loan platform, Marcus, last October. Goldman also took another step towards diversifying its retail banking arm by acquiring online retirement savings platform Honest Dollar last May.
Notably, by offering personal loans to replace card debt through Marcus, Goldman ensured a higher interest yield on its loan portfolio. This, in turn, could be used to offer higher interest rates on savings accounts. And that is exactly what Goldman has done with its recent decision to hike savings rates from the existing 1.05% to 1.2%. Data compiled by Bankrate.com shows that there are only three companies that offer FDIC-insured deposits at higher savings rates of 1.3% – BankPurely, BankPurely and ableBanking. Among them, only ableBanking (a division of Northeast Bank) is directly offered by a bank. By putting itself right at the top of the list of banks in terms of savings rates offered, Goldman has ensured visibility among rate-shoppers looking for the best place to park their free cash. It should be noted here that the average rate for savings accounts in the U.S. is currently 0.06%.
Goldman reported total deposits of just under $128 billion at the end of Q1 2017, of which its relatively new online savings offerings accounted for $12 billion. A bulk of Goldman’s deposit base (~$54 billion) comes from its private banking clients, while its institutional clients maintain deposits of almost $13 billion with the bank. Goldman’s latest move should quicken the pace of growth in its online deposit base over subsequent periods. The bank includes these deposits as a part of its total assets under supervision (AUS). You can see how changes to the total AUS impacts our price estimate for Goldman by modifying the chart below.