Goldman’s Retail Banking Ambitions Extend To The U.K. With Plans To Offer Online Deposits

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Goldman Sachs

In what comes as the latest step by Goldman Sachs (NYSE:GS) to diversify away from its core investment banking operations into the less risky and less volatile retail banking business, the investment bank is currently working on a plan to offer online deposits in the U.K. starting next year. The bank is trying to replicate the success it has seen in the U.S., where its online deposits have raked in more than $1 billion since the offering was launched in early 2016, primarily because its online savings accounts offer one of the highest interest rates in the country.

While Goldman’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’s retail banking expansion in the U.K. is in line with our expectation that the bank will steadily grow its offerings in the traditional loans-and-deposits banking space to complement its strength in investment banking. We maintain our $230 price estimate for Goldman’s stock, which is slightly ahead of the current market price.

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See the full Trefis analysis for Goldman’s stock here

Over recent years, Goldman Sachs has focused its efforts on growing its retail banking business. One of the factors behind this move was 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. The fact that deposits are a cheap source of funds only made it an attractive option for the banks. Additionally, the foray into loans-and-deposits offerings also lowers the overall risk profile of these banks’ business model.

Goldman marked its entry into core retail banking operations in mid-2015 with its acquisition of GE Capital Bank. The bank closed the deal in April 2016, and soon began offering online-only savings accounts. These accounts amassed $1 billion in cash by the end of Q2 2017, with the figure likely to cross $2 billion by the end of this year. The success of these deposits has largely been driven by the fact that Goldman offers extremely competitive interest rates – one of the highest by a U.S. bank with no minimum deposit requirement. And the bank clearly expects to garner a similar response with its proposed online savings platform in the U.K. Notably, Goldman’s move will make it a direct competitor to Barclays, RBS, HSBC and Lloyds as it vies for a share of the U.K. deposits market.

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 expects to 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. In fact, the bank is also complements its online savings account offerings with online loans in the U.S. through its Marcus lending platform.

Goldman reported total deposits of $125.5 billion at the end of Q2 2017. A bulk of this figure comes from its private banking clients (~$62 billion), while its institutional clients maintain deposits of around $15 billion with the bank. In comparison, the online savings accounts hold around $1 billion – but represent the segment that should grow the most over coming years given Goldman’s focus. 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.

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