Goldman Sachs projects hefty returns in its personal loan business

Goldman Sachs is never short on ambition. In its latest gambit, the investment banking giant is seeking to siphon off a substantial chunk of the exceptional profits being earned by the U.S. credit card industry.

During a conference call with analysts on Tuesday, Goldman Chief Financial Officer Martin Chavez provided new financial projections for Marcus, the New York-based company’s fledgling consumer lending platform.

The digital lending operation, launched in October 2015, is expected to earn a return on equity in the high teens, Chavez said.

That level of profitability would easily surpass the 8.7% return on average common shareholders’ equity that the Wall Street company reported for the entire firm Tuesday in its second-quarter earnings report.

The projections for Marcus would also be roughly in line with the earnings profile of large, well-established credit card companies. At the end of the first quarter, Capital One Bank reported a return on equity of 11.42%, while Discover Bank’s was 20.65%.

During an interview last month on CNBC, Goldman Sachs CEO Lloyd Blankfein said that the volume of loans originated on the Marcus platform has surpassed $1 billion. He predicted that the company will hit the $2 billion mark by the end of 2017.

By comparison, $1.018 trillion in revolving consumer credit was outstanding in the United States as of May 2017, according to the Federal Reserve.

Blankfein said that most U.S. credit card customers get charged interest rates of 17%-19%, and that Goldman sees an opportunity to refinance that debt at rates that are 3-5 percentage points lower.

“There’s plenty of room for us to make a great return,” he said.

Marcus offers personal loans of $3,000 to $35,000; they carry annual percentage rates of 6.99% to 23.99%. The product competes against not only card-issuing banks, but also a slew of online lenders, including LendingClub, Prosper Marketplace and Social Finance, which specialize in refinancing credit card debt.

One key advantage that Goldman has over the other online lenders is a supply of low-cost deposit funding. As of March 31, the company’s bank had $110 billion in deposits. Goldman has been luring depositors to its online bank by paying some of the highest rates in the industry.

Chavez said Tuesday that Goldman is also using its fast-growing deposit base to fund loans to its private wealth management clients.