Goldman Sachs’ Apple split could cost $500-4 billion, analyst says

In 2019, Goldman Sachs made waves by announcing what it called a “game-changing” credit card with Apple. Five years later, the partnership appears to have fizzled out, and Apple is looking for a new card partner. If that goes ahead, it will leave Goldman with a big bill and see the bank eliminate one of its three business lines entirely, according to one star analyst.

For context of Goldman’s potential business pivot, it’s helpful to go back nearly ten years. That’s when the firm, known for advising high net worth individuals and its investment bank, decided to diversify. In 2016, he launched Marcus by Goldman Sachs, an online bank that offered personal loans and savings accounts. Goldman then added credit cards to its consumer mix, including partnerships with GM and Apple.

This was the bank’s attempt to target the so-called “mass affluent”. Goldman, however, has not been very good at going downstream, and its consumer businesses, as of August 2022, were still operating at a loss. Later that year, Goldman withdrew from consumer banking and reorganized.

Goldman’s response included combining asset and wealth management into one segment and placing investment banking, global markets and trading into a second segment. (Goldman moved Marcus Invest and Marcus Deposits, which offer users high-yield savings accounts, into the wealth and asset management business.)

The bank’s third unit, called platform solutions, housed transaction banking, Goldman’s consumer partnerships (primarily credit cards with Apple and General Motors), as well as its specialty lender GreenSky. Stephanie Cohen, one of Goldman’s most powerful women and former head of its consumer and wealth management business, has been put in charge of platform solutions. Cohen resigned from Goldman in March as the bank that month completed the sale of Greensky to a consortium led by Sixth Street.

Goldman now appears to be exiting card partnerships. In November, the investment bank reached an agreement with GM to begin a process to find a new issuer for the card, a person familiar with the situation said. GS is currently expected to transfer the GM card business to Barclays. Also in November, Apple decided to drop its credit card partnership with Goldman, according to the report Wall Street Journal. JPMorgan Chase is in talks with Apple to take over the tech company’s credit card program, the WSJ reported this week.

If JPMorgan succeeds, the sale would make strategic sense and likely lead Goldman to phase out platform solutions, according to a flash note this week from Mike Mayo, managing director and head of US large-cap bank research at Wells Fargo Securities. Closing Platform Solutions would allow Goldman to focus fully on its two core businesses: GBM (banking and global markets); and AWM (asset and wealth management), Mayo said.

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“For us, the sale reported in WSJ (unconfirmed) from Apple’s GS card portfolio ($17 billion) would be a strategic positive and help move further “back to the future,” Mayo said. The problem, however, is the exit cost, which, if it were to exceed $1 billion, would appear negative, he wrote.

Mayo noted that the sale would reflect another “black eye” for Goldman’s failed consumer strategy, especially if the cost of disposal is too high. There are some positives. If the investment bank were to drop both the Apple and GM card partnerships before the end of the year, it could remove the cards from the federal stress test in 2025, Mayo said. “Generally, GS implies that the cards are approaching break-even, meaning a sale appears set (to be discussed),” Mayo wrote in the note.

According to the WSJ, Apple has held talks with several potential buyers for the card business, including Synchrony Financial and Capital One, while its talks with JPMorgan began earlier this year and have advanced in recent weeks. JPMorgan, however, does not want to pay the full face value of about $17 billion in outstanding balances from Apple’s credit card program, the story said.

Mayo said in the note that it had heard exit cost estimates of about $500 million to $4 billion, with the analyst saying it would be at the lower end of that range, with a 3 percent discount to at 10% of the nominal value. “In our view, a payment from GS to JPM of more than $1 billion could be viewed negatively if GS truly believes it is moving the portfolio toward break-even and in the context of the premiums often associated with card portfolio sales,” he said. Mayo said.

There won’t be much left in platform solutions after the GM card is sold and Goldman offloads the seller’s financing portfolio. Banking is not a big line item and could be moved to GBM, Mayo said. Last week, Goldman CEO David Solomon said the investment bank expected to take a $400 million hit from the transition of GM’s card business and other small retail businesses.

News of Goldman’s estimated $400 million loss sent shares down 4 percent, but the stock has since rebounded, adding nearly 4 percent to $503.48 in afternoon trading Thursday. JPM shares were down some from their 52-week high of $225.48 but rose nearly 2 percent, or $3.10, to $210.63.

Mayo has “overweight” ratings on both JPMorgan and Goldman. His price target for JPM is $225, while for Goldman it is $550.

This story was originally featured on Fortune.com