2023-03-22 12:40:57 ET
Summary
- The recent banking crisis prompted us to take a closer look at SOFI Bank through the standard metrics.
- Our deep dive further bolstered our confidence in its forward execution and profitability, significantly sweetened by its rapid growth thus far.
- With a lower unrealized loss-to-equity ratio, minimal uninsured deposits, and excellent risk management, we believe SOFI may outperform from these levels.
- Investors may consider adding the stock here, due to the highly attractive risk-reward ratio.
We previously covered SoFi Technologies, Inc. ( SOFI ) here . Its FQ4'22 performance was discussed in depth, with double top and bottom line beats, narrowing GAAP net losses, and expanding adj. EBITDA YoY. The outperformance was partly attributed to SOFI Bank's early success. The segment delivered tremendous growth in deposits, while similarly being GAAP profitable.
For this article, we will further discuss SOFI Bank's prospects through the standard metrics, determining the health of its assets, deposits, and profitability. Our deep dive revealed that the company was highly competent in delivering improved profitability while managing risk, despite the uncertain macroeconomic outlook.
The Smaller Bank Investment Thesis
In FY2022, SOFI Bank grew its deposits tremendously to $7.3B, despite only obtaining the banking license in early January 2022. Furthermore, it hinted at another stellar FQ1'23 quarter in the recent Bank of America's Electronic Payments Symposium Conference in March 2023.
The bank expected another $2.3B of deposits (in line QoQ), if not more, potentially pushing its total deposits up to $9.6B (+31.5% QoQ & +700% YoY ) by the upcoming quarter. The rate of expansion is impressive indeed, highlighting its accelerated stage of growth, despite the recent banking crisis.
Particularly, only $615.9M of SOFI's deposits exceeded the FDIC's insured amount, comprising only a minimal 8.4% of the total sum, compared to other US big banks, such as Wells Fargo ( WFC ) at 36.9% , JPMorgan ( JPM ) at 56%, Bank of America ( BAC ) at 37.9% , and Citigroup ( C ) at 85.2% in FY2022. In this case, the former's smaller size seemed to have worked to its advantage.
While SOFI did not report its Liquidity Coverage Ratio [LCR], we believe the bank would have more than enough liquidity to stem any potential bank run, given the $1.42B (+187.6% YoY) of cash/equivalents reported in FY2022. This was on top of the $5.41B (-5% YoY) in available warehouse and revolving credit facility in FY2022.
In addition, SOFI plans to introduce a service where up to $2M of deposits will be insured with FDIC, compared to the current $250K, in view of the banking crisis. This may encourage bigger depositors to migrate to the bank once implemented.
SOFI has also strategically moved away from early-stage startups over the past few years, while focusing on larger and more stable clients, as opposed to those more favored by SVB Financial ( SIVB ). This was in line with the former's strategic choice of maintaining high credit score standards for various loans in order to improve its profitability, as highlighted by Anthony Noto, CEO of SOFI:
It was my belief that our loans needed to have a 40% to 50% variable profit margin per loan and that’s what was required for those loans to be attractive to us and buyers of our loans through a cycle. And we really worked that entire year across every functional area marketing, credit, pricing, operations, product and engineering to be able to get to that point. ( Seeking Alpha )
While SOFI might not need the additional liquidity, we were also assured by the availability of two Federal Reserve backstop facilities over the past week. As of March 15, 2023, US banks had already borrowed $152.85B, expanding from $4.58B from the week ended March 08, 2023, and $111B during the financial crisis in 2008.
JPM analysts also estimated that the Fed might potentially provide up to $2T in additional liquidity, overcoming market fears for now. Therefore, we reckon SOFI need not realize any losses in its available-for-sale (AFS) securities in the intermediate term, which amounted to $8.61M (+537.7% YoY) in FY2022.
Particularly, the bank's unrealized loss-to-equity ratio was only at 0.2%, compared to WFC at 6.9% , JPM at 5.6%, BAC at 7.2%, and C at 18.9%, suggesting its excellent risk management thus far.
Impact Of Banking Crisis On Banking Stocks & Alternative Hedges
Nonetheless, despite its excellent execution, it appears that Mr. Market had punished most banking/fintech stocks, with the SOFI stock declining by -18.8% since March 06, 2023. Interestingly, investors' focus had drastically shifted to the conventional storage of value, Gold, which recorded a nice uptick of +4.73%, with Bitcoin ( BTC-USD ) similarly rallying by +24.97% at the same time.
However, we reckon this is where the rate opportunity arises.
This can be attributed to SOFI Bank's stellar Net Interest Margin [NIM] of 5.4% (+1.45 points YoY) in FY2022, compared to WFC at 3.14% , JPM at 2% , BAC at 2.2% , and C at 2.39% in FQ4'22. It naturally led to the bank's robust lending Net Interest Income [NII] of $530M in 2022, well exceeding its lending costs of $443M at the same time.
SOFI also appeared to be in a good position to expand its deposit base, by offering an attractive variable Annual Percentage Yield of up to 4% for Saving balances and 1.2% for Checking balances, as of March 17, 2023. Given the stark difference with JPM at 0.01% and BAC at 0.01% , it was no wonder that SOFI had quickly tripled its members to 5.2M by the last quarter.
The Fed's continuous rate hike might also contribute to this cadence, boosting its NII and NIM over the next year, suggesting further tailwinds to its top and bottom-line growth.
Furthermore, the rapid growth of its deposits allowed SOFI to hold loans longer on the balance sheet. This allowed the bank to strategically maximize returns on its loans according to market conditions and fluctuating rates, instead of realizing losses similar to SIVB . This was especially helpful given the widening gap of 190-basis-points from its deposit funding to the alternative sources as of FQ4'22.
Combined with the one-stop-shop strategy across money management, investments, insurance, and credit card products, we reckon SOFI is more than well-positioned to grow in scale while "building lifetime relationships" with its members.
Its well-diversified portfolio may also hedge the fintech's growing assets/ businesses ahead, no matter the inflationary pressure and fluctuation in interest rates. Therefore, we remain cautiously confident in the management's ambitious guidance towards FQ4'23 GAAP net income profitability.
SOFI 1Y Stock Price
Since our previous article on March 03, 2023, SOFI has further retraced by -17.11% to $5.57, nearing our previous buy target and significantly enhancing its risk-reward ratio. Given the excellent support it has enjoyed at the current levels, we are re-rating the stock as a Buy here.
For further details see:
SoFi: An Outperformer Through The Banking Crisis