Here’s why SoFi’s stock isn’t gaining momentum right now.motley fool

One-stop-shop financial services company and digital bank SoFi technology (SOFI -3.36%) The company’s stock has risen more than 15% after its recent earnings report. The company has beaten consensus expectations, management has raised guidance, and at first glance it looks pretty good.

But the stock gave up on those gains over the next few days, displeased many of SoFi’s cult investors, and some embarrassed by the drop.

There’s a lot of promise and progress in SoFi, but I think there’s a clear reason why the stock doesn’t seem to be gaining momentum even after its strong earnings report.

to become a bank or not

After a long process, SoFi was finally able to acquire a bank charter by acquiring Golden Pacific Bancorp, a small Sacramento bank. It had many advantages, such as the ability to collect and hold Fund the loan. The bank’s Articles of Incorporation will allow SoFi to take out loans in-house, saving customers money and time.

However, management appears to be very uncertain about its future strategy, which has led to concerns among institutional investors. According to management, the company’s plan under the bank’s articles of incorporation is for the loan to be held by him for six months, during which time he collects regular interest income, after which the loan is sold to investors. This allows banks to legally circumvent major bank accounting rules related to whether loans are held to maturity or not.

Image Source: Getty Images.

Banks are required to prepare for credit losses in a very proactive manner under current Expected Credit Loss (CECL) accounting methodology. Therefore, if SoFi held the loan to maturity, it would need to set a reserve for lifetime losses on the loan as soon as the loan was reflected on the balance sheet.

In the first nine months of the year, SoFi posted approximately $39.4 million in loan loss reserves. At the end of the third quarter, SoFi had $11.2 billion of loans on its balance sheet. This equates to a provision for losses of only about 0.35%, or an annualized rate of about 1.4%. As noted above, SoFi classifies these loans as held-for-sale and is therefore permitted to do so.

However, if SoFi ultimately decides to hold the loans to maturity, the company will significantly increase its allowance for doubtful accounts as these loans may ultimately be more profitable. is needed. Total loans held on the balance sheet (this is an educated guess).

SoFi currently has about $6.8 billion in personal loans on its balance sheet, which, like credit cards, is the segment that suffers the bigger losses. If the company holds all of these to maturity, the 5% credit reserve he equates to $340 million, which is clearly a big hit to the company’s bottom line.

As such, investors may be concerned about future transitions to CECL accounting. But when asked by analysts about their willingness to grow their balance sheet and hold on to loans longer, CEO Anthony Noto said, “We’re looking forward to a year of continuity and stability across markets and company-specific initiatives.” “We look forward to .” He also said the company expects to reinvest 70% of incremental earnings back into the business. This means the company still appears to be more focused on growth than profitability.

potential concerns

However, all of these create short-term risks. Because SoFi eventually has to sell all of these loans before they come to maturity. What if the economy hits a deep recession next year and SoFi’s investors lose interest in lending? Yes, the company serves a very high quality customer base. The company’s personal loan portfolio has a weighted average FICO score of 746, and the average borrower earns him $160,000.

but what do you see we just heard From other companies with personal rental spaces, lending club (LC 2.78%), the demand for personal loans is declining. Despite strong demand for personal loans among consumers, LendingClub cut his $433 million in investor loans in the third quarter and could continue to come under pressure in the fourth quarter. suggests that

Additionally, the average FICO score for loans sold to investors by LendingClub was 718, not far below SoFi’s score. For personal loans, which LendingClub holds on its own balance sheet, which currently has a weighted FICO of 730, the company has retained sufficient capital to cover a 7.2% loss on the books.

SoFi also confirmed that personal loan sales margin gains have started to narrow slightly, from 3.4% in Q2 excluding hedges to 3.25% in Q3. SoFi very likely won’t have a problem selling loans to investors next year, but we don’t know what the environment will be like.

more transparency would help

I can see why management is using this approach. First, they want to earn more interest income from loans without incurring upfront accounting costs.

Also, they speculate they want the market to continue to perceive them as high growth. Fintech It is a company that is likely to get a higher valuation than a traditional bank.

However, it feels like this strategy created a potential risk that the company could struggle to offload these loans for profit if the economy continues to deteriorate. I do hope that management can be a little more transparent and provide more disclosure in its quarterly financial statements.

Leave a Comment