Earnings Recap: SOFI Q1 2024

Disclosure: The author owns securities in the referenced company or companies. This is not financial advice or a recommendation, and not a substitute for due diligence. 

Originally tweeted April 29th, 2024:

SoFi Technologies, Inc. (NASDAQ:SOFI) had a great quarter. And while I have a bullish position in this company, the major reason why anyone should take look at this bank is that it provides detail on a very specific part of consumer lending, namely, those of the highest credit quality, aka 700+ credit score.

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First, the basics. It was a great quarter by any metrics. Revenue was up 37%. This came from the fact the loans they were making are more profitable. The technical term for this is expanding Net Interest Margins (NIM). EBITDA was up 26%. Net Income is now positive.

The one thing that has always been an "outstanding issue" is how to value SOFI. In the recent period, you have the bears with the criticism that SOFI is just a bank and should get a bank valuation. For context, in the current market environment the weaker banks might have a Book Value of 1x and a stronger bank might have a Book Value closer to 1.5-1.75x.

SOFI is trading at about 2x Book Value. HOWEVER, most banks do NOT show 37% Revenue Growth & 26% EBITDA growth. Also, most banks did not have NIM expansion this quarter or volume of deposit increases. 

Most banks showed quite the opposite.

The bears picked on both the above and also guidance. They pretend that SOFI is having a problem because they are suggesting the loan book will be less than last year. But this has to do with the strategy the bank is taking. Because the timing, frequency and size of rate changes are unknowable right now, SOFI is not baking any of these positive factors in. Hence, for anyone who actually understands how banks ought to operate, it would be prudent to not expand the loan book size. The only way you’d do it given that lower rates are eminent is by lower credit quality.

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This chart demonstrates clearly the impact of the convertible bond. Among the banks I look at, SOFI is the only one that has expanded NIM! Avg Interest on Loans is up 1.14% with funding cost up only 54bps, meaning you made a far larger spread on all your loans.

But here's what the bears that know donut about banks likely don't understand. And this is also what justifies the 2x BV. Demand deposits grew 31% and have a rate of 86bps. Realize that if they continue to grow deposits, then even if they do not grow the size of the loan book, you will get NIM expansion. That is literally the opposite trend that every other bank has right now. This implies they do not need and even in some cases, shouldn't do much in the way of balance sheet clean up, i.e. the opposite of all other banks that must desperately find a way to securitize stuff off their balance sheets. 

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The one area that could be disputed has to do with their commentary on loan origination & prepayments. You'd have to be the most "needling" of analysts to think this was a bad thing. Even though you had a 22% origination increase, you had flat loan growth. They are guiding loan growth to be less than 100% of what they have this year. This is NOT b/c of default. It's from prepayment! 

This is the nature of their specific customer base which has a 700+ average credit score. Also, they mentioned that charge-offs were a bit high, but that is misleading. The issue is that the term on loans has shortened considerably and as such charge-offs occur in earlier origination vintages (aka people are just paying it off ever since rates got so high). This is a math thing that most people will not factor in, but your girl Markets with May does because she sat on a risk desk for more than a minute. The point is shorter duration means you take losses sooner vs longer duration. AND ALSO, the nature of this loss is prepayment risk, not default loss.

However, if the hazard rate has not changed, which it has not (because it’s coming from pre-payment not default), later periods will show lower losses. You get the same amount of total defaults throughout the loan, they just come earlier. Also, you are getting higher prepayment, which is the positive side of the hazard rate. Hence, unlike other banks where the concern is default, in the case of SOFI, you have meaningful prepayment risk instead. Prepayment risk for SOFI means that your high rate is not a long-term locked deal, and also, you have to really work to keep the loan book at the same size. 

Right this minute in banking, that's the epitome of "high-class problems."

Link to original Tweet: https://x.com/marketswithmay/status/1784931103976882321