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SoFi Gets Intriguing When You Look at It Like a Bank Stock

By Bram Berkowitz - Updated Mar 16, 2021 at 10:35AM

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SoFi will likely be able to operate with a banking charter later this year. While it's not a traditional bank, it will have a lot of attractive banking characteristics.

It has long been known that the digital online personal finance company SoFi has wanted to obtain a formal bank charter. The company, which is going public through Chamath Palihapitiya's blank check company Social Capital Hedosophia Holdings Corp. V (IPOE), received conditional approval for a national bank charter toward the end of last year. Most recently, SoFi said it plans to purchase the tiny Golden Pacific Bancorp based in Sacramento, California, to accelerate these efforts.

Although you can't value SoFi exactly like a traditional bank, if you start to look at it more through the lens of a bank investor, you can start to see some of the value it brings to the table.

Looking at it like a bank

SoFi offers a buffet of financial products and services for consumers. Products include student loans, personal loans, and credit cards, as well as cash management accounts and an online brokerage for people to invest.

From a high level, SoFi looks appealing as a bank because the company has the ability to capture so much value from the more than 1.7 million members currently on its platform, a number the company expects to grow to 3 million members by the end of this year.

Woman on phone holding credit card.

Image source: Getty Images.

SoFi seeks to create a "financial services productivity loop," where it sells multiple products to each one of its members. It wants its brokerage clients to take out loans from the company and its borrowers to store their deposits with SoFi as well.

This in turn will drive down customer acquisition costs and significantly increase profits on certain loans and products. The company can then pass on savings to the consumer through lower loan rates or higher-yielding savings accounts. So far, that strategy seems to be paying off, with 65% of the company's home loans coming from existing customers. Every traditional bank seeks to get more out of each one of its customers, but it's no easy feat considering more than half of all Americans still use more than one bank for their financial needs.

Attractive banking characteristics

A bank investor might look at SoFi and see the company's potential to create a very solid deposit base, a diversified revenue stream, and eventually much better profitability.

The big thing about SoFi becoming a bank is that it will soon be able to hold deposits on its balance sheet. That will greatly improve the profitability the company can make on loans. Currently, SoFi CFO Christopher Lapointe said the company uses warehouse lines of funding to fund its loans. These warehouse lines cost the company 2% to 4% in interest, depending on interest rates. As a bank, SoFi can use the money in its SoFi Money cash management products as deposits to fund its loans. Those funds will cost much less right now than 2% to 4% in interest, and with a membership that is expected to grow to 3 million this year, the company should have no problem gathering deposits.

The other exciting thing about SoFi is that the company expects to diversify its revenue. Currently, SoFi earns 83% of its revenue from loans that it either holds on the balance sheet or sells into the secondary market. But very few banks today succeed by solely relying on lending. When interest rates decline, revenue from lending can significantly drop. And when there's a sudden downturn, like say a global pandemic, borrowers can default suddenly and loan activity can dry up.

But by 2025, SoFi expects to have three solid revenue streams from lending, tech platform fees, and financial services. Its lending business should be much more profitable by then just by using deposits to fund its loans. Tech platform fees will continue to grow from SoFi's acquisition of Galileo last year. Galileo is a payment processing company that makes it possible for other fintech companies to set up payment capabilities such as bank accounts, virtual cards, bank transfers, and more. The company brought in more than $51 million in fees through the first nine months of 2020.

The company also expects to eventually be making much more money from financial services it offers including from its cash management services, online brokerage, credit card offerings, and more. The company is not yet profitable, but with all of these things in motion, SoFi expects to grow adjusted net revenue from $620 million in 2020 to nearly $3.7 billion by 2025, which should result in much better profitability.

SoFi revenue composition.

Image source: SoFi investor presentation

Potential risks

SoFi is still more of a high-flying tech company, so it's investing in its operations significantly, which is why its expenses continue to outpace its revenue and the company continues to report losses. Obviously, this is not unexpected, as SoFi is still building out its capabilities and you would rather see the company invest for the long term now.

But once the company is officially public and builds out its desired capabilities, it needs to think about better reining in expenses and showing investors a clear path to profitability. For the record, it seems like SoFi already has a good plan, but lots of tech companies struggle to demonstrate their road to profitability. 

Credit quality is another aspect to watch closely. Here, I might have a little concern because two of the company's main products, personal and student loans, can be riskier asset classes.

Loan quality seemed to hold up pretty well for SoFi during the pandemic, with the majority of borrowers who went on deferral returning to making payments. But it's always something to keep an eye on. SoFi does stress that it lends to borrowers with high FICO scores, but that isn't always a good indicator during a recession. It will be interesting to see how many loans SoFi holds on the balance sheet once it has a bank charter.

A compelling stock

SoFi has several characteristics that many traditional banks could only dream of. It is succeeding in extracting more value from each one of its customers, which lowers customer acquisition costs and increases profitability. I also think SoFi should be able to build a solid and fairly low-cost deposit base with its massive and growing membership. The company's plan to greatly diversify revenue by 2025 is also strategically compelling, so if it can hit goals on time, SoFi looks like it could be a high-growth stock.

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