Recently, Morgan Stanley analysts Betsy Graseck and Jeffrey Adelson downgraded SoFi (SOFI -2.87%) from an overweight to an equal weight rating. The two analysts also significantly trimmed their price target on the one-stop-shop financial services company from $18 to $10. The main reason for the downgrade is that the two now expect the federal student loan moratorium, which has already been extended twice and is supposed to expire on May 1, to be extended yet again.
Graseck and Adelson said in their report that the moratorium could now extend all the way until 2023. If that's the case, that would be very bad for SoFi's outlook in 2022. Here's why.
Student lending makes up a decent part of the business
SoFi offers many products, including cash-management accounts, online investing, and various lending products, including credit cards, personal loans, mortgages, and student loans. The lending business is easily the greatest contribution to revenue and profit at the company. In 2021, the lending division generated nearly $12.7 billion of originations, contributing nearly $764 million of its more than $1 billion of total adjusted revenue. It also added almost $400 million in profit, again far surpassing SoFi's other two divisions.
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Before the pandemic, student lending was easily SoFi's largest loan product. Of its $11.2 billion of total originations in 2019, close to $6.7 billion were student loan originations. The bulk of these student loans come from refinancing existing loans, but as Graseck and Adelson note in their report, borrowers don't need to refinance as much with the current pause on federal student loan payments. The pain is evident, with student loan originations coming in at nearly $4.3 billion in 2021, which is even smaller than 2020's depressed levels.
Management projected the pain would continue in the current quarter, telling investors and analysts that because the moratorium hadn't expired on Jan. 31 as initially expected, adjusted revenue for the quarter would come in at least $25 million lower than if the moratorium had been lifted, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would come in at least $15 million less.
In the fourth quarter, SoFi actually saw a resurgence in student loan originations. Over the past six quarters, the fintech company hasn't had student loan originations surpass $1.04 billion, but in Q4, originations jumped up to $1.46 billion. Management attributed the sudden boost to borrowers anticipating the Jan. 31 moratorium expiration and the Federal Reserve's looming increase to its benchmark overnight lending rate, which the Fed has now formally done. SoFi management noted on the recent earnings call that the surprise extension of the moratorium in December caused a reduction in student loan refi demand during the last week of December.
Still some uncertainty
It's not a foregone conclusion that the moratorium will be extended, although more and more analysts and experts now see it as a possibility. Marketplace reports that while loan servicers are telling borrowers about expected payments when the moratorium expires, the U.S. Department of Education is telling servicers not to bill borrowers yet, which has led to some confusion.
President Biden faces pressure from both sides, with some arguing that bringing back student loan payments will cut into economic recovery and hurt consumers already dealing with high inflation. On the other side, proponents say that the consumer has been in great shape for a while now and that the moratorium should have ended months ago.
For SoFi, there is still some uncertainty. With the Fed now saying that it expects to raise rates at each of its next six policy meetings the year, it's possible that might create some more urgency for borrowers to refinance.
The other somewhat positive takeaway from all of this is that SoFi has managed to increase total origination volume well past 2019 levels even without strength in the student loan business, which is a good sign for investors. But if the moratorium is delayed until 2023 as Graseck and Adelson expect, that's likely going to dent SoFi's outlook on adjusted revenue and EBITDA this year.
