Shares of SoFi Technologies (SOFI -1.70%) are already up 112% year to date going into this weekend, and investors are anxiously awaiting the release of the banking and fintech leader's second-quarter results on Monday morning.
Regardless of how the market responds to that report in the near term, I believe SoFi is poised to continue benefiting from another catalyst made clear this week: The Fed's latest rate hike.
More specifically, on Wednesday, U.S. Federal Reserve officials approved their latest widely anticipated rate hike -- this time another quarter-percentage point hike that brings borrowing costs to their highest levels since 2001.
How SoFi is uniquely positioned to win as rates rise...
For perspective, higher rates are widely viewed as a positive catalyst for banks. They can increase their profitabililty by taking advantage of greater spreads between the money they make by investing customers' funds and the interest they pay to those customers.
But those catalysts should apply to all banks, including SoFi, which went through the arduous process of obtaining its own national bank charter in 2022.
That's not what makes SoFi unique, however. The company enjoys several advantages, not only over smaller competitive fintechs that don't possess a bank charter, but also over larger banking institutions.
First, unlike larger banks with lots of physical branches and old technology foundations, SoFi is a vertically integrated, digital-first fintech stock with full ownership of Cyberbank Digital -- a banking-as-a-service platform launched late last year that resulted in its acquisitions (and subsequent combination) of cloud banking platform leaders Technisys and Galileo. As such, SoFi now enjoys the most attractive cost spreads it's ever experienced with its checking and savings account offerings, even as it continues to attract hundreds of thousands of new high-quality members (>433,000 added last quarter alone) by aggressively raising the yield rates offered on those accounts.
These hordes of new members have helped SoFi's deposit base surge at a staggering pace. Total deposits grew by an incredible $2.7 billion last quarter (first-quarter 2023) alone to $10 billion, good for sequential growth of 37% from fourth-quarter 2022 -- and management has suggested that rate of growth should be relatively consistent when the second-quarter results hit the wires next week.
These swelling deposits benefit SoFi, both by granting it a lower-cost funding source for its loans and by enabling the flexibility to maximize net interest margins through holding those loans on the balance sheet longer (rather than securitizing and selling most of them to third parties, as it was before).
Put simply: The longer rates stay elevated, the faster yield-hungry members will continue flocking to SoFi's banking offerings, and the greater operating leverage SoFi can drive through its superior cost structure.
...and as rates decline
Even then, during SoFi's first-quarter 2023 earnings call with analysts, CEO Anthony Noto hinted that an even greater catalyst could be on its way -- namely, when rates inevitably start to come down again [emphasis mine]:
The great thing about our company and our vertical integration is that the cost that we currently have on our checking and savings accounts are lower than the cost that we've ever had in the business historically from a spread standpoint. So it's actually cheaper for us to fund via deposits than the way we've historically funded via warehouse lines. And so that's a huge competitive advantage. The reason we can offer the interest rate that we offer is because we actually make more money than we would with warehouse lines and without being a bank. I think the bigger question is what happens when rates start to get cut and go down. I think we'll be able to hold rates much longer and higher than our competitors and really gain even more market share.
So not only is SoFi taking significant market share in the current environment where interest rates are climbing -- it should also be able to extend that advantage by more aggressively, profitably offering members more attractive rates than competitors even as rates begin to decline in the future.
Even then, the resulting network effects of cross-selling multiple attractive products to new members under a single, cohesive mobile interface -- from checking and savings to investment accounts, credit score monitoring, credit cards, lending products, and even travel offerings -- will make these high-quality members significantly less likely to switch to another competitive bank down the road.
In the end, it's increasingly clear that SoFi has transformed itself from a niche student loan specialist to a virtually unstoppable banking behemoth, capable of winning market share regardless of where rates are headed. I'm perfectly content continuing to hold my shares while the market has yet to fully appreciate the fruits of SoFi's strength.
