It's not every day you hear a bank manager allude to nefarious activity. When Anthony Noto, the CEO of SoFi Technologies (SOFI 0.31%), said that his company was "really stealing share from the big banks" during an interview on CNBC, reporters ran with it.
OK, what Noto really meant instead of "stealing" was "gaining quickly with relatively little effort." SoFi finished 2022 with just 4,200 employees, but it has added more than $2 billion worth of deposits to its books every quarter since it earned approval to operate as a national bank in early 2022.
Consumers are flocking to SoFi's mobile-first banking application, but is the stock a smart buy right now? Here's what investors should know.
NASDAQ: SOFI
Key Data Points
Gaining market share
Noto might regret using the word "stealing," but he was right to use strong language when describing the differences he sees between SoFi and its larger rivals. His bank reported total deposits that grew by $2.7 billion during the second quarter to reach $12.7 billion at the end of June. SoFi's larger competitors, though, have seen billions disappear from their balance sheets.
During the second quarter of 2023, Bank of America reported average deposits that declined by about $72 billion year over year to $1.006 trillion. Wells Fargo saw average deposits fall by $98 billion to $1.347 trillion.
SOFI Total Deposits (Quarterly) data by YCharts
It's not just stodgy old banks that are having a hard time with their deposit base right now. Total deposits at Capital One Financial, a primarily online bank, were growing steadily, but they have started reversing course. It reported total deposits at the end of June that fell by more than $6 billion during the second quarter to $343.7 billion.
Heading for profitability
Bank of America and Wells Fargo can afford to lose billions worth of deposits right now because the rates they offer most consumers are still a tiny fraction of a percent. Soaring interest rates on their lending products have allowed net income to rise significantly over the past year for Bank of America, while Wells Fargo's bottom line held steady.
More than half of SoFi's new checking and savings account owners sign up for direct deposit within 30 days. They're eager to sign up largely because SoFi offers a big 4.5% interest rate on savings deposits at the moment.
Despite offering savers a much higher interest rate than its big competitors, SoFi reported second-quarter net interest income that more than doubled year over year to $201 million.
SoFi was able to report soaring interest income and a healthy 5.74% net interest margin in the second quarter because it's been originating heaps of relatively high-interest personal loans. While many banks and credit unions hire Upstart to evaluate individual credit risk, SoFi has an algorithm of its own, and it appears to work. Its annualized charge-off rate dropped sequentially to a manageable 2.94% in the second quarter.
SoFi is still reporting net losses, but those losses are shrinking rapidly. In the second quarter, it reported a net loss according to generally accepted accounting principles (GAAP) that contracted 50% year over year to $47.5 million. Management is so confident about the continued upward trajectory of its bottom line that it's predicting profitability on a GAAP basis in the fourth quarter.
Image source: Getty Images.
A buy now?
At recent prices, SoFi stock has been trading for around 2.8 times its tangible book value. Compared to the stodgy old banks it's taking market share from, this is a sky-high valuation.
I wouldn't criticize anyone for letting its high valuation turn them off from investing in SoFi right now. It's far riskier than the big banks it's gaining on. That said, pulling in just a fraction of the deposits its larger competitors are losing gives it ample room to grow. If you have a reasonably high risk tolerance, buying some shares of this stock to hold for the long run looks like a good move.
