Update: SOFI Technology & Credit Risk

April 30, 2025 | Premium Service | As we prepare to rebalance the WGA Bank Top 100 Index this week, one of the best performers of the group, SOFI Technology (SOFI), has just reported earnings. SOFI is a bank, but not. It prefers to describe itself as “a member-centric, one-stop shop for digital financial services that helps members borrow, save, spend, invest and protect their money.” What's not to like?

Much of the SOFI disclosure seems to be IR hype focused on the company’s image as a fintech platform, but the bottom line for many investors is double-digit growth in assets, loans and deposits. Finding meaningful information in the hyperbolic SOFI disclosure is a challenge. The company's focus on earnings before interest, depreciation and amortization (EBITDA), for example, is not particularly relevant to a bank or financial company that uses leverage. The cost of funding is obviously relevant to investors in banks, but at least SOFI does highlight net interest margin and the steady progress toward building a deposit base, as shown in the graphic below from the Q1 2025 presentation.

For example, interest expense rose in Q1 2025. SOFI states: "The income tax expense recognized in both years was primarily attributable to the Company’s profitability and discrete tax benefits for stock compensation recorded in each quarter." The income statement on Page 13 of the press release shows that rising marketing and overhead costs actually drove net income down in Q1 2025 vs the same period in 2024.

Since the last thing that Wall Street equity managers want to see in an emerging fintech is profitability, the decline in earnings is probably positive for the stock. Like many other banks in Q1 2024, SOFI saw credit costs fall this quarter. Fees for loan originations and servicing also fell, but loan platform fees jumped $80 million vs Q1 2024. SOFI provides just bare bones financials in their press release, so there is no sequential balance sheet and income statement data. 

While it is clear why equity managers like SOFI, we are reminded of how PayPal (PYPL) and Block (XYZ) fell out of favor after achieving profitability. In the case of SOFI, however, we have two specific concerns. First, the portion of revenue that is being consumed by overhead costs is excessive. In 2024, overhead costs were over 90% of net interest income and non interest income vs 63% for Peer Group 1. The retort, of course, is that the bank needs to grow, but at $36 billion in assets the bank should be more profitable. How big does SOFI need to be in order for overhead costs to fall into line with comparable companies?

Source: YahooFinance

Our second concern is credit. Overall, credit expenses were down in Q1 2025, along with the rest of the industry, but the bank still reported 330bp of net losses on the bank’s $18 billion portfolio of personal loans. If we covert 330bp into a bond equivalent rating, that suggests a “BB/B” rating for the SOFI consumer book. This is just below the net loss rate for CapitalOne (COF).

If we include the delinquent loans sold by SOFI, however, the net loss rate on consumer loans is close to 5%, which is a solid "B" rating equivalent. The table above and the chart below come from the SOFI Q1 2025 presentation. SOFI indicates that loan sales are accretive and that the sale of delinquent loans with servicing retained is also a source of profitability.

SOFI is known among institutional investors as a student lender, but its biggest area of growth and risk is credit cards and unsecured consumer loans. Credit cards at SOFI were reporting almost 11% of net charge-offs in Q1 2024, a loss rate that compares with COF and other, more aggressive consumer lenders. 

Source: FFIEC

CEO Anthony Noto focused most of his comments to investors in Q1 2025 on the SOFI loan platform, but given the anemic volumes in the lending market, we think credit is more relevant area for discussion. The overall loss rate for the SOFI credit book is very low and the overall net loss rate reported in the Form Y-9 is also low, as shown in the chart above. But the levels of net loss on the bank's unsecured consumer loan book are eye-opening. As and when credit costs actually start to rise among US banks, the unsecured consumer book of SOFI may become a larger concern.

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