Thanks again for the hard work in putting together these articles together as always Hoegermeister.
As you noted in the article you wrote, SOFI management has stated very publicly that they intend to hold loans for longer in order to maximize the ROE. Yet, it's clear that they do not want to forgo the possibility of selling and/or securitizing these loans entirely. It will be interesting to see if SOFI does another loan sale and/or securitization in Q2 this year. If SOFI doesn't in Q2 and/or the rest of the year, this yellow flag is going to start looking more and more like a red flag. SOFI's multi-billion dollar deposit growth doesn't look like it will end soon, so this issue regarding the increasing personal loan balance on the books will only grow in the coming quarters.
SOFI management is saying one thing while the stock market is saying another. Whether or not SOFI's management is right or the stock market is right is up in the air and it looks like the ball is in SOFI management's court to prove the stock market wrong.
It looks like this is where the macro environment comes into play regarding SOFI's growing bank deposits. If SOFI continues to take in billions of dollars of deposits every quarter with a savings rate of 4.2% APY that SOFI must pay out, there doesn't seem much else that SOFI can do to put these deposits to work aside from personal loans. The market for home, student, and commercial loans like real estate aren't doing very well right now.
It just seems like SOFI just needs to get through the current macro environment. Then if home and student loans can come back, we will be able to diversify more out of the personal loan market. SOFI may then also have opportunities to grow in other loan markets like commercial loans.
We all should hope that the macro environment doesn't deteriorate and the economy can keep chugging along despite the bank industry issues, the debt ceiling issues, high interest rates, inflation, and everything else going on currently.
It looks like we SOFI investors just weren't paying enough attention to the full picture. For example, we focused so much on the growth of deposits in SOFI bank, but we failed to realize that SOFI isn't able to do much else with it at the moment other than to keep originating more personal loans and grow their personal loan balance.
Regarding the topic of using a third party valuation firm despite being a bank, how unusual is this practice in the banking sector? Is this something highly unusual? Is this an acceptable practice?
It sounds good on paper to use a third party valuation firm to remove conflicts of interest, but this needs to be looked at in context of bank industry standard practice.
Dude, newer to Reddit, here for my stocks-WKHS too, your stuff is stellar. I recently was able to read Morningstar and Credit Suisse reports on SOFI, your stuff is easy on the eyes and mind, thanks. Those analysts reports are difficult
What does this mean exactly: Additionally, even though they didn’t sell any whole loans, they did have a $340M securitization in the quarter.
What is the difference between selling loan vs securitization?
Both selling whole loans and securitizations remove them from taking up capital from warehouse facilities, deposits, and SoFi's own capital. Whole loan sales is when they just straight up sell them to somebody else, who then takes the loans onto their own balance sheet and gets the payments from that point moving forward.
A securitization is a little different. SoFi packages a bunch of loans into a security that is traded on the ABS market. Different institutions will buy tranches (a fancy financial word for a portion of something) of the securitization that guarantees them a certain interest rate. Those payments are disbursed from the payments that the securitization issuer receives from the loans.
That's the best layman's explanation I can give.
> A securitization is a little different. SoFi packages a bunch of loans into a security that is traded on the ABS market. Different institutions will buy tranches (a fancy financial word for a portion of something) of the securitization that guarantees them a certain interest rate.
so i take it this is why securitization isn't as good as whole loan sales, because the security interest rate is guaranteed which means SoFi is still stuck with the default risk? (and should be setting aside CECL for their securitizations?)
There’s different types of securitizations that could be done. Think this was touched upon in a previous post. There’s a securitization where sofi still keeps the securitization on BS versus the other one where they don’t have any ownership. So you sell the loans in a security but still have ownership of the entity.
I honestly don’t fully understand why they would securitize the loans and still keep it on the balance sheet. In this case why would they securitize it in the first place if they are not selling
good stuff, always enjoy your analysis
not sure i understand this part
> In a lot of ways, SoFi is a victim of their own success. When you grow deposits by $2.3B - $2.7B every quarter, you have to find a way to put that money to work. They are paying 4.2% APY on that cash, so they need a good return on it.
i understand that SoFi would prefer to maximize interest income through their loan originations, but they can do that with the deposit growth they forecasted and then just put the excess deposits in short-term treasury bills and still make money right? 3 month t-bill is just over 5% market rate vs the 4.2% APY they pay.
in other words, it doesn't seem like they would ever _suffer_ from having too much success in deposit growth because the excess is just free money?
Could they just buy T-bills? Yes, but those are a tiny ROE, and if they can just hold more personal loans on the balance sheet instead, that is a much better use of the deposits. I guess what I meant by being a victim of their own success is that the deposits have grown so fast that they have been forced to grow the balance sheet at a rate that they probably did not think was possible. It explains to an extent why they've ended up extending the amount of time they are holding loans on the balance sheet.
I 100% agree it was a misstep to not prove the fair value is still accurate with a sell. I really hope they sell some in Q2.
Maybe housing buying season will lead to increased home loans and we will have enough originations to justify a sell.
If we do sell some in the quarter would there be any way for the markets to see the sell before earnings are released?
1Q23 earnings highlighted the growing balance sheet and how they account for their loans at fair value. I took the time to talk about the risks that SoFi is taking and how it could affect the company. This is a real risks that should highlighted and discussed, and I seek to do that in this article. Hopefully it's helpful.
I think after recent stock selloff SoFI will sell some of it's loans as a proof, that loans are marked to market correctly.
Thank you for the detail analysis
Thanks again for the hard work in putting together these articles together as always Hoegermeister. As you noted in the article you wrote, SOFI management has stated very publicly that they intend to hold loans for longer in order to maximize the ROE. Yet, it's clear that they do not want to forgo the possibility of selling and/or securitizing these loans entirely. It will be interesting to see if SOFI does another loan sale and/or securitization in Q2 this year. If SOFI doesn't in Q2 and/or the rest of the year, this yellow flag is going to start looking more and more like a red flag. SOFI's multi-billion dollar deposit growth doesn't look like it will end soon, so this issue regarding the increasing personal loan balance on the books will only grow in the coming quarters. SOFI management is saying one thing while the stock market is saying another. Whether or not SOFI's management is right or the stock market is right is up in the air and it looks like the ball is in SOFI management's court to prove the stock market wrong. It looks like this is where the macro environment comes into play regarding SOFI's growing bank deposits. If SOFI continues to take in billions of dollars of deposits every quarter with a savings rate of 4.2% APY that SOFI must pay out, there doesn't seem much else that SOFI can do to put these deposits to work aside from personal loans. The market for home, student, and commercial loans like real estate aren't doing very well right now. It just seems like SOFI just needs to get through the current macro environment. Then if home and student loans can come back, we will be able to diversify more out of the personal loan market. SOFI may then also have opportunities to grow in other loan markets like commercial loans. We all should hope that the macro environment doesn't deteriorate and the economy can keep chugging along despite the bank industry issues, the debt ceiling issues, high interest rates, inflation, and everything else going on currently. It looks like we SOFI investors just weren't paying enough attention to the full picture. For example, we focused so much on the growth of deposits in SOFI bank, but we failed to realize that SOFI isn't able to do much else with it at the moment other than to keep originating more personal loans and grow their personal loan balance. Regarding the topic of using a third party valuation firm despite being a bank, how unusual is this practice in the banking sector? Is this something highly unusual? Is this an acceptable practice? It sounds good on paper to use a third party valuation firm to remove conflicts of interest, but this needs to be looked at in context of bank industry standard practice.
Dude, newer to Reddit, here for my stocks-WKHS too, your stuff is stellar. I recently was able to read Morningstar and Credit Suisse reports on SOFI, your stuff is easy on the eyes and mind, thanks. Those analysts reports are difficult
Thank you, glad it's helpful
What does this mean exactly: Additionally, even though they didn’t sell any whole loans, they did have a $340M securitization in the quarter. What is the difference between selling loan vs securitization?
Both selling whole loans and securitizations remove them from taking up capital from warehouse facilities, deposits, and SoFi's own capital. Whole loan sales is when they just straight up sell them to somebody else, who then takes the loans onto their own balance sheet and gets the payments from that point moving forward. A securitization is a little different. SoFi packages a bunch of loans into a security that is traded on the ABS market. Different institutions will buy tranches (a fancy financial word for a portion of something) of the securitization that guarantees them a certain interest rate. Those payments are disbursed from the payments that the securitization issuer receives from the loans. That's the best layman's explanation I can give.
> A securitization is a little different. SoFi packages a bunch of loans into a security that is traded on the ABS market. Different institutions will buy tranches (a fancy financial word for a portion of something) of the securitization that guarantees them a certain interest rate. so i take it this is why securitization isn't as good as whole loan sales, because the security interest rate is guaranteed which means SoFi is still stuck with the default risk? (and should be setting aside CECL for their securitizations?)
My understanding is that whole loan sales typically lead to better economics than securitizations
There’s different types of securitizations that could be done. Think this was touched upon in a previous post. There’s a securitization where sofi still keeps the securitization on BS versus the other one where they don’t have any ownership. So you sell the loans in a security but still have ownership of the entity.
I honestly don’t fully understand why they would securitize the loans and still keep it on the balance sheet. In this case why would they securitize it in the first place if they are not selling
Me either but I’m not fully versed in securitization. u/snipahshot or u/bender9000 probably can explain the difference
Great article thank you
good stuff, always enjoy your analysis not sure i understand this part > In a lot of ways, SoFi is a victim of their own success. When you grow deposits by $2.3B - $2.7B every quarter, you have to find a way to put that money to work. They are paying 4.2% APY on that cash, so they need a good return on it. i understand that SoFi would prefer to maximize interest income through their loan originations, but they can do that with the deposit growth they forecasted and then just put the excess deposits in short-term treasury bills and still make money right? 3 month t-bill is just over 5% market rate vs the 4.2% APY they pay. in other words, it doesn't seem like they would ever _suffer_ from having too much success in deposit growth because the excess is just free money?
Could they just buy T-bills? Yes, but those are a tiny ROE, and if they can just hold more personal loans on the balance sheet instead, that is a much better use of the deposits. I guess what I meant by being a victim of their own success is that the deposits have grown so fast that they have been forced to grow the balance sheet at a rate that they probably did not think was possible. It explains to an extent why they've ended up extending the amount of time they are holding loans on the balance sheet.
Yes but it's not as attractive.
I'll buy some of those loans if it helps the stock price
Seriously! 😆
I 100% agree it was a misstep to not prove the fair value is still accurate with a sell. I really hope they sell some in Q2. Maybe housing buying season will lead to increased home loans and we will have enough originations to justify a sell. If we do sell some in the quarter would there be any way for the markets to see the sell before earnings are released?
The good news: houses we build are selling fast the last few weeks. The bad news: so many of them are cash deals.
Fantastic article as always. Thank you for breaking down the “why/how”. I learned a lot.
1Q23 earnings highlighted the growing balance sheet and how they account for their loans at fair value. I took the time to talk about the risks that SoFi is taking and how it could affect the company. This is a real risks that should highlighted and discussed, and I seek to do that in this article. Hopefully it's helpful.