Lendtech SoFi flying low as losses linger
San Francisco-based digital lender SoFi has lost money for the second consecutive quarter as loan volume slumped and the company invested in expansion plans.
Its financial results aren’t on its site at the time of writing. Instead, according to a person familiar with the company’s results that spoke with the Wall Street Journal (WSJ), the firm recorded an adjusted loss of around $12 million before interest, taxes, depreciation and amortisation during the third quarter.
This setback came after an adjusted loss of around $150 million in Q2 and an adjusted profit of $56 million in Q3 2017, according to the person and an investor letter reviewed by WSJ.
Anthony Noto, SoFI’s new chief executive, seems unfazed.
“We optimised for investing over profitability this quarter, and expect this to continue given the opportunity in front of us,” he explains.
In the letter he states that the company is emphasising loan quality over volume.
SoFi provides student loan refinancing, as well as mortgages and personal loans. The company looks beyond credit scores and debt-to-income ratios to consider factors such as cashflow, career, and education to offer lower rates to borrowers it refers to as “members”.
The company proactively supports timely repayment of loans through a variety of tools, resources, and strategies including temporarily suspending payments in the event of job loss.
SoFi also provides wealth management and insurance services. The company’s investment management solution combines both live advisors and automated rebalancing to give investors advice and support for their long-term financial planning.
The company has also partnered with Protective Life to offer life insurance coverage up to $1 million for online applicants and up to $5 million for applicants with a medical exam.
It has raised more than $2 billion in funding, and has an estimated valuation of $4 billion based on its most recent $500 million fundraising in February 2017.
However, the WSJ points out that refinancing student loans is particularly sensitive to interest rates. Lacking its own base of deposits, the company borrows money at variable rates from banks to then lend to recent graduates. Most of its target customers previously took out a student loan at a fixed rate from the federal government, so SoFi can only pass on so much of its own higher borrowing costs to consumers before its offers stop being competitive with borrowers’ existing loans.
According to WSJ, that dynamic helped drive down loan volume. The company extended around $2.5 billion in refinanced student, unsecured consumer and mortgage loans in the third quarter, according to the investor letter. That’s down nearly 30% from the same period a year ago.
In terms of future plans, the firm is revamping its wealth-management service to let customers buy single stocks, exchange-traded funds and cryptocurrencies and make use of robo-advisor services by the end Q1 2019.
According to the person familiar with SoFi’s financials, such initiatives and other projects to improve SoFi’s internal technology were costly in the third quarter, helping push the company’s overall expenses above $100 million. (You could argue that this is always the case for tech revamps.)
WSJ adds that some of SoFi’s recent financial performance has been due to changes in the value of loans it holds on its balance sheet. That had a “material negative impact” on SoFi’s second-quarter results but gave a boost to its third-quarter results as the company sold the vast majority of those loans at prices above where SoFi had revalued them, according to letters to shareholders.
In recent weeks, SoFi also closed on a $560 million revolving line of credit from a group of six banks, according to the shareholder letter. WSJ reported in July that SoFi executives were in talks for a loan that could help fund potential buyouts of other financial-technology firms.