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Sofi Got Its Bank License, But the Stock Is Still in the Dumps

Sofi Technologies (NASDAQ:SOFI) recently closed on its acquisition of Golden Pacific Bank, just as it has been trying to do for over a year. But so far investors are not impressed. Year-to-date (YTD) Sofi stock is down 16% to $13.13 from $15….

Sofi Technologies (NASDAQ:SOFI) recently closed on its acquisition of Golden Pacific Bank, just as it has been trying to do for over a year. But so far investors are not impressed. Year-to-date (YTD) Sofi stock is down 16% to $13.13 from $15.68 where it ended last year.

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Moreover, Sofi is way off of its highs. For example, on Nov. 4, it peaked at $23.29. So what is really going on here? Don’t investors understand what the company is saying about all the benefits of becoming a bank?

After all, they have known about the deal to purchase Golden Pacific Bancorp, Inc., a bank holding company, for a while. It was first announced on March 9, 2021. Ever since then the company has pointed out how much money it was going to be able to save or make more in profits.

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Moreover, other analysts have written at length about the benefits of the bank holding company structure. So why isn’t SOFI stock at a peak price now? Knowing all this should have pushed it much higher if the deal was so good.

Sofi will rename the bank holding company as Sofi Bank and all the benefits of lower funding, long-term holding of loans and other benefits can start accruing. So why has SOFI stock been drifting down?

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Downsides of the Deal

There is a very high likelihood that Sofi will now have much higher costs and be subject to a lot more regulations. It will be a national bank, meaning that it can operate in all 50 states as a federally chartered bank.

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But more importantly, investors could be worried about interest rates. They are mostly going to rise going forward as the Fed begins raising interest rates. After all, inflation is now at record rates, as I recently wrote about in NewsBreak. At 7.5% for the past 12 months, the Fed is going to have to start quickly forcing rates up to slow economic activity and lower inflation.

What does this mean for Sofi Bank? For one, its profit margins are likely to be squeezed. Its loan funding costs will undoubtedly rise dramatically as checking and CD account interest rates rise.

Moreover, as rates rise, there will be more competition for loans, and loan performance will also deteriorate. For example, as economic growth slows, people have a harder time paying off their loans.

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These two factors will lower Sofi’s future profitability. And don’t forget the company is still losing money. Last quarter it posted a net income loss of $30 million.

What To Do

Investors may want to wait until March 1, 2022, when Sofi will report its upcoming fourth quarter numbers. At least then they can decide whether the plans that Sofi Technologies has as a bank will be able to weather the coming interest rate storm.

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Moreover, its valuation today, even though way off of its peak is probably stretching it as a bank holding company. That is because banks tend to be valued very conservatively by the market. They are usually not much more than two times tangible book value.

Here is where Sofi stands on that measure. Its market capitalization is $10 billion. As of Sept. 30, it had $4.25 billion in shareholder equity, but only $3.05 billion in tangible book value(TBV).

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Therefore, at today’s price, the stock trades for 3 times tangible book value. This is a very high valuation. If rising rates start to compress its already loss-making lending business, that will force SOFI stock down from this high valuation.

This is an alternative, contrarian view on SOFI stock that might show why it has been falling. It should give investors pause as to the conventional view now that it has its bank license. Sofi stock will rise.

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On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.

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