SoFi will 'always' stay in student lending, despite challenges: CEO Noto

SoFi Technologies is expecting to turn a profit by the end of the year following a quarter of growth in deposits and in personal loan originations, despite continued headwinds in its bread-and-butter business of student lending.

The San Francisco-based company will always be in the business of originating and refinancing student loans, despite the federal government's student loan moratorium and rising interest rates tamping down on the business, said CEO Anthony Noto on SoFi's first quarter earnings call Monday morning.

"As long as college education in the United States is not free, there will be a student loan market," Noto said on the call. "It's never a question in our mind whether we're going to be in the business. It's just a question of, 'What are the actual products, and how do we best meet the member's needs?' Because, I'll just reiterate again, we want to be there for every one of the major financial decisions in someone's life."

SoFi is one of the more diversified neobanks, and it wasn't hit by the fallout of the banking crisis in March that hurt some banks this quarter. SoFi offers a broad suite of products in consumer lending, savings and investing, among others, and is one of the few with a bank branch, unlike other online lenders like Upstart. It is also morphing into a bank since its acquisition of Golden Pacific Bancorp, which gave it a national bank charter in 2022.

John Hecht, an analyst at Jefferies, wrote in a post-earnings note that he thought SoFi saw a good quarter, despite a "tough backdrop." He added that the company's strong deposits and flexibility are providing momentum for growth, and expects profitability by next year.

The company beat analyst estimates with adjusted net revenue of $472 million, up from $443 million last quarter. Net interest income grew to $236 million from $209 million last quarter. Deposits grew by 37% to $10.1 billion in the quarter, due to the fintech's competitive rates. SoFi's stock dipped nearly 12% after its earnings call to $5.49, but is up 22% year-to-date.

Michael Miller, an analyst at Morningstar, said student loan refinancing challenges are driven by the moratorium on student loan repayments and rising interest rates. Kevin Barker, an analyst at Piper Sandler, also said the government's pause on federal student loan repayment has stymied opportunities for SoFi's core business of student lending. Barker added that at the end of the payment pause, that business could grow again, depending on the rate environment. 

SoFi's quarterly student loan origination volume dropped 47% from the previous year to $525 million. 

In early March, SoFi sued the U.S. Department of Education to end the payment pause, alleging it has cost the company a minimum of $150 million in profits since March 2020. The fintech claims the latest extension of the policy is "unlawful on multiple grounds." The lawsuit is ongoing, and SoFi didn't comment on the lawsuit during its earnings call.

In an interview just after the lawsuit was filed, Michael Perito, an analyst at Keefe, Bruyette & Woods, said he thought student loan refinancing was SoFi's most profitable business and its revenue engine. 

"SoFi has been able to manage through this pretty admirably," Perito said. "You're essentially talking about their longest-tenured and most profitable business being turned off. The way they've managed to do that is by taking a lot of market share as a personal lending business … and trying to fill the gap from the student lending drop-off."

SoFi said on its first quarter earnings call that it plans to begin turning around its home lending business, which has also been sputtering with macroeconomic headwinds. The company acquired Wyndham Capital Mortgage, a fintech that specializes in mortgage lending, at the beginning of the quarter. SoFi's quarterly home loans of $90 million were down 71% year over year, which the company attributed to fulfillment challenges as well as a harsher economic environment.

Noto said on the call that SoFi had been looking for a mortgage technology platform to acquire for the last three years. He added that Wyndham should be accretive by the end of the year, and will have a "much more meaningful impact" in 2024, when it's fully integrated.

Miller said the mortgage business was an obvious space to shift strategy because of SoFi's goal of cross-selling products to customers. Barker said the acquisition poses an attractive opportunity for SoFi.

"When they fully integrate it into the SoFi platform, they should be able to generate more customers because the brand is much larger and more valuable than Wyndham Capital," Barker said. "I think there's a lot of new customers that they could potentially bring in for that. The issue why SoFi hasn't ramped home loans is because it's had operational issues, particularly around the third party that was fulfilling."

SoFi is also still investing in what it calls its "tech segment," a line of business that helps other financial institutions build payments, checking, savings, credit and debit services. The tech segment saw revenue dip 9% this quarter to $78 million, which Noto said is due to a transition in its strategy as it moves from partnering with many small accounts and early-stage startups to fewer, but more established, legacy financial institutions. 

Last quarter, SoFi said the segment was a "work in progress" while it folded in Technisys and Galileo, which it acquired in 2022 and 2020, respectively. In January, the company also announced layoffs in the unit that represented less than 5% of SoFi's total employee base.

Miller said refining the tech segment blueprint makes sense, but is easier said than done.

"On the weaker side of the quarter, the technology platform segment did have a sequential decline in revenue," Miller said. "It really does seem like they're having some growth headwinds there. They are trying to transition to [higher-quality financial institutions.] Larger, better-established companies do tend to have longer sales cycles. It does seem like it's having an impact on the ability of the segment to maintain growth."

Barker said if SoFi can start to show revenue or an increase in customers, he thinks the tech segment will be an accretive business.

Miller said the quarter was decent, with some mixed results due to the struggling tech platform.  He added the company has been able to reign in expenses the past few quarters. Despite SoFi's projections, he doesn't expect SoFi to be profitable until 2024, due to the student loan moratorium.

SoFi expects to generate $470 to $480 million of adjusted net revenue next quarter. The company also slightly pushed up its expectations for full-year revenue growth, projecting $1.955 to $2.02 billion, instead of its previous guidance of $1.925 to $2.0 billion.