Recently, Morgan Stanley analysts Betsy Graseck and Jeffrey Adelson demoted SoFi ( SOFI 3.48% ) from overweight to equal weight. The two analysts also significantly reduced their price target on the one-stop financial services company from $18 to $10. The main reason for the downgrade is that the two now expect the federal student loan moratorium, which has already been extended twice and is due to expire on May 1, to be extended again.
Graseck and Adelson said in their report that the moratorium could now extend through 2023. If so, that would be very bad for SoFi’s prospects in 2022. Here’s why.
Student loans are a decent part of the business
SoFi offers many products, including cash management accounts, online investments, and various loan products, including credit cards, personal loans, mortgages, and student loans. Lending activity is by far the largest contributor to company revenue and profit. In 2021, the lending division generated nearly $12.7 billion in issuance, contributing nearly $764 million of its more than $1 billion in total adjusted revenue. It also added nearly $400 million in profit, again far outpacing SoFi’s other two divisions.
Before the pandemic, student loans were by far SoFi’s biggest lending product. Of its $11.2 billion in total originations in 2019, nearly $6.7 billion were student loan originations. The bulk of these student loans come from refinancing existing loans, but as Graseck and Adelson note in their report, borrowers don’t need to refinance as much with the current pause in federal student loan repayments. The pain is evident, with student loans rising to nearly $4.3 billion in 2021, which is even lower than depressed 2020 levels.
Management expected the pain to continue into the current quarter, telling investors and analysts that because the moratorium had not expired on Jan. 31 as originally expected, adjusted revenue for the quarter would be at least lower. less $25 million than if the moratorium had been lifted, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) would be at least $15 million lower.
In the fourth quarter, SoFi actually saw a resurgence in student loans. In the past six quarters, the fintech company hasn’t had student loans above $1.04 billion, but in the fourth quarter, loans jumped to $1.46 billion. Management attributed the sudden boost to borrowers anticipating the expiry of the Jan. 31 moratorium and the impending Federal Reserve hike to its benchmark overnight lending rate, which the Fed has now officially done. SoFi management noted on the recent earnings call that the surprise moratorium extension in December led to reduced demand for student loan refis in the last week of December.
It is not certain in advance that the moratorium will be extended, even if more and more analysts and experts now see it as a possibility. Marlet reports that while loan servicers are notifying borrowers of expected payments when the moratorium expires, the US Department of Education is telling loan servicers not to charge borrowers yet, which has caused some confusion.
President Biden faces pressure from both sides, with some saying the return of student loan repayments will reduce the economic recovery and hurt consumers already facing high inflation. On the other side, proponents say the consumer has been in great shape for a while now and the moratorium should have ended months ago.
For SoFi, there is still some uncertainty. With the Fed now stating that it expects to raise rates at each of its next six policy meetings this year, this may create a little more urgency for borrowers to refinance.
The other somewhat positive takeaway from all of this is that SoFi was able to grow total origination volume well beyond 2019 levels, even with no strength in the student loan space, which is a good sign for investors. investors. But if the moratorium is delayed to 2023 as Graseck and Adelson expect, it will likely affect SoFi’s outlook for adjusted revenue and EBITDA this year.
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