How Much Upside Would a Bank Charter Provide to SoFi Stock?

One of the key upsides to SoFi, which will go public through a reverse merger, will be getting a national bank charter. The company announced the acquisition of a community bank, Golden Pacific Bancorp, in March, which should help expedite its application for getting a charter. What would the bank charter mean for SoFi?

Chamath Palihapitiya-backed SPAC IPOE (Social Capital Hedosophia Holdings V) took SoFi (Social Finance) public. SoFi started trading on Nasdaq under the ticker symbol "SOFI" on June 1.

SoFi applied for a bank charter in June 2017 when it applied for an industrial loan company charter with FDIC (Federal Deposit Insurance Corporation). The company withdrew its application the same year after senior executives departed. In July 2020, SoFi applied for a national bank charter with the Office of the Comptroller of the Currency and received conditional approval in October 2020.

In March 2021, SoFi announced the acquisition of Golden Pacific Bancorp (GPB) for $22.3 million. The acquisition marked another major step towards a national bank charter for the company. Having a bank charter would allow SoFi to accept deposits and make more profitable loans using its member deposits. It would also remove the need to rely on third-party banks.

As a result of SoFi’s acquisition of GPB, SoFi would switch its current de novo (net new) bank application to a change of control application. GPB currently has nearly $150 million in assets, but if it gets a national bank charter, SoFi will put $750 million towards its national, digital business plan.

Previously, SoFi’s competitor, Square got approval for a national banking charter and announced the beginning of its banking operations starting in March. It's the second major fintech company to get a banking charter. In February, FDIC approved a banking charter for Varo Money. LendingClub, another fintech, got access to banking by acquiring Radius Bank.

We can take a leaf out of Square’s book to see how obtaining a national bank charter could impact a company’s financials. Square doesn’t expect it to add anything significant to its earnings, at least at first. It would just be the first step towards expanding the company’s lending capabilities, which could become a significant part of the business over time.

A national bank charter is important for SoFi’s future plans of increasing its lending capabilities and lowering its cost of capital. At the same time, it would be easier for SoFi to follow regulatory compliance through GPB. According to Sam Kilmer, a senior director at Cornerstone Advisors, “It's basically just getting inside the club in an easier fashion than going about it the long, organic, legal, start-up way of proving yourself to a regulator.”

In SoFi's investor presentation, it estimated that without a bank charter its adjusted EBITDA (base case) would be $254 million in 2022 but that it would be $447 million with the bank charter. The 76 percent jump in EBITDA due to the bank charter is estimated due to the lower expected cost of capital and increased lending growth. Similarly, the company has estimated the incremental EBITDA until 2025 and the cumulative incremental EBITDA comes out to be $1,005 million until 2025.

Based on IPOE’s current price, SoFi’s EV-to-EBITDA multiples are 59x, 31x, 19x, and 13x for 2022, 2023, 2024, and 2025, respectively. However, if we include the upside from a bank charter, according to SoFi’s calculations, the multiples come in at 34x, 21x, 14x, and 10x, respectively. The charter provides an upside to earnings, which lowers its multiples. A bank charter makes SoFi stock even more attractive at the current prices.

The outlook for fintech stocks looks positive since Millennials seem to prefer them over traditional financial services companies. Amid this space, SoFi is very well placed with a wide array of offerings. A bank charter would certainly create an upside for the stock with even more opportunities to expand.