1 Thing That Bothers Me About BofI Holding, Inc.

BofI Holding might be innovative and at the forefront of a massive sea-change in financial services, but it's still susceptible to the most feared of financial scourges: liquidity risk.

Apr 3, 2014 at 7:00AM

While BofI Holding (NASDAQ:BOFI) has a lot of things going in its favor, its elevated liquidity risk leads me to wonder whether its stock is truly worth more than twice the multiple that shares in a phenomenal bank like Wells Fargo (NYSE:WFC) command -- BofI trades for 3.9 times book value vs. Wells Fargo's 1.7 times book.

You can see evidence of this risk in the following interactive chart, which depicts the funding profiles of the nation's preeminent lenders: JPMorgan Chase, New York Community Bancorp, BofI Holding, US Bancorp, Wells Fargo, BB&T, and M&T Bank.

There are two things to note here. First, as illustrated by the bottom third of each column, BofI Holding relies on borrowed funds -- i.e., funds from other institutional lenders as opposed to deposits from businesses and consumers -- for a quarter of its liquidity. And second, the lion's share of the rest comes from interest-bearing deposits. The result is that only 3.8% of its funds consist of core noninterest bearing deposits. 

Now, just to be clear, there's nothing inherently wrong with BofI Holding's funding profile. One of the best banks in the country, New York Community Bancorp, employs a similar allocation, with 35% of its liquidity coming from borrowed funds and 59% from interest-bearing deposits.

Additionally, having a large base of core noninterest-bearing deposits violates the essence of BofI Holding's Internet-based business model, which obviates the need for a large retail presence and thus higher operational expenses. But the flipside is that it forces the bank to go without demand deposits, which customers want readily and physically accessible.

So, what's the problem? The problem is that BofI Holding relies to a large extent on "hot" money. In the first case, borrowed funds are potentially susceptible to redemption at the slightest display of weakness. Suffice it to say, this could turn an otherwise temporary hiccup into a struggle for survival.

And the same can be said of its interest-bearing deposits. Unlike demand deposits, which are placed in a bank for the convenience of the depositor and thus said to be "stickier," high-yielding time deposits like those offered by BofI, are more akin to investments. As such, they can be enticed away by a lack of confidence in BofI itself or by the promise of higher rates elsewhere.

My point is simply that these same issues aren't as pronounced at more traditional lenders like Wells Fargo, US Bancorp, or M&T Bank. While this doesn't mean that BofI isn't safe, it does mean that it's riskier in this regard than many of its peers. And this is the reason I can't help but wonder whether its stock deserves such a large premium over its well-heeled peers.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends BofI Holding and Wells Fargo. The Motley Fool owns shares of BofI Holding, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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