1 Thing That Bothers Me About BofI Holding, Inc.

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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Read/Post Comments (4) | Recommend This Article (6)

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  • Report this Comment On April 07, 2014, at 2:22 PM, gwinner wrote:

    Your analysis is wrong. The February 5, 2014 financial release from BofI states:

    "The increase in total liabilities resulted primarily from growth in demand and savings deposits of $504.6 million partially offset by a decline in time deposits of $193.5 million."

    You must have concluded that the reported 3.9% of deposits in the non-interesting bearing category are the only demand deposits. However, the best BofI account is Rewards Checking, which pays more interest than long-term CDs at other banks.

    I have one of these "sticky" accounts and love it. No need to hassle with funds transfers to/from CDs or money market accounts when it is earning more interest in your demand account. Yet another example of the marketing rupturing businesses practices at BofI.

    I would posit that BofI is taking "sticky" demand account business away from other banks at a speed that Usain Bolt would envy. Articles like this serve to help more find BofI, which exposure fuels the growth, without advertising costs. Thank you!

  • Report this Comment On April 07, 2014, at 5:48 PM, Mega wrote:
  • Report this Comment On April 08, 2014, at 2:42 PM, BentMike wrote:

    "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."

    Maybe I don't understand, BOFI is FDIC - that is not very risky up to the FDIC limit. So you get to make higher interest and you are insulated from risk of BOFI failing. That sounds like a good investment for short term funds - better than a brick and mortar bank will every offer.

  • Report this Comment On April 11, 2014, at 9:39 AM, imajinashion wrote:

    John,

    Does BOFI's purchase of H&R Block's bank change your opinion?

    You say that "BofI Holding relies to a large extent on "hot" money that are potentially susceptible to redemption at the slightest display of weakness." Will the purchase and transfer of H&R customers increase the number of demand deposits that are "stickier?"

    Alex

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