America's Got Some Bad News for BofI Holding, Inc.

The unpopularity of savings as an investment should not affect BOFI’s earnings in the foreseeable future.

May 3, 2014 at 10:00AM

The Gallup organization's latest survey of Americans' investment habits contains what could be some bad news for Bank of Internet (NASDAQ:BOFI), with the percentage of Americans that think savings accounts and CDs are a place to park money falling steadily.


Savings accounts and CDs were the preferred investment choice of just 14% of Americans, the latest Economy and Personal Finances poll found -- down from 19% last year. The poll also found that stocks, mutual funds, real estate, and even gold were more popular investments for Americans than bank accounts.


Source: Flickr / Georgio Monteforti.

The problem these figures pose for BofI Holding is an obvious one; the company's business model is partially built on offering savings and money market accounts or CDs with higher than average interest rates. Yet Gallup's numbers indicate average Americans have a dim view of these particular investments.

If Gallup's numbers are right, fewer and fewer Americans see bank accounts as a good investment. That means fewer people will be looking for the higher interest rates that BofI Holding has long used to attract customers.

Are low interest rates to blame?
Obviously, much of the reason for the unpopularity of savings is the low interest rate. Even the returns on the best savings products such as Bank of Internet's High Yield Savings accounts are dismal these days because of the Federal Reserve's efforts to keep interest rates low.

That means money might start flowing back into savings if quantitative easing, the Fed's program to keep interest rates low to stimulate the economy, ends. Observers think the Fed will reduce the bond buying that is the basis of its policy but not end it when its open market committee meets.

Basically, that means low interest rates will be with us for some time to come, which means less incentive to save. It also means that the company's savings accounts could be a tough sale for some time to come.

Still doing well
The interesting thing is that BofI Holding is still doing very well despite the unpopularity of savings accounts in America. Bank of Internet's trailing yearly revenue increased from $111 million at the end of 2012 to $142 million in 2013.

The growth extended to the company's profitability as well. On Dec. 31, 2013, it reported a quarterly profit margin of 34.3%, an increase from 31.3% in 2012.

These figures indicate that savings accounts might not be that important to banks. Instead, it is other factors, such as convenience and the reimbursement of ATM fees, that are driving customers to Bank of Internet.


Source: Flickr / Mark Moz.

Yet Bank of Internet and its investors should pay attention to the Gallup survey because it identifies a potential growth area for all banks. The poll found that 30% view real estate as a long-term investment, a percentage that is increasing.

That creates an opportunity for BofI Holding's mortgage business. The company is making an aggressive foray into mortgages right now, such as offering discounted lender fees to Costco members.

Foolish takeaway
BofI Holding offers a lot more than savings accounts and CDs. Other services, such as mortgages and checking, should help the online bank attract new customers even as Americans look for other places to put their money.

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Daniel Jennings has a position Bank of Internet. The Motley Fool recommends BofI Holding. The Motley Fool owns shares of BofI Holding. 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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