BofI Holding: 14% Earnings Growth, but Is the Stock Too Expensive?

BofI is still growing strong and producing some impressive profitability metrics. But has the stock come too far, too fast?

Matthew Frankel, CFP
Matthew Frankel, CFP
Jan 31, 2017 at 7:33AM

Online-only bank BofI Holding (NYSE:AX) reported second-quarter earnings that beat analyst estimates and showed impressive growth in the bank's business. However, with the stock up 65% over the past year, has investors' window of opportunity passed?

Picture of a building with the word "bank" over the doorway.

BofI Holding has no physical branches, a big advantage over peers. Image source: Getty Images.

The numbers look good at first glance

Over the past several years, BofI Holding has been growing rapidly, and that doesn't seem to be changing. In fact, the bank's total assets are now approaching $8.2 billion, an increase of 22.6% from just one year ago.

As a result, net interest income rose 21%, total net income grew by almost 15%, and earnings per share was 13.6% higher than a year ago.

The main goal of an online-only bank is to run an operation that is more efficient, and therefore more profitable, than brick-and-mortar peers. With return on assets (ROA) and return on equity (ROE) of 1.66% and 17.49%, respectively, BofI handily beats the industry benchmarks of 1% and 10%. And an efficiency ratio of less than 36% is simply unheard of among most banks with physical branches.

Furthermore, the bank has grown safely, without sacrificing asset quality. The total nonperforming assets ratio of 0.43% is one of the best in the business, and this amount is well covered by BofI's allowance for loan and lease losses.

But the news isn't all good for investors

For one thing, BofI is rather expensive. As of this writing, the bank trades for 2.4 times its book value, which is a hefty premium over most other banks, as you can see in the chart below. Even the most rock-solid big banks like U.S. Bancorp and Wells Fargo don't trade at such a high valuation.

BOFI Price to Book Value Chart

BOFI Price to Book Value data by YCharts.

Sure, the bank's growth and profitability do warrant a higher multiple. However, this leaves investors more vulnerable if, say, growth begins to slow. Plus, BofI doesn't pay a dividend, and dividend payers tend to do better if the overall stock market drops. And while the entire banking sector has rallied in the wake of the election, BofI's 65% gain in the past year is a big move. It's clear that the market has high expectations for BofI in the years ahead.

Additionally, while ROA and ROE were strong during the quarter, they did decline significantly from last year's numbers, as did the bank's efficiency ratio. The nonperforming assets and loan loss reserve coverage ticked up since last year as well.










Efficiency ratio (note: lower is better)



Nonperforming assets (% of total)



Allowance for losses to nonperforming loans (% coverage)



Data source: BofI.

Related Articles

Also be aware of this lingering issue before investing

Before investing in BofI, you should know that the company has been the target of fraud accusations, first from a single ex-employee, and later from a law firm that checked on the accusations with nine former employees. My colleague Brian Stoffel recently wrote a thorough article on the situation if you're unfamiliar.

As a result, the stock became a target for short-sellers. In fact, nearly 36% of all BofI's outstanding shares were sold short as of Jan. 15, 2017.

Could BofI still have room to run?

If it turns out that all the fraud allegations are just a bunch of hot air, we could see massive short covering drive BofI's stock price up. And it's entirely possible that deregulation of the banking industry, higher interest rates, and the economic growth plans proposed by the new president of the United States could cause BofI's profits to soar.

The bottom line is that BofI seems to be firing on all cylinders lately, but this stock isn't for the faint of heart. As I just mentioned, it's entirely possible that the rally is just getting started. Or, the short-sellers could be right about the bank, or growth could slow down, and the exact opposite could happen.