Internet-based bank BofI Holding, Inc. (AX -2.75%) runs one of the most efficient and profitable operations in the banking industry, and it has grown at an impressive rate over the past several years. However, there is good reason to believe the bank's growth is just getting started. Here's what investors should know about this high-potential bank, and where it might be headed.
What makes BofI Holding unique?
BofI Holding (which stands for "Bank of Internet"), is an online-only bank with about $8 billion in assets. The company does not have any physical branches -- rather, all operations are conducted at a single office.
The result of this is some pretty valuable competitive advantages when it comes to cost. After all, BofI doesn't need to pay the costs associated with maintaining and staffing physical banking locations -- real estate rent, maintenance, furnishings, décor, staffing costs, etc. In addition, online-based transactions cost banks a small fraction of what comparable in-person transactions cost.
The numbers speak for themselves
Because of the efficiency advantages, BofI can generate better profits than peers while offering customers better interest rates on deposits and loans.
In the most recent quarter, BofI Holding generated return on equity (ROE) of 17.49% and a return on average assets (ROAA) of 1.66%. Both metrics handily surpass the industry benchmarks of 10% and 1%, which many peers haven't been able to produce in the persistent low-interest environment. In fact, BofI's peer group averages a ROE of 7% and ROAA of just 0.78%. BofI is in the 95th and 93rd percentile, respectively, for these two metrics.
And as you might expect, the bank's efficiency ratio is much better than peers as well. While the bank's peer group average is 66.82% (lower is better), BofI's efficiency ratio is an unheard-of 31.46%.
Strong growth so far
Over the past few years, BofI has grown impressively. Loan originations have grown at an annualized rate of more than 43% since 2011, and the bank's book value per share has roughly tripled in that time. Earnings per share have grown at an annualized 32% rate, producing big gains for shareholders who bought during the early days and held on.
One big reason for this is that the bank has successfully transitioned from a time-deposit (CD) business model to a deposit base that more closely resembles a traditional bank. Checking and savings deposits now make up 82% of BofI's portfolio, up from 50% in 2013.
And, the growth hasn't slowed down much. In the most recent quarter, BofI grew its assets by 22.6% year over year, and grew its deposit base by about 27%.
Future growth potential
While BofI Holding has grown tremendously so far this decade, there's reason to believe that there's still plenty of room to run. For one thing, BofI's $8 billion in assets is a rather small amount, even when compared with most small regional institutions.
Management believes there is still plenty of room for organic growth in the bank's current lines of business (most of the loan portfolio is currently made of single-family and multifamily residential loans).
However, the bank is rolling out new lending products that it feels could take its business to the next level. In 2017, the bank is venturing into consumer auto lending and unsecured personal lending. Perhaps the most exciting thing in the works is the bank's tax refund anticipation lending operation in partnership with H&R Block, which has about 10,000 branches. This has massive potential for cross-selling opportunities, and could be a major boost to BofI's deposit base as well as its lending portfolio.
In a nutshell, BofI has generated some impressive growth so far, but the bulk of its expansion could still be ahead. There's no way to predict the future, but there's a good possibility that BofI could become a millionaire-maker stock if things continue to go well for the company.