If you think that brick-and-mortar bank branches are old-fashioned, you may want to look into a direct, or branchless, banking company for your next stock investment. Two interesting players in this space are BofI Holding (BOFI +3.40%), a rapidly growing online-based bank, and Ally Financial (ALLY +8.10%), one of the nation's top auto lenders with a massive online banking business.
Here's a quick rundown of the two companies, along with a discussion of the key differences between them, and a call on which may be the better buy now.
Image source: Getty Images.
A small, rapidly growing bank
BofI Holding is an online-only bank with about $8.5 billion in assets. All of its business is conducted online, with no physical branches whatsoever. The idea is that a branchless-banking concept should translate into better profits and efficiency, and it seems to be working. BofI's efficiency ratio (indicates noninterest expenses as a percentage of revenue) is among the lowest of all U.S. banks, mainly because its noninterest expense is less than half of its peer group average.
The majority of BofI's portfolio is made up of mortgages, with smaller concentrations in commercial, industrial, and other types of loans. Retail auto lending, unsecured personal lending, and tax refund advance loans -- in partnership with H&R Block -- are all new areas of BofI's business, but the portfolio remains extremely mortgage-heavy for the time being.
BofI has grown impressively in recent years, with earnings per share growing at a 32% annualized rate since 2011 and book value more than tripling over that time period. Deposits have grown from about $1.34 billion in 2011 to nearly $7 billion currently.
One of America's top auto lenders
Ally Financial was formerly known as GMAC, which was founded as General Motors' consumer finance arm. So it shouldn't come as a surprise that Ally's primary business is auto lending. In fact, the company is tied with JPMorgan Chase for the leading auto-lending market share, based on full-year 2016 loan originations.
Auto lending and leasing makes up roughly three-fourths of Ally's assets, and the company also has smaller operations in mortgage lending and corporate finance. However, the auto-focused portfolio is one major difference between the two banks. Auto loans tend to earn higher interest rates than mortgages, but also tend to have higher delinquency rates.
Like most banks, Ally finances its operations primarily with deposits, and with more than $70 billion in retail deposits, the company is one of the largest direct (branchless) banks in the U.S. In fact, Ally uses a banking model rather similar to BofI Holding's.
In recent years, Ally has experienced impressive growth, although at a slower rate than BofI. Total deposits have grown at a 16% annualized rate over the past three years, and tangible book value per share has grown from $22.20 to $27.40 over that time period.
Key differences
While the general idea of both banks is the same -- to lend money and accumulate deposits without using traditional brick-and-mortar banking branches -- there are several key differences to be aware of, especially in terms of size, maturity, and profitability.
|
Metric |
BofI Holding |
Ally Financial |
|---|---|---|
|
Market capitalization |
$1.7 billion |
$10.3 billion |
|
Total assets |
$8.5 billion |
$155.1 billion |
|
Total deposits |
$6.9 billion |
$86.2 billion |
|
Dividend yield |
N/A |
2.1% |
|
P/E ratio (TTM) |
13.0 |
11.1 |
|
Price-to-book ratio |
2.05 |
0.77 |
|
Efficiency ratio |
39.1% |
55.7% (43.7% core) |
|
Net interest margin |
3.80% |
2.76% |
Data source: Company financials for second quarter 2017. TTM = trailing 12 months.
First, notice the huge difference in size between the two. A market leader in auto lending, Ally is more than 18 times the size of BofI, in terms of assets.
I'd call Ally the more mature and stable of the two companies, which can be seen in the company's relatively slow and steady growth. On the other hand, BofI has tons of potential to grow. In addition to the company's core mortgage lending business, it's also important to point out that BofI is just beginning to venture into auto lending, as well as other areas of the business such as unsecured personal lending.
To be clear, I'm not saying that Ally doesn't have room to grow. While the company's auto lending business naturally has somewhat limited potential to grow, the company has started some promising new ventures, such as its Ally Invest investment platform, as well as mortgage lending business. However, BofI clearly has the higher long-term-growth potential of the two.
In addition, the last two metrics in the chart show how even though both companies have online-based banking operations, BofI has a significant advantage when it comes to efficiency and profitability.
The other side of the equation is valuation. As a high-potential, fast-growing, and highly efficient banking operation, BofI trades for a significantly higher valuation relative to its asset size. In fact, BofI's price-to-book ratio is 166% higher than Ally's.
Two very different investments
Although both companies are online-based banking operations, they are two very different investments. BofI is not a cheap stock in terms of valuation, but it has lots of potential for long-term growth, as well as a proven record of profitability and efficiency. Ally Financial is the more mature of the two companies, and trades at a significant discount to book value.
While there is certainly a solid case to be made for both of these stocks, as a more growth-oriented investor, I would choose BofI if I had to buy one today -- simply for its sky-high potential.
