BofI Holding (AX 0.70%) has grown tremendously in recent years, but it's still a relatively small bank. Here are some of the catalysts that could help grow its business even more, as well as some economic trends that could boost its profit margin even further.
A full transcript follows the video.
This video was recorded on Dec. 4, 2017.
Michael Douglass: The bank has a number of opportunities it's trying to execute on right now. We mentioned auto lending. They're also getting into the personal-loan game. You've probably seen Marcus by Goldman Sachs ads on Facebook. At least I have. They're certainly pushing into that. And that's all, when you think about all of what they're doing, it feeds into this universal digital initiative that they're working toward.
Matt Frankel: Yeah, this is kind of their initiative where they want to be a one-stop digital bank for anybody's banking needs. They want to make the most user-friendly interface among digital banks, offer any lending and deposit product you could ever want, and be more open to third-party partnerships like the H&R Block partnership I mentioned earlier.
Douglass: Yeah. That means, among other things, they're doing a lot of other investment in tech right now. Actually, that 40-and-some-change efficiency ratio we talked about is higher than it's been historically in part because they are making so many of those investments right now. Of course, you still have an enormous cost advantage.
Two other things going forward that are worth highlighting -- the first one is interest rates. The Fed has increased interest rates by 0.75% in the last year. BofI has only increased their average interest rate, checking and savings deposits rates, by 0.29%. So that difference is an arbitrage advantage, and that's one of the reasons why, when we talk about rising interest rates benefiting banks, this is why, it's things like this. The banks are able to raise how much they are paying out for deposits in savings accounts at a lower rate than the Fed is increasing overall interest rates, which then enables them to pocket the difference.
Frankel: Yeah. It's also worth pointing out that the 0.29% is actually more than most banks have increased in the same amount of time. My Wells Fargo savings account still pays out something like 0.02% or something like that.
Douglass: [laughs] Right.
Frankel: So it sounds like the bank is being a little greedy by getting 0.75% more on their loans, and only paying out less than half of that in additional interest on deposits. But it's really a lot more generous than the industry standard. BofI's rates were a lot higher to begin with, too, so this makes some of the more appealing interest rates in banking look even more so.
Douglass: Yes. And this for me highlights the really key thing to think about with BofI, and it's the primary reason that I'm a shareholder, which is this inherent advantage, which is its low-cost structure. Low-cost structure is everything in my mind if management is good, because that means you're going to be able to continue attracting deposits, because you're able to pay out more for them.
You're also, on the flip side, on the loan side, you're able to get the most creditworthy folks with the really high FICO scores because you're able to offer them a slightly lower loan rate than anybody else, and you're able to do that on both ends because of your non-interest expenses -- so, things like, in this case, physical plant, are so much lower than anybody else has, such that you are able to take those hits on both sides of the loan/deposit part of the business, but still maintain profitability and core conservative underwriting standards, because you don't need to chase yield. If your cost is lower than everybody else's, you can give more back on both sides to attract the best consumers.
For me, this is a huge advantage that BofI has.