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BofI Holding's Valuation: Cheap or Expensive?

By Motley Fool Staff - Dec 6, 2017 at 4:07PM

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Here's a look at BofI’s valuation and profitability. Is the bank’s stock cheap or expensive?

BofI (AX 1.58%) trades for a seemingly high valuation, but that's because it is more profitable and efficient than other banks. In this clip, Industry Focus: Financials host Michael Douglass and financials specialist Matt Frankel discuss BofI's valuation metrics and how investors should interpret the numbers.

A full transcript follows the video.

This video was recorded on Dec. 4, 2017.

Michael Douglass: Let's turn to part two: How expensive is the bank? And there are a couple of different ways to look at this.

Matt Frankel: My favorite way is using the price-to-tangible book value metric. This basically tells you how expensive a bank is in relation to how many assets are on its balance sheet. BofI's currently 2.1 times tangible book value. This is relatively expensive in terms of banking, but to put it into perspective, it's the exact same as JPMorgan's right now, just slightly above Wells Fargo and not even that far above Bank of America. So BofI is not an expensive bank stock by any stretch. U.S. Bancorp, for example, is well above BofI's valuation.

The other way you can look at it is in more traditional terms of the P/E ratio. For BofI is actually about 12, which is very low, especially compared to the S&P right now. That's about half of the S&P right now, from the last 12 months. So don't think that just because this is a high-tech, fast-growing bank stock that it's going to be priced outrageously. It's really not.

Douglass: And hopping forward into the historical perspective a little bit, it has been priced, at least as banking people, we'd say, pretty outrageously in the past. There are some reasons the valuation has come down, which we'll come to later in the show.

Let's turn to part three, then. I promised they go a little bit faster, and they are. What is the bank's earnings power? BofI's price-to-tangible book value ratio is high-ish, let's say, and its price-to-earnings ratio is very low, which sounds a little bit weird. Return on equity, or ROE, bridges that gap. And BofI's is very good; it's 17.4% over the trailing 12 months. That highlights their ability to turn equity into earnings. For background, an ROE over 10 in banks is usually considered pretty good. So, 17.4% is stellar.

Frankel: Yeah, definitely. Usually, 10 is considered to be the industry benchmark on that. But another thing to look at is the net interest margin, which is kind of a fancier way of saying the spread between the rate the bank is loaning money at and how much it's paying out in deposits. BofI's is about 3.77% right now. Which is about a full 1% ahead of most of the rest of the banking industry, thanks to its cost advantages, which we'll also get into in a second.

Douglass: Right. And I was just going to say, the cost advantage is really key here, because BofI is paying out on a lot of its deposits. And if you consider the fact that, chances are good whatever bank you bank with doesn't pay interest on your checking account and on your savings account, they're paying you very little as well, BofI is generally paying more, and that's because, in part, they can afford to. So they can attract really high-quality deposits.

That is, in part, as you noted, Matt, because of their low-cost structure. The efficiency ratio is really critical here. This ratio includes all of the non-interest expenses. That's real estate costs, marketing expense, salaries, etc., and divides them into revenue, so lower is better. Last quarter's efficiency ratio was 40.49%, which is fantastic. Anything below 50% is considered great. BofI's peer group, that is all savings banks with assets greater than $1 billion, has an efficiency ratio on average of 63% by comparison. So that really highlights the value of their online-only model, and the fact that they don't have physical branches that you can go to.

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