Maybe the best banks don't have any branches at all. Internet-based bank BofI Holding (NYSE:AX) has grown tremendously in recent years. From mid-2013 through the end of 2017, the bank has grown by more than 250%.
However, there could still be lots of room to grow in the years (and decades) ahead. Here's a rundown of what you need to know about this bank and its advantages, as well as how it could potentially grow to several times its current size.
What does BofI do?
The simple description is that BofI Holding (which stands for Bank of Internet) is an online-only bank. It offers many of the same features as brick-and-mortar banks, such as checking and savings accounts, CDs, and mortgages -- but without physical branches.
The majority of BofI's loan portfolio consists of single-family loans, with an emphasis on jumbo mortgages. It also has substantial amounts of multifamily and other commercial real estate loans, as well as commercial loans,
Instead of relying on physical branches to make its presence known, BofI invests heavily in digital marketing and relies on partnerships and cross-selling ability to grow. This approach has certainly been successful -- over the past year alone, BofI's assets have increased by more than 9% and its deposit base has grown by nearly 12%. And over the past six years, the bank's EPS has grown at a staggering 29% annualized rate while its loan originations have grown at an even more impressive 31.8% rate.
Cost advantages produce massive profitability
Because of its online-only business model, BofI has significantly lower operating costs than its peers. For example, BofI's salary and benefit expense is just 0.83% of its assets, far below its peer group average of 1.49%. And the company spends less than half on buildings and equipment as other banks of comparable size. In all, BofI's non-interest expense is an impressive 124 basis points lower than its peers.
The result is an extremely profitable operation. To cover their cost of capital, banks are generally expected to earn a 10% return on equity (ROE) and 1% return on assets (ROA). Most of the big banks are right around these numbers, or slightly above them. BofI, on the other hand, earned an 18.5% ROE and a 1.87% ROA in its most recent quarter. In other words, the bank is nearly twice as profitable as most other banks are expected to be.
Room to grow
One of the most important takeaways is that with just under $9 billion in assets, BofI is still a relatively small bank, despite its growth. In fact, it is the 151st largest bank by asset size, just behind Safra National Bank of New York and just ahead of Towne Bank. If you haven't heard of those other two banks, well, that's kind of my point.
For comparison, the four largest U.S. banks all have well over $1 trillion in assets, and there are more than 80 banks with at least twice the size of BofI. In short, there's plenty of room to grow.
There are plenty of ways BofI can grow, both in terms of its existing business and new, untapped areas of the banking business.
As far as current business lines go, there are tons of room to expand the mortgage business, especially when it comes to agency (also known as conforming) mortgages. Agency mortgages are the largest part of the residential mortgage market but make up roughly one-fifth of BofI's residential mortgage pipeline.
There are also new and lucrative business areas, such as auto lending and unsecured personal lending, which BofI plans to start tapping into this year. Plus, 2018 is the first year BofI is the exclusive provider of H&R Block's refund anticipation loans, which opens the door to tremendous cross-selling potential.
In addition, it's worth pointing out that BofI's low cost structure allows it to pay higher rates on deposits than its competitors. In fact, the bank currently advertises 1.25% APY checking accounts and even higher CDs. As the Federal Reserve raises rates, the bank's deposit products could begin to look even more attractive compared with relatively low-paying options from the big banks. https://www.bankofinternet.com/
How big could BofI get?
To be clear, I don't think BofI, or any other internet-based bank for that matter, will become as big as JPMorgan Chase or Bank of America -- at least not for the foreseeable future. There is definitely a valuable convenience advantage to brick-and-mortar banking, and there are also some banking products and services that can only be offered in person. For example, it would take significant creativity for BofI to figure out a way to offer safe deposit boxes.
Having said that, there's lots of room for BofI to grow, especially considering its profitability allows it to undercut the lending rates of brick-and-mortar competitors and offer more enticing rates on deposits. While I don't want to speculate on a specific size, I wouldn't be surprised to see BofI's asset size climb well into the 11-figure range in the coming years.