Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Axos Financial Fell 12% in February

By Jon Quast - Mar 3, 2020 at 2:06PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors anticipated interest rate cuts, and now we know they were right.

What happened

Shares of Axos Financial (AX -0.09%) fell 11.6% in February, according to data provided by S&P Global Market Intelligence. The stock had risen modestly following its second-quarter fiscal 2020 earnings release on Jan. 29. But the broad market correction took most stocks down with it, and Axos Financial was no exception. Investors likely anticipated federal interest rate cuts, and that's not great for companies like Axos. 

So what

A health crisis like COVID-19 has obvious repercussions to consumer spending, especially in places like China, where stores were forced to temporarily close. It also has obvious effects on manufacturing, as workers stay home to prevent the further spread of the disease. A less obviously affected industry is the financial sector, as interest rate cuts can hurt a bank's profitability.

A man lays his head down in frustration, with a down stock chart behind him.

Image source: Getty Images.

Indeed, rate cuts are now happening around the world, in an attempt to curb the economic impact of the novel coronavirus. Today, the Federal Reserve released a note saying that it was lowering interest rates by 50 basis points. It said that it believes the overall economy is strong, but it wanted to ensure continued high employment rates and combat potential inflation. That may be good for a lot of companies, but it hurts net interest margins for banks. 

For Axos, 84% of its Q2 2020 income came from net interest. This is revenue generated from the spread between the rate it lends money and borrows money. Unless the company can increase loan volume enough to offset the rate cuts, Axos could see its revenue decline.

Now what

Rate cuts may not be over. President Trump has already expressed support for cutting further. But any decision would have to come from the Federal Reserve, which has expressed reluctance to cut rates unless something extraordinary occurs. In other words, the fallout from COVID-19 might need to get worse for there to be further cuts. But more cuts would hurt banks like Axos Financial.

That said, in Q2, Axos' net interest margin was 3.87%, among the best in the industry. And other financial metrics demonstrate that Axos Financial is a top bank stock. Therefore, it's well positioned for the long term. Considering that the current market downturn is likely temporary, now may be a good time to pick up shares on the cheap.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Axos Financial, Inc. Stock Quote
Axos Financial, Inc.
AX
$35.29 (-0.09%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.