What happened
Shares of Axos Financial (AX 2.09%) 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.
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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.
