Shares of Axos Financial (NYSE:AX) fell 10% in trading on March 3, before rebounding slightly to finish down 9%. Today's big drop was caused by two things: the surprise announcement by the U.S. Federal Reserve that is was cutting a key benchmark that affects every bank, and a filing with the SEC in which Axos said its deal with H&R Block (NYSE:HRB) was at risk of termination.
Let's start with the macro news that's affecting the banking sector: the lowering of the Federal Reserve's target range for short-term federal funds. The Fed board voted unanimously today to lower the range by 50 basis points -- which works out to half a percentage point -- in an effort to offset the economic impact of the coronavirus on the global economy.
This move was made to help stimulate economic activity, as lowering lending costs for individuals and businesses should encourage continued expenditures, ranging from home and auto purchases among consumers to capital investments among businesses.
One industry that doesn't particularly benefit from falling interest rates is banks, and today's Fed move has many bank stocks down sharply. The Financial Select Sector SPDR ETF (NYSEMKT:XLF) was down more than 4% on the day.
Axos' bad day was compounded by a company filing with the SEC disclosing that its partnership with H&R Block is at risk of falling apart. The two companies failed to reach a Feb. 28 agreement to modify the terms of the deal that was triggered when Axos passed $10 billion in assets in 2019. The failure to reach new terms gives Block the unilateral right to terminate the agreement, which generates millions in profits for Axos during tax season each year.
While the lowering of interest rates to what now stands as some of the lowest in U.S. history isn't great for banks, it's also a move that will hopefully stave off a downturn in economic activity caused by fears over coronavirus. Whether that happens remains to be seen.
As for the potential risk of losing the H&R Block partnership, it stands to reason that it wouldn't be in the tax preparer's best interest to terminate the agreement quickly. Tax season has already kicked off, and unless the company has another bank ready to step in immediately, Block would be likely to harm its own financial results if it made an immediate change.
Besides, as Axos CEO Greg Garrabrants described on the fourth-quarter earnings call, the reason behind the risk of Block's termination -- the loss of interchange fees triggered when Axos passed $10 billion in assets -- won't kick in until July, when the tax season is "substantially complete."
So while there's long-term risk to the deal, it's unlikely it will happen before the end of tax season. That gives the two companies more time to negotiate, and for both to have an exit strategy in place if they can't reach an agreement.
For Axos investors, it's a good time to look back at Garrabrants' efforts over the past few years to diversify the bank's business. Losing Block won't be great if it happens, but Axos' future doesn't require it to remain the tax preparer's banking partner forever.