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Is Axos Financial a Buy?

By Dave Kovaleski - May 23, 2020 at 6:00AM

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In an industry that has been hit hard by the pandemic, this online bank still has a lot going for it.

If you are looking for a bank stock to add to your portfolio right now with good long-term growth prospects, consider Axos Financial (AX 0.16%), the parent company of Axos Bank.

Axos is not your typical bank, in that it is completely online with no physical branches, and it hasn't performed like other banks during this pandemic. In the last quarter, its fiscal third quarter, when most other banks reported earnings declines, its earnings per share climbed 44% to $0.91, beating estimates. 

Axos Financial's stock price got a nice bump out of that report, but it's still down about 33% on the year. Let's look inside the numbers to see why this bank is a buy.

On open laptop showing a log in page with the words "online banking" at the top.

Image source: Getty Images

Great efficiency

A bank's efficiency ratio is one of the most important measures of its profitability. It's calculated by dividing its non-interest expenses, or operating costs, by net income. The lower the efficiency ratio, the more the bank is earning relative to how much it is spending. Generally, a 50% ratio is considered pretty good.

In the most recent quarter, Axos posted a ridiculously low 39.8% overall efficiency ratio, which was down significantly from 52.7% in the same quarter last year. The efficiency ratio for the banking segment was 33.2% in the quarter, down from 35% the same period the previous year. 

Those great results were buoyed by record earnings over the last three months and nine months. In its fiscal Q3, which ended March 30, Axos had a 44% increase in net income year over year to $56 million. For the nine-month period ending March 30, Axos posted a 20.6% increase in earnings year over year to $138.1 million.

Strong loan growth

The spike in earnings was driven by growth in its loan and lease portfolio, which grew about 14% year over year to $10.3 billion.

Those loans are very low-risk, asserted Axos President and CEO Gregory Garrabrants on the third-quarter earnings call. "Our single-family mortgage, multifamily and commercial real estate mortgages have low loan to values, low loan to costs and are located in markets with historically strong demand," he said. "Approximately 95% of our loans outstanding at March 31, 2020, were collateralized by hard assets with a loan-to-value ratio in the 50s, including $9.1 billion of real estate assets and $787 million of primarily consumer receivables."

The loan-to-value ratio, or LTV, measures the value of the loan relative to the full value of the asset securing it. So, an LTV in the 50% range is excellent and means these are lower-risk loans. Plus, the bank has minimal exposure to hard-hit industries like airlines, malls, casinos, retailers, theme parks, hotels, oil and gas, restaurants, and small businesses.

Net interest income was $120 million, up 9% from the same period a year ago, even though the bank set aside another $28.5 million in loan loss provisions in anticipation of defaults related to the COVID-19 pandemic -- 50% more than it set aside in Q3 of its fiscal 2019. Its net interest margin, which is how much it earns in interest on loans versus how much it pays out in interest on deposits, rose to 4.97% in the quarter, compared to 4.84% the previous year. That is well above the historical average for banks.

While loan growth will likely slow in the near term, the company expects net interest margins to remain around 4% for the year.

What now?

There is a lot to like about Axos, including its tangible book value -- the financial value of a bank's hard assets minus its intangible assets. It's a good metric for gauging a firm's financial condition, capital strength, and capacity to handle potential losses. Axos' tangible book valueat the end of the quarter was $17.46 per share, up from $14.49 per share the previous year. Based on Friday's closing prices, Axos is currently trading at almost 1.2 times that amount, which shows the market has some confidence in it. Yet it's still cheap if you go by its price-to-earnings ratio, which is only around 7.  

Axos' strong loan portfolio, along with its low expenses and great value, make it a solid buy.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axos Financial, Inc. The Motley Fool has a disclosure policy.

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