Online banking company Axos Financial (NYSE:AX) hasn't exactly performed well during the COVID-19 pandemic. The stock is down by 28% for the year, which dramatically lags the 5% decline in the S&P 500 and is even underperforming the beaten-down financial sector.

While Axos isn't exactly down for no reason, there are several reasons why the bank could be a smart buy while it's still trading cheaply. Here's a rundown of the current state of Axos' business, as well as the reasons for and against investing in the stock right now.

Woman at a table typing on a laptop while holding a credit card.

Image source: Getty Images.

Why has Axos performed so poorly?

Financial stocks as a group have underperformed the market because they have a lot to lose if the pandemic's economic effects are worse or longer lasting than expected. In an extended period of high unemployment, for example, millions of consumers could have trouble paying their bills, leading to a spike in loan defaults.

Axos has underperformed the overall financial sector by about 6 percentage points in 2020, but keep in mind that the financial sector is a combination of commercial banks (like Axos), investment banks, insurance companies, brokerages, and more. Some types of businesses included in the index -- especially investment banking -- are actually performing quite well. So, although Axos is underperforming the 22% year-to-date drop in the Financial Select Sector SPDR ETF (NYSEMKT:XLF), it's not exactly an apples-to-apples comparison.

Axos' performance has been hurt because of its lack of an investment banking business, but this has been somewhat offset by the bank's generally high-quality asset portfolio. (Axos isn't a credit card lender, for example.) As far as commercial banks go, Axos is performing on par with most of its peers, so it's important to realize that the bank isn't much of a sector laggard.

Reasons to invest in Axos

There are several good reasons why Axos could be a good stock to buy while it's down. Just to name some of the most important for investors to know:

Fast growth: Axos has done a great job of growing its business, with a five-year annualized growth rate of 21.6% in loan originations. Growth has slowed a bit in recent years, but when it comes to assets, deposits, and net income, Axos is still growing at a double-digit rate.

Asset-backed loans: Ninety-five percent of Axos' loan portfolio is asset-backed. Most of the bank's loans are mortgages, which are backed by the real estate asset they were used to purchase, and there are also more than $2 billion of asset-backed commercial loans on Axos' balance sheet. It has a small portfolio of auto loans and unsecured personal loans and doesn't have any credit card loans at all. In short, Axos' lending operation is less risky than most of its peers.

Partnership potential: Axos has done a great job of building partnerships, particularly its H&R Block (NYSE:HRB) arrangement. The bank is the exclusive issuer of H&R Block's refund anticipation loans, which creates lots of potential for brand awareness and cross-selling of other products and services.

Profitability: Because of its online-only business model, Axos is far more profitable than most other banks. Axos' noninterest expenses add up to 1.90% of assets -- 66 basis points less than its average competitor.

Valuation: Axos trades for less than 1.1 times book value, which is a sharp discount to its historic valuation and a cheap price to pay for a bank that's growing as fast as Axos.

Risk factors to know

With all of that in mind, it's important to point out that Axos isn't cheap for no reason. For one thing, it could certainly see an uptick in loan defaults due to the COVID-19 pandemic. Axos has $263 million in commercial loans to hotels and another $97 million to retail businesses, just to name a couple of potential trouble spots.

There's also far more competition in the online banking space than there used to be, and this is a big risk factor. Axos used to be the only major online bank to offer user-friendly checking accounts that pay interest, but that's not the case anymore. The bank does a good job of differentiating itself, but competitive pressures will be an increasing risk factor over time.

Is Axos Financial a buy while it's down?

There is quite a bit to like about Axos Financial, especially at the current valuation. Patient investors with a relatively high risk tolerance may want to take a closer look at this online lender that enjoys the efficiency advantages of a branchless banking structure without the risk that comes from focusing on unsecured lending like many other fintechs do.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.