Is Axos Financial a buy while it’s down?
online banking company Axos Financial (CHOPPED 2.73%) didn’t really work well during the COVID-19 pandemic. The stock is down 28% for the year, significantly lower than the 5% drop in the S&P500 and is even underperforming the beaten financial sector.
While Axos isn’t exactly down for no reason, there are several reasons the bank could be a smart buy as it’s still trading low. Here’s an overview of Axos’ current state of affairs, as well as the reasons for and against investing in the stock right now.
Why did Axos perform so poorly?
Financial stocks as a group have underperformed the market as they have a lot to lose if the economic effects of the pandemic are worse or longer than expected. In a prolonged period of high unemployment, for example, millions of consumers could struggle to pay their bills, leading to a spike in delinquencies.
Axos has underperformed the overall financial sector by around 6 percentage points in 2020, but keep in mind that the financial sector is a combination of commercial banks (like Axos), investment banks, insurance, brokerage houses, etc. Some types of companies included in the index, especially investment banks, actually perform quite well. So while Axos is underperforming the 22% year-to-date decline SPDR Selected Financial Sector ETFs (XLF 0.94%)it’s not exactly an apples to apples comparison.
Axos’ performance was hurt due to its lack of an investment banking business, but this was somewhat offset by the bank’s generally high-quality asset portfolio. (Axos is not a credit card lender, for example.) When it comes to commercial banks, Axos is on par with most of its peers, so it’s important to realize that the bank is not at lagging behind in the sector.
Reasons to invest in Axos
There are several good reasons why Axos might be a good stock to buy while it’s down. To name a few of the most important for investors to know:
Rapid growth : Axos has done an excellent job of growing its business, with a five-year annualized growth rate of 21.6% in loan originations. Growth has slowed down a bit in recent years, but in terms of assets, deposits and net income, Axos continues to grow 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 used to buy, and there are also more than $2 billion in asset-backed commercial loans on the company’s balance sheet. ‘Axos. He has a small portfolio of auto loans and unsecured personal loans and no credit card loans. In short, Axos’ loan operation is less risky than most of its peers.
Partnership potential: Axos has done a great job of building partnerships, especially its H&R block (HRB 0.61%) arrangement. The bank is the exclusive the issuer of H&R Block’s repayment anticipation loans, which creates a lot of potential for brand awareness and cross-selling of other products and services.
Profitability: Due to its exclusively online business model, Axos is much more profitable than most other banks. Axos’ non-interest expense is 1.90% of assets, 66 basis points lower than its average competitor.
Evaluation: Axos is trading at less than 1.1 times its book value, which is a steep discount to its historical valuation and a cheap price to pay for a bank growing as rapidly as Axos.
Risk factors to know
With all of this in mind, it’s important to point out that Axos isn’t cheap for no reason. On the one hand, it could certainly see an increase in defaults due to the COVID-19 pandemic. Axos has $263 million in commercial loans to hotels and another $97 million to retail businesses, to name just a few potential trouble spots.
There is also a lot more competition in the online banking more space than there was before, and that’s 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 no longer the case. The bank is doing 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’s a lot 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 which enjoys the efficiency benefits of a branchless banking structure without the risk of focusing on unsecured loans like the many other fintechs do.