- BOFI is addressing its funding issues buying deposits.
- HRB deal reinforces you need a "toaster" to gain deposits.
- BOFI is a bank at 3.5x book.
After yesterday's close H&R Bloch (NYSE:HRB) sold their bank to Bank of Internet Holdings (NASDAQ:BOFI). An incredible coup for HRB allowing to break the chains of fed oversight. Equally as helpful to BOFI was a source of deposits at a lower cost than they are capable of acquiring through current channels, primarily the internet banking and by offering high interest rates. The average cost of HRB deposits is a mere 11 basis points.
The problem for BOFI long term is from a consumer point of view the deposit account is a commodity. Banks need to offer more services, local branches with notary, safe deposit boxes, and convenient ATMs to gain the customers balances. BOFI cannot offer any of this and they need a "toaster." The toaster comes from a time when banks could not offer high rates on deposits due to interest caps by regulation. So they offered free everything including toasters to get customers to open accounts. The HRB deposits are tied to their debit card and tax return business. For BOFI to get the next set of deposits they will need a new toaster and after time the variety of toasters offered will erode the cost advantage.
BOFI is a bank that trades at a substantial premium to tangible book and multiples of traditional banks. See the fantastic write-up by Kerrisdale Capital. While BOFI is a fast grower, they are still a bank and haven't yet reinvented it in a way other high flyers are their markets. The only path to long term profitability is to continually raise capital to buy more deposits. A strategy only sustainable by a high stock price.
Best of Luck
Disclosure: I am short BOFI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.