I hate banks. I hate many if not most bank stocks, and I hate analyzing them even more, the reasons for which could be the topic of an entire post itself. That being said, I think I've found a bank stock that I don't hate, but rather like, as I think it has the potential to post solid gains.
Before I begin discussing my arguments, I want to disclose that I first encountered this stock working for a client. The client hired my firm to conduct research on the stock and has a long position in it. Our policy is to keep such work between us and our clients, but fortunately, this particular client has allowed me to share some of my work on this stock. See the full disclosure at the end of this post.
Many of the most widely-held and talked-about bank stocks are large-to-mega cap, national (if not global), diversified financial institutions. Analyzing just one business line or asset class on these banks' balance sheets is hard enough. Trying to get anything resembling an accurate forecast for these banks involves more guesswork than The Price is Right, and that's before we try to project impacts from changing regulatory or Fed policy decisions. From an investing standpoint, the uncertainty inherent in analyzing these banks is problematic, given that uncertainty is seldom an investor's friend.
That's why I think Bank of Internet Holdings (BOFI) is not only a cut above the rest because it's actually analyzable, but because the business is sound, management has a demonstrated commitment to risk management, costs are low, and growth prospects are incredibly high. Compare these characteristics to those of the major integrated banks or even one of the smaller thrifts.
Whether we are examining a Citigroup (C) or Bank of America (BAC), or a Zions Bank (ZION) or Regions Financial (RF), analyzing these stocks can be a daunting task. There are dozens of business lines, management is questionable at best, risk management largely consists of being "Too Big To Fail" (if it exists at all), operating costs are relatively high, and growth prospects can be difficult to pin down. For the thrifts, some of these factors are less of a concern, but for the most part, their costs are substantially higher (ie. their efficiency ratios are less attractive) and growth prospects lower than BOFI's.
BOFI is, as far as I can tell, the only pure-play, web-based consumer bank stock trading on a major stock exchange. BOFI operates out of a single branch in San Diego, with the majority of its operations being online, allowing the company to operate without the huge costs of a national branch network. Its main direct competition has either gone belly-up (e.g. NetBank, for an instructive case), been sold to a larger diversified financial institution (e.g. ING Direct, now part of Capital One (COF)), or is private (e.g. Everbank).
If you believe as I do that the internet, and internet banking specifically, will increasingly take market share away from branch-based banking in the coming years, you probably want to own this stock. If you doubt the increasing role of internet banking, just look at these charts from BOFI's presentation at the Roth conference last week:
click to enlarge
If you would also rather own a bank stock that has few of the loan loss issues plaguing its competition, that trades at a discount despite posting better operating performance relative to its peer group, that has delivered solid performance in good times and bad, then you need to check out BOFI.
How many banks delivered this sort of performance over the past seven years?
Not many, that's for sure.
Net Interest Income growth of almost 30% per year from 2005-2009 is pretty incredible, as are 20% net income and 14% EPS growth over a period that saw hundreds of banks die, get bailed out by the Treasury or Federal Reserve, and / or get put on the FDIC's Problem Bank List. Over the past 5 years, the numbers are even more impressive, a fairly remarkable feat considering the financial crisis.
Given BOFI's average LTV on its loan portfolio of 57%, debt service coverage ratio of 1.48% (i.e. lots of cushion), and general aversion to high risk businesses (capital markets only account for 8%), I think it's very reasonable to argue that BOFI is significantly undervalued on both P/TBV and P/E, on both a relative and absolute basis, even given increasing competition in the online/internet banking space.
I don't want to give away the whole story now, but over the next few weeks I'll try to delve into the competitive landscape/industry analysis and company fundamentals, which I'm confident will show even those as cynical on bank stocks as I that BOFI is a stock with far more upside potential than down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Stone Street Advisors' company policy is to keep the bespoke, paid research and analysis we do for clients confidential. However in certain circumstances - and only with a client's explicit permission - we may share some or all of that research publicly. The above (the analysis/article) contains some of the research we performed for/with a client and from whom we received compensation for so doing. The client who paid for this research has a long position in BOFI and stands to gain if BOFI markedly increases in price. In addition, following publication of this article, our client may continue to hold, add or reduce its position. The opinions presented herein are those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in BOFI, nor do we have any plans to initiate one. The information and opinion presented in this article is presented as-is, and does not constitute any offer or solicitation. Stone Street Advisors LLC makes no representation as to the accuracy or completeness of the information contained herein and has no duty to update the information and opinion in the article. The content presented is not investment advice, nor is Stone Street Advisors LLC a Registered Investment Advisor.