Axos Financial, Inc. (AX, $23.31): “Not Your Father’s Bank”
By: Sean Dole, AIM Student at Marquette University
• Axos Financial, Inc. (NYSE:AX) provides banking and securities products and services through its online channels to customers across the country. The company was founded in 1999 and is headquartered in Las Vegas, NV.
• The COVID-19 pandemic has accelerated the shift to digital banking and Axos is in a great position to benefit from this trend.
• Through their Universal Digital Banking and Axos Invest platforms, Axos proves that they are ready for the new age of banking.
• Historically, Axos’ concentration in hard asset secured loans has led to a strong performance, and the AIM fund should continue to hold this security.
With bank branches unable to operate face-to-face during the pandemic, they saw a large uptick in remote deposits and online account openings. McKinsey & Co. estimates the crisis accelerated the shift to digital banking by at least two years. In fact, a survey by Deloitte shows that over half of first-time online banking users will use a mix of online and in-branch services once the crisis is over and 14% will switch to completely online banking. This is an obvious threat to the typical brick-and-mortar banking industry, and Axos needs to capitalize on the trend.
Axos was founded as a digital bank and has grown into a “full-fledged, technology-based financial services company”. Their focus on online checking accounts is one of their key strengths and differentiators. At its core, Axos offers many of the same services as a traditional bank, but they also operate a couple exciting platforms: the Universal Digital Bank Platform and Axos Invest.
As a “Universal Digital Bank (UDB)”, Axos aims to create better personalization for customers. They will leverage AI and integrate products (savings, credit, investing) to create a smoother and more customizable experience. Through this process, the company can increase its own efficiency by cross-selling products and delivering on higher volumes.
Axos Invest offers a free financial digital advisor that automates the financial planning process. The platform boasts a high conversion rate (20%), low acquisition costs, and sticky accounts which creates a product moat. This service directly targets the growing demand for do-it-yourself financial products. To keep improving the company, Axos needs both the UDB and Axos Invest platforms to attract new customers and retain existing customers.
The company consistently has a better ROE, ROA, and efficiency ratio than its peers. In the most recent quarter, they surprised analysts with an expanding net interest margin that will continue to be within 3.8% and 4.0%. For comparison, many major banks NIM’s have been decreasing and sit in the 2% to 3% range. Axos’ strong fundamentals come from its asset-backed lending focus. Currently, 94% of their loans are secured by hard assets. This differentiates them from other digital banks, such as Goldman Sachs’ Marcus, which have largely unsecured loan portfolios.
What has the stock done lately?
Over the summer, AX moved up with the rest of the market and now sits 60% above its March lows. A positive earnings report at the end of July also helped propel the stock upward through August. Now with an LTM P/E ratio of 7.92, AX is trading at a discount to its pre-pandemic P/E ratio of 11. As the market continues to turn toward cyclical stocks, I expect AX to continue rising in the short term.
Past Year Performance
AX has fallen about 10% over the last twelve months. Given that the stock fell more than 50% from peak to trough in March, this performance is not all that bad. Also, it has recovered faster than the iShares Regional Bank ETF (IAT) which is still down 35% over the past year. AX has been holding in a range ever since 2014, but the acceleration of digital banking may be the catalyst it needs to take its next leg up.
Going forward, Axos will face intense competition from large tech companies such as Apple and fintech startups such as Betterment. However, Axos knows what they do well, and they stick to it. The overall movement to online banking should greatly benefit their digital strategy. Because they have performed well recently and have strong growth prospects, I recommend the AIM Small Cap Fund continues to hold the security.