BofI Holding (NASDAQ: BOFI), is a unique bank. Aside from a single office, the company has no physical branches whatsoever, operating exclusively online. (The name stands for "Bank of Internet.") In recent years, the bank has grown tremendously, so what should investors expect in 2018?
Expect strong margin to continue
First, it's worth pointing out what not to expect to change. In BofI's case, its key competitive advantage, running a branchless banking system, will continue to keep costs low and allow the company to pay more on deposits and charge less for loans.
Just to put some numbers behind this claim, consider that the average bank of BofI's size pays 2.84% of its assets in non-interest expenses annually. BofI pays roughly half of that, mainly thanks to far lower costs related to salaries, equipment, and facilities. In the most recent quarter, BofI generated 15.2% return on equity and 1.54% return on assets, far greater than the 10% and 1% industry benchmarks.
Expect an initial hit from tax reform, but a benefit later
It may come as a surprise, but BofI -- as well as most other banks, for that matter -- are initially going to take a hit from the newly passed corporate tax cut. That may sound odd -- after all, the corporate tax rate is dropping from 35% to 21% in 2018, so it may sound like a pure benefit.
Well, not exactly. Simply put, banks carry what are known as "deferred tax assets" based on their loan loss reserves, which can be used to reduce taxable income. Well, if an "asset" is expected to reduce taxable income that is only being assessed a 21% rate, it becomes less valuable than if it could reduce income taxed at a 35% rate.
BofI recently said that it expects to occur a one-time charge of between $8 million and $9 million, which will negatively affect earnings by $0.12-$0.14 per share. This hit will be taken in the quarter ended Dec. 31, which we'll hear about when BofI reports earnings on Jan. 30. (Note that BofI's fiscal year runs from July 1 through June 30, so the fourth quarter of the calendar year was actually the second quarter of BofI's 2018 fiscal year.)
After it takes this hit, the company will certainly benefit. In the most recent quarter, BofI's combined federal and state effective tax rate was a sky-high 42%, and it expects this figure to fall significantly in the coming year. For fiscal 2019, which starts on July 1, BofI is forecasting a combined effective tax rate in the 28%-30% range.
Expect the strong growth to keep up, or even accelerate
Over the past year alone, BofI's deposits have grown by 13.5%, which has increased net income by more than 12%. And I don't foresee this rate of growth slowing down anytime soon.
For one thing, rising interest rates should allow BofI's already-competitive interest rates to get even more attractive. As I write this, BofI offers CDs with rates as high as 2.25% and even offers rates as high as 1.25% on checking accounts. If the Federal Reserve raises rates three more times during 2018, as it's expected to do, it could push these rates higher and bring an influx of deposits.
In addition, BofI has historically been a mortgage lender primarily, but it's venturing into other lending businesses. For example, the bank recently started offering unsecured personal loans of as much as $35,000, and it plans to expand into auto lending in the near future.
One wild card that I'm keeping an eye on is BofI's recently expanded partnership with H&R Block (NYSE: HRB) to provide all of the tax preparer's refund anticipation loans for 2018 tax season. While the loans themselves aren't likely to be a major revenue driver (they're at 0% interest, with no fees or finance charges), there are other ways BofI could profit. Specifically, the relationship creates the opportunity for BofI to cross-sell its other products and services to H&R Block's customers. In fact, on BofI's "Welcome H&R Block Customers" FAQ page, there's a list of BofI's other products and services with links to each.
To sum it up
BofI has several positive catalysts as we head into 2018. Tax reform should significantly boost profits, new business lines and partnerships should keep deposits and loan volume growing, and BofI's key competitive advantage of a branchless banking system remains intact. In short, I believe 2018 will be a strong year for BofI.
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