Monday, January 9, 2012

Bank Of...Internet?

I generally stay away from banks, but for value investors who do dabble in the highly-leveraged financial companies, Bank Of Internet (BOFI) may be worth keeping an eye on.

BOFI has only one branch, as it transacts with most of its customers over the internet. This allows it to save a bundle in costs versus its bricks-and-mortar competitors, giving it the opportunity to grow its business by offering superior rates to customers.

BOFI is also very conservative compared to other banks, reducing the risk to value investors. It navigated the disastrous 2008-2009 period unscathed, and current management has no plans to make the bank more aggressive. The current weighted-average loan-to-value ratio is just 57%!

One problem with this stock is that it has recently had a good run already. As such, it now trades above book value and pretty close to the exercise price of convertible preferred shares it just sold. But the good news is that this is a volatile stock, so if a market panic or bank stock panic ensues, one may be able to get in at a very favourable price.

Investing at the current price can still make sense - but to do that one would have to believe in the growth story. But while Bank of Internet has grown profitably over the last few years, it has not yet faced stiff competition. Should well-capitalized, competent competitors enter the field, Bank of Internet could be reduced to the commodity-type business its bricks-and-mortar cousins already face, bringing down growth and returns.

Bank of Internet is a conservatively run, profitably-growing institution. But will it's future be as bright as its past? That part is difficult to predict. As such, unless you really know what you're doing, you don't want to assume future returns will be anything better than average. But an opportunity to pick this up for a discount to book value may occur at some point, so interested investors should be prepared.

Disclosure: No position

1 comment:

Paul said...

Speaking of funny bank names: