market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Sahm Adrangi of Kerrisdale Capital who pitched a short of Bank of Internet (BOFI).


Sahm Adrangi's Value Investing Congress Presentation

• Posting a short – originally long this company. One point the largest stock position. Stock is up 15x since when they originally bought it. 6x P/E less than 1x TBv and no   sell-side coverage when they first bought it. Went from $100MM to 1.2B, 26 PE 4x   TBV. Largest short. Bank of Internet is that short (BOFI).

• Owns a wide variety of internet banks, one branch in San Diego. Offers one of the highest savings rate (not the highest). Sources loans through branded websites and through the wholesale correspondent channel. LTM NI is $47MM versus 1.2B market cap.
• Key part to the thesis – BOFI is over-earning. Why will there be pressure? On the asset side and liability side. Yield on the assets inflated by MBS purchased three to four years ago (bought distress RMBS) – particularly high securities yield. As they roll off NIM declines. Loan book focused on jumbo mortgages – increasing competition. Either yields will decline or adverse credit quality. Loan provisions are thin. Long duration – Deposits will re-price upwards, won’t be able to raise NIM   without taking interest rate and other risks. Increasing competition among online banking as well will hurt NIM.
• (1) BOFI’s asset yields not sustainable - made attractive RMBS investments. Yields have started to decline, believe it will continue to decline. Loan yields and securities are in-line with other banks ex. RMBS purchased in the downturn. Asset yield versus   its peers 4.4% for BOFI versus 2.2% for their peers. 
• (2) Jumbo loans are a material driver for BOFI – competition is increasing. More and more banks are competing – either yields decline or BOFI takes on greater credit risk.
• (3) Another risk – BOFI is/may be taking on longer duration assets. Banks generally have a mismatch, but as interest rates drive up, deposits re-price, but you have to wait for the loan to mature before you can re-deploy capital. Mentioned that BOFI looks like it has made bet on declining interest rates.
• (4) Liability side – Deposits are less sticky – plus BOFI can’t offer the relationship/cross-sell services. Plus, it’s much easier to set up an online bank account versus physical account.
• (5) New Competition is weakening BOFI’s position. Large lenders like GE Cap, Ally Bank, CIT, etc. are going after the online banking space. U.S. regional banks are launching online divisions as well. Believes GE or Ally/other providers will capture new deposits as well. BOFI isn’t in the top 10 for a lot of segments.
• (6) Organic growth has stalled 
• Putting it all together, NIMs will fall.
• Outside of NIM – a quarter of operating income came from mortgage gains on sale. Problem with this, is that mortgage origination has been declining due to Fed tapering and rising rates – will be a headwind.
• May be under-reserving on NPLs. Only 55 bps allowance for loan losses versus gross loans, competitors are higher. 
• Valuation multiples – 4x TBV is higher than even its peers – twice as high. Think there is a lot of retail investors in BOFI and Motley Fool talk.
• NPV of loan book is ~$400MM 
• 7% short interest
• Risk: good management team – thinks 2.5x TBV reasonable valuation. Stock has ran up largely over the past couple months. Think there may be some more short term volatility. Think they can pull levers to grow perhaps, but at 4x TBV – not justified. Further, NIM pressure will probably offset growth. 


Be sure to check out the rest of the Value Investing Congress presentations.