What Can EverBank Teach Us about Bank of Internet?

Value investor favorite BOFI Holding (NASDAQ: BOFI), the company popularly known as Bank of Internet, can be a hard company to analyze because there are few benchmarks for it.

Most of its competitors, such as Capital One 360 are part of companies that have other businesses. For example, 360 is owned by Capital One Financial Corp (NYSE: COF), which is primarily a credit card company.

Yet there is one publicly traded financial institution with a business model similar to Bank of Internet’s. It is Florida-based EverBank Financial (NYSE: EVER). Like BOFI, EverBank offers consumer banking services like savings and checking accounts online. It also employs some of the same strategies to drive business, such as offering higher interest rates and advertising heavily.

Those similarities should worry Bank of Internet investors because EverBank posted very dismal financial numbers for the first quarter of 2015. The sorry statistics include:

• A quarterly year to year revenue growth rate of -12.75% on March 31, 2015. In contrast, BOFI reported a rate of 44.42% on the same day.

 

• A diluted EPS of .09627 on March 31, 2015; BOFI reported an astounding diluted EPS of 4.896 on the same day.

 

• A free cash flow of -$184.54 million. BOFI reported a free cash flow of $31.31 million.

To be fair, EverBank did post some appealing numbers, including a return on equity of 8.36% and a dividend yield of .89%. Bank of Internet offered investors a return on equity of 18.18% and no dividend yield. Bank of Internet has also been displaying an incredible profit margin of 35.7%, while EverBank has a very nice profit margin of 7.57%.

Why Are EverBank and BOFI’s Results So Different?

So what is going on here? Why are two companies with essentially identical business models operating in the same sector getting very different results?

Size might have something to do with it. EverBank has an enterprise value of $7.051 billion compared to BOFI’s $1.809 billion. One possibility is that there are size and market limits for online banks; they might simply stop growing after hitting a certain level. One has to wonder if BOFI will hit that size limit at some point and stop growing.
Another possibility is that BOFI’s growth is not from stealing customers from brick and mortar banks as its cheerleaders claim but from swiping depositors from other online banks. One reason why EverBank’s revenues are shrinking is that BOFI is stealing its depositors.

If that’s the case, both EverBank and BOFI could be in big trouble given the recent explosion in online banking. Online depositors might be more likely to switch banks at the drop of a hat. After all, there is no physical relationship involved, and opening a new account and transferring funds is as easy as downloading a video from Netflix.

A big problem is that customers might move their money around every time they see that an institution is offering a better interest rate or a spiffier deal. BOFI is also making a very big push into lending, which could be attracting more depositors.

Interestingly enough, EverBank is cutting back on its lending, selling $12.4 billion in what its CEO Robert Clements calls non-core mortgage assets. That too could be driving some depositors away and cutting revenues.

Which Online Bank Is a Value for the Future?

Now for the big question: Which of these financial institutions would be a better investment? My take is that it would be EverBank simply because its shares are a lot cheaper than Bank of Internet’s right now. BOFI, on the other hand, seems very overpriced and probably headed for a fall at some point. For the record, Bank of Internet was trading at $92.23 a share on the morning of May 26, 2015, while EverBank was trading at $18.06 a share.

EverBank is also less of a risk than BOFI because it has far more assets. The only problem is that its potential for growth seems limited by a state of affairs that could soon affect Bank of Internet.

The big problem here is that the whole online banking sector is too new and too unstable. It is gripped by intense competition, and it faces serious outside pressure from disruptive solutions like Apple Pay, PayPal’s Venmo and Google Wallet, all of which could easily rewrite all the rules in the banking industry. My prediction is that both Bank of Internet and EverBank could face a fierce struggle to simply maintain market share in the near future.