AI And Technology Investments Will Reshape Lending Landscape

Key Takeaways

• Strategic initiatives in lending, technology, and securities are expected to drive revenue growth and improve net margins through enhanced efficiency and expanded services.
  
• Stock repurchases aim to increase earnings per share by reducing share count, supported by asset growth from Axos Securities and Axos Invest platforms.
  
• Interest rate pressures and competitive challenges may narrow margins and earnings, with tax changes and credit risks potentially impacting financial stability and growth projections.

Catalysts

Provides consumer and business banking products in the United States.

• Axos Financial anticipates strong loan growth in the high single-digit to low teens range on an annual basis driven by strategic actions, improved distribution channels in lending sectors such as fund finance, equipment leasing, and multifamily lending. This is expected to positively impact revenue.
  
• The company is making significant investments in technology, including AI and a low-code development strategy, to enhance operational efficiency. This is likely to contribute to improved net margins by reducing costs related to software development and operations.
  
• Axos Financial is focused on leveraging its Axos Securities and Axos Invest platforms to grow assets under custody and customer cash balances through cross-selling opportunities and new customer acquisitions, which could contribute to higher interest income and fee-based revenues.
  
• The company is actively engaging in stock repurchases, having deployed about $58.3 million for buybacks recently, which may lead to an increase in EPS due to a reduced share count.
  
• Axos is implementing strategic initiatives in its securities business, such as the Axos professional workstation and modernization of Axos Invest, potentially offering expanded services and improving service integrations, which should generate incremental fee income and support long-term revenue growth.

Axos Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axos Financial's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.1% today to 33.1% in 3 years time.
• Analysts expect earnings to reach $493.0 million (and earnings per share of $8.51) by about May 2028, up from $427.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 8.9x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Axos Financial Future Earnings Per Share Growth

Risks

• Despite the overall positive tone, there are concerns about the impact of interest rate and competitive pressures, particularly affecting new loan yields, which might lead to narrowing net interest margins and potentially lower earnings.
  
• The uncertainty and volatility in interest rates and market conditions could affect the pace and stability of loan growth projections, potentially impacting future revenue expectations.
  
• There are potential future tax implications due to changes in California's taxation of financial institutions, which could initially lead to a decrease in deferred tax assets, affecting net margins in the short term.
  
• While credit quality remains solid, rising net annualized charge-offs compared to the previous year, along with the need for a higher allowance for credit losses, might indicate increased credit risk, affecting net earnings and profit margins.
  
• Rising input costs and tariff uncertainties, particularly affecting the construction and logistics sectors, could have an adverse effect on specific loan portfolios, impacting revenue from these segments.

Valuation

• The analysts have a consensus price target of $81.167 for Axos Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $88.0, and the most bearish reporting a price target of just $72.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $493.0 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $67.15, the analyst price target of $81.17 is 17.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.