Lending And Tech Advancements Will Shape Future Performance Despite Credit Concerns

Key Takeaways

• Loan growth acceleration and optimized deposit mix strategies are expected to positively impact Axos Financial's revenue and net margins.
  
• Leveraging technology and expanding advisory services are likely to enhance operational efficiency and boost fee income, supporting long-term growth.
  
• Concerns over loan book credit quality, competitive pressures, and acquisition risks present potential challenges to Axos Financial's future earnings and profitability.

Catalysts

Provides consumer and business banking products in the United States.

• Axos Financial anticipates loan growth acceleration due to improved loan pipelines in the single-family mortgage and multifamily term lending businesses, benefiting from recent strategic actions and a more favorable yield curve. This is expected to positively impact revenue growth.
  
• The company is optimizing its deposit mix by targeting cross-selling opportunities and managing deposit costs, with initiatives to continue increasing lower-cost deposit balances through products like commercial cash management. This is likely to contribute to improved net margins.
  
• Axos is leveraging technology and process optimization, including artificial intelligence and low-code software development, to enhance operational efficiency and reduce noninterest expenses. These efforts are expected to positively impact net margins over time.
  
• The expansion of Axos Advisory Services is contributing to growing fee income, with ongoing investment in onboarding processes, product offerings, and client acquisition strategies. This is expected to drive revenue growth in the advisory business segment.
  
• The potential for opportunistic share repurchases and strategic acquisitions, supported by a strong excess capital position, could drive enhanced earnings per share (EPS) growth, contributing to overall shareholder returns.

Axos Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axos Financial's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 42.6% today to 25.0% in 3 years time.
• Analysts expect earnings to reach $362.3 million (and earnings per share of $6.11) by about January 2028, down from $479.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Axos Financial Future Earnings Per Share Growth

Risks

• There are concerns regarding the credit quality of Axos' loan book, particularly with the rise in nonperforming assets in the real estate-backed loan area, which could impact future earnings due to potential increased provisions for credit losses.
  
• The sustainability of recent growth figures is in question as past growth in deposits and net interest margin was influenced by non-recurring factors such as the payoff of FDIC-acquired loans, which might not be replicable, potentially affecting future net margins and earnings.
  
• Axos faces competitive pressures that might require them to adjust pricing in significant lending categories, which could compress net interest margins and impact revenue.
  
• There are inherent risks and uncertainties in potential future acquisitions that require additional capital; unsuccessful acquisitions or poor integration could impact financial stability and earnings.
  
• The base of nonperforming assets has increased, particularly in the commercial and multifamily real estate portfolios, which might necessitate increased reserving in anticipation of possible losses, affecting earnings and profitability.

Valuation

• The analysts have a consensus price target of $81.67 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 $91.0, and the most bearish reporting a price target of just $75.0.
  
• 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 $362.3 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $72.4, the analyst's price target of $81.67 is 11.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.