Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

We all know Bank of America Corp. and the Bank of Japan. But what about Bank of Internet USA?

It calls itself "America's oldest and most trusted internet bank" (italics are its own). Its parent company, BofI Holding Inc., has a market value of $1.9 billion and also happens to hold the title of most shorted U.S. bank. Skeptics have been betting on a decline in the company's performance, and expected an unraveling due to a customer base that's proven to be more risky than your typical lender. (Past approved borrowers have subsequently been sentenced to prison for crimes ranging from operating a Ponzi scheme to Medicare and Medicaid fraud.)  

Betting on a Fall
Bank of Internet's holding company is the most-shorted U.S. bank, and the fifth most-shorted U.S. financial stock^
Source: Bloomberg
*Data at 1/13/2017. ^Only four fiinancial stocks have a higher short interest as a percentage of free float: Credit Acceptance Corp., Fidelity & Guaranty Life, LendingTree and World Acceptance Corp.

That bear case was strengthened in October 2015, when one of the bank's former internal auditors filed a lawsuit that alleged regulatory violations including the fact that portions of its financial statements were false and misleading.  

For shorts, though, that's as far as it goes. As BofI's president and CEO Gregory Garrabrants said Monday, the bank maintains a "strong regulatory standing" and -- after completing multiple regulatory exams -- it hasn't received any enforcement actions, fines or recommendations for modifying its business practices.  

Bear Case
Short interest in BofI remains high despite the fact that the Southern District of California Court has dismissed without prejudice the majority of the claims in a whistleblower's lawsuit
Source: Bloomberg, Markit

BofI's underlying performance has also spoken louder than words: Earnings per share has climbed by more than a third in each of the past most recent fiscal years (ending June 30). Shareholders have piled back in, resulting in its stock more than doubling in the past year.

This week, the San Diego-based lender posted better-than-expected second-quarter earnings. Highlights included net interest margins of 4 percent, return on tangible common equity of 17.5 percent and year-on-year loan growth of 20.6 percent -- figures that larger commercial banks can only dream of. And as for its credit quality, its ratio of non-performing assets to total assets remains at 0.4 percent, which is even lower than that of industry stalwarts like Bank of America and JPMorgan Chase & Co.

Survivor
Immediately after the lawsuit was filed, half of the analysts on Wall Street covering BofI moved to "hold". Since November 2015, the recommendation has been a unanimous "buy".
Source: Bloomberg

KBW analyst Jefferson Harralson is telling clients that the "litigation overhang" is preventing BofI from reaching its true value. Wall Street analysts on average believe that figure is $34.19, basically where the bank traded before its former employee filed his allegations and roughly 16 percent higher than its closing price Tuesday.  

Now seems to be a good as time as any for shorts to reconsider. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net