Navigation Menu+

Business model of Internet Banks

Bank Of Internet: Still Growing Nicely At A Cheap Valuation

In January 2010, we wrote an introductory article introducing our long thesis on It has been nearly two years since that article, and it's time to provide an update on what continues to be one of our favorite long ideas.

By and large our thesis remains intact, and the high-level arguments that we highlighted in our original post continue to be the main points supporting our long thesis today.

Nevertheless, given that two years have passed, it makes sense to provide an update.

The Big Picture

Before we get to the numbers, it's important to explain some of the distinguishing aspects of BOFI's business model. Bank of Internet is an internet bank, and the only publicly traded internet bank in the United States as far as we know. As such, it has no direct comparables and the nuances of its unique approach to banking have received scant equity research coverage.

Internet banks are banks of extremes, as in some of their metrics are industry-leading while others are potentially industry-lagging.

On the positive side, internet banks feature:

  • Industry-leading efficiency ratios, because they don't operate physical branch locations. BOFI has one branch and its loan officers, sales team, and management are primarily based out of its San Diego headquarters
  • Industry-leading deposit growth, because they aren't reliant on branch locations to gain customers, but rather benefit from consumers' increasing shift to the internet to fulfill their banking needs
  • A more rational underwriting policy, because credit officers are located in a single, central location and are not pressured to make loans to local customers at the branch level

On the negative side, internet banks feature:

  • The potential for industry-lagging net interest margins, because internet banks gain customers by offering high savings interest rates
  • Industry-lagging non-interest income, because internet banks have historically had limited business customers and have found it difficult to offer ancillary banking services like trust services, investment management fees, etc.

As we can see, when compared to traditional brick-and-mortar banks, internet banks have some positive traits and some negative ones. Yet when all the pros and cons of the internet bank operating model are combined, the end result is actually a sound business that can achieve attractive returns on equity and earnings growth as long as it's run by a management team that diligently monitors credit quality.

Strong Operating Momentum

As far as banks go, Bank of Internet's financial statements are among the most straightforward that you'll come across, partly because the company maintained robust credit quality during the credit crunch.

Apress Practical .NET for Financial Markets (Expert's Voice in .NET)
Book (Apress)

Conventions? Jeezus! Organize and target

by catsass

Corporations that offend you, one by one.

Take down Chase Bank.

Use the internet that hosts viral videos to organize boycotts concentrated at individual corporate offenders.

Get your parents to transfer their mortgages and accounts

A few successes, and the rest of the banks will slowly adapt to a friendlier business model.

You need a tea party'er to lead you guys.

Stomp out the campfires and put away the damn s'mores

Enron was a creature of the global casino

by derivatives

Enron was a creature of the global casino, which applied the techniques of the derivatives markets to the electricity and natural gas markets. Enron's rapid rise was made possible by the 'Wall of Money' that the Federal Reserve and its partners in crime have pumped into the global system since the cardiac arrest which seized that system in Autumn 1998, in the wake of the Russian GKO default and the collapse of the Long-Term Capital Management (LTCM) hedge fund. Similarly, Enron's fall can be attributed to the failure of that 'Wall of Money' policy, which hyperinflated monetary aggregates while sharp deflation hit the financial assets supposed to be rescued by that wall of money

You might also like
Business Model Canvas | The 9 Building Blocks Explained
Business Model Canvas | The 9 Building Blocks Explained
How Can A Business Be Made of Bits?
How Can A Business Be Made of Bits?
Marshall Cavendish International (Asia) Pte Ltd Digital Bank: Strategies to launch or become a digital bank
eBooks (Marshall Cavendish International (Asia) Pte Ltd)
BizPlanDB Internet Cafe Business Plan - MS Word/Excel
Single Detail Page Misc (BizPlanDB)
  • Easy to Use 3 Year MS Excel Financial Model
  • 9 Chapter Business Plan (MS Word) - Full Industry Research - Investor/Bank Ready
  • Private Placement Memorandum and PowerPoint Presentation Included Free!
  • Same Day Shipping (If order is placed before 5PM EST)! Delivered as CD-ROM.
  • Easy to Use Instructions for the Software and the Business Planning Process!
LTBR, Inc The Guru's Get More Biz, Godfather Principles and Sales Models for Bank Notes Internet Businesses 3 CD Power Pack
Book (LTBR, Inc)
Related Posts