Should you invest in Axos Bank?

Axos Financial is highly exposed to America’s commercial-property slump

Financial buildings, New York City
(Image credit: Getty Images)

The past four years have radically changed the landscape of the US property market. The residential market has surged, with the average house price now nearly 50% higher than in January 2020. However, it has been a very different story for the commercial property market due to remote working. Despite the best efforts of some prominent technology companies, all the evidence suggests that the return to the office in the US has stalled. Office vacancy rates have continued to increase as firms decide to save money by not renewing their leases, or selling their offices. 

Around 15% of office space in the United States is vacant (double the pre-Covid figure), but the rates are even higher in the major cities, such as Los Angeles and Chicago. In San Francisco, more than 20% of office space is vacant. This is not only bad news for property companies, but also for banks such as Axos Financial (NYSE: AX)

As short-seller Hindenburg Research has pointed out, instead of cutting its exposure to the flatlining commercial market, Axos has significantly increased lending to the commercial sector, nearly doubling it over the past three years. Commercial property (counting apartment blocks, which are also doing badly) now accounts for slightly more than half the bank’s loan book.

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How investors feel about Axos Bank

Although headquartered in California, Axos has made a particularly strong push into New York’s commercial property sector. While the city’s vacancy rates are roughly the same as those in the US as a whole, there has been a surge in repossessions in recent months, and experts predict worse to come. The rate at which commercial properties are being foreclosed is one of the highest in the US, and rising. Even more worryingly, Axos’s loan book is especially concentrated on a relatively small number of individual projects, with one developer comprising nearly 5% of its total loan book. 

There are also anecdotal indications that, in a bid to expand, Axos has lowered its lending standards, taking on commercial loans that other lenders in the area are unwilling to back, and making high-risk loans to firms in other sectors, such as cryptocurrencies. Despite these risks, investors continue to be extremely bullish about Axos. Although most comparable midsized US banks typically trade at, or on, a small premium to the value of their net tangible assets, Axos is valued at a much larger 51% premium. 

The market has ignored these problems, even though Axos is one of the most shorted small regional banks. The stock nearly doubled from $33 in November to a high of $61 last month. However, it has now fallen back by around 15%, and is trading below its 50-day moving average. I, therefore, suggest that you short Axos at the current price of $53.75 at £40 per $1. In this case, I’d put the stop loss at $77.75. This should give you a total downside risk of £960.

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri