KBRA Affirms Ratings for Axos Financial, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Las Vegas, Nevada based Axos Financial, Inc. (NYSE: AX) ("the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, Axos Bank, based in San Diego, California. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

AX’s ratings are supported by its unique neo-banking platform led by an experienced management team. The platform provides the company with the opportunity to reach a national client base and provide greater geographic diversification compared to peers. Moreover, we view the company's various businesses as countercyclical including its bankruptcy trustee business, securities business, and cash sorting. Further supporting the ratings is the company’s consistently stronger than peer earnings profile driven by its asset sensitivity and leveraged balance sheet, which facilitates a healthy NIM, and is further boosted by a highly efficient operating model. While noninterest income has generally been lower than peers, we positively view AX’s noninterest income mix, which is generated from a variety of noncorrelated sources. The company has made notable progress with improving the quality of funding over the past several years although AX’s funding base remains sensitive to the higher rate environment primarily due to its digital banking model as reflected with its 3.64% cost of deposits at 3Q23. Moreover, Axos Securities provides the company with additional funding flexibility given the approximately $0.5 billion in off-balance sheet deposits held at partner banks that can be brought back on balance sheet. AX has historically maintained its capital levels 100 – 200 bps below peer averages, however, the company has worked to rebuild its capital base by balancing growth with its retained earnings. Capital remains a ratings constraint due to its concentrated C&D and CRE portfolios. More recently, CET1 and total RBC ratios have grown to 11.1% and 14.1%, respectively, a notable increase from the year-ago levels. KBRA views the company’s ability to build capital as stronger than peers due to its solid earnings capacity combined with a no dividend policy.

Rating Sensitivities

A positive rating action could be considered in the event that the company builds and sustains risk-based capital ratios at levels above peer averages. In addition, KBRA would favorably view lower concentrations among the C&D and CRE segments of the loan portfolio. Also, greater revenue diversity with noninterest income closer to 20% of revenue and 1% of average assets would be considered positive. The ratings would come under pressure if credit quality materially deteriorated, negatively impacting earnings or if the consolidated CET1 ratio falls below 10% for a sustained period of time. An increase in wholesale funding usage that would negatively impact NIM could also pressure ratings. Additionally, any unforeseen risk management or governance issues within the broker-dealer business, which is a relatively newly established business line without a seasoned track-record, could pressure the ratings.

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Methodologies