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 innovative neo-banking platform, developed and managed by an experienced and capable executive team that has expanded the company into new business lines and lending verticals. Its unique operating model offers broad diversity across products, services, and customers through a robust national distribution channel. Additionally, the diversification of its business lines introduces a countercyclical element, enhancing revenue stability and supporting consistent growth. The company’s differentiated business approach has driven consistent earnings outperformance over the years, with success particularly notable in the current higher interest rate environment (ROA of 1.7% in 4Q24). This performance has been supported by its asset sensitivity and a more leveraged balance sheet, characterized by a high proportion of loans to earning assets. Additionally, margins and returns have been bolstered by the management team’s opportunistic ability to capitalize on periods of market disruption and stress. Notably, the acquisition of high-quality assets following the 2023 bank failures has significantly contributed to results through purchase accounting accretion. With that said, we also acknowledge that AX is primarily spread reliant, with noninterest income levels generally well below peers, though positively view the company’s fee income composition, which is generated from a variety of non-correlated sources. While the company may appear to have a weaker funding and liquidity position at first glance—given its higher cost of deposits (3.44% in 4Q24) and a loan-to-deposit ratio typically near 100%—we believe this is well-suited to its business model. This is supported by the higher yields and variable rate nature of its loan portfolio, as well as the minimal reliance on uninsured or uncollateralized deposits (~10%). Additionally, AX’s liquidity position is strengthened by over $3 billion in cash at the Federal Reserve and its ability to quickly grow deposits, particularly through its digital retail channel, albeit at a higher cost. The company also benefits from the optionality provided by its securities business, which includes meaningful off-balance sheet deposits that can be brought onto the balance sheet if needed, as well as deposits generated through the growth of its custody business. The loan portfolio is concentrated in investor owned CRE (greater than 300% of risk-based capital) and construction and development loans with a focus on multifamily, although these risks are partially mitigated by: low LTV/LTCs, first priority positions on larger relationships that include PE sponsor note-on-note structure, and low overall exposures to high volatile office and hotel sectors. AX is also focused on boosting its C&I lending going forward which should reduce the concentrations over time. KBRA expects AX to maintain capital levels consistent or higher than peers, while we also view 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 to 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 could 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. Moreover, an increase in wholesale funding usage that would negatively impact NIM could 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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