NEW YORK (TheStreet) - Kerrisdale Capital has reversed a long-standing trade in internet banking player BofI Holding, Inc. (BOFI), turning one of the hedge fund's biggest long investments into its biggest short position. The short trade is based on BofI Holding's valuation and Kerrisdale's expectation the firm's margins may be peaking.
Those views, while they don't reflect a wider recommendation on the financial sector, come at a turning point for many banks. The looming prospect of rising short term interest rates amid U.S. economic growth could dramatically alter the earnings environment for many banks. Depending on the business model, some may be poised for an earnings windfall, while others could see their performance slump.
BofI, according to Kerrisdale's analysis, sits in a vulnerable position. The bank, which has approximately $3.6 billion spread across its brands, doesn't have a single bank branch and instead relies upon its internet presence to draw in deposits. That means BofI has brought in depositor money at a low cost. BofI's efficiency ratio of 35% is almost half that of larger lenders with nationwide bank branch networks such as Wells Fargo (WFC), Bank of America (BAC), and JPMorgan (JPM).
BofI also has been one of the top performing banks after it identified an opportunity to buy distressed mortgage bond securities in the wake of the crisis, driving industry-leading interest margins. A high-yielding loan book versus low-cost deposits also means BofI's net interest margin -- the difference between what it earns on loans and what it pays to fund them -- has sat at above 4% in recent years, far above the industry average.