Axos Financial Hit With Short Seller Report, Stock Tumbles

Axos Financial, Inc. AX shares are trading lower after Short seller Hindenburg Research issued a short report on the stock.

Hindenburg alleged that a former Axos credit review officer detailed the practice of loan “evergreening,” or providing loans to non-performing or doubtful borrowers to avoid recognizing problems, per litigation records.

Similar schemes, also known as “extend and pretend,” were described by former employees during our investigation.

“A former regional leader told us Axos’ customer base in commercial and multifamily revolved around ‘borrowers who couldn’t get loans from other banks’.”

Benzinga has reached out to Axos for comments on the report. We will update the story with their response.

Hindenburg says that based on their examination of a cross-section of Axos’ loan portfolio, these underwriting standards have led to the accumulation of problematic loans.

As of March 31, 2024, Axos reported provisions for credit losses in its commercial real estate (CRE) category of only $83 million, a figure that appears significantly underestimated given the evident issues within the portfolio.

As per a former employee, “Axos has been extending loans or attempting to offer slight discounts to keep them afloat, but “in a lot of cases the loans, the properties didn’t cover.”

Hindenburg claimed that Axos’ seemingly favorable credit metrics suggest potential manipulation or distortion, with disclosed loan-to-value (LTV) ratios in commercial real estate reported to be 17% lower than the median average of nine of its peers.

As per allegations by a former credit review officer documented in litigation records, “the Bank routinely misrepresented the average loan-to-value ratios of its loans to investors.”

The short seller projects that around $1.1 billion in CRE loans, initially issued at lower interest rates, will need renewal in the next year, which will challenge the adequacy of Axos’ remarkably low provisions.

The report adds that Axos’ auditors have flagged this as a critical audit matter due to the subjective nature of the company’s forecasts.

“While we do not to call into question Axos’ liquidity position or its depositor base, history shows that these ‘outliers’ often take on undisclosed risk to fuel their optimistic numbers. Overall, Axos’ exposure to the riskiest asset classes, its lax underwriting standards, and glaring issues with its portfolio indicate that the company faces significant stress ahead.”

Investors can gain exposure to the stock via The Acquirers Fund ZIG and WisdomTree U.S. SmallCap Fund EES.

Price Action: AX shares are down 12.01% at $46.16 at the last check Tuesday.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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