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 differentiated neo-banking platform, developed and managed by an experienced and capable management team that has expanded and diversified the company into new business lines and lending verticals over time. Its unique operating model provides broad diversification across products, services, and customers through a robust national distribution channel. This diversification introduces a countercyclical element that enhances revenue stability and supports consistent growth. While Axos’ digital approach and technological capabilities enable greater-than-peer growth opportunities in both lending and deposits, KBRA believes this growth has been pursued in a disciplined and conservative manner, reflecting sustained demand for the company’s offerings and reinforcing its competitive positioning within the banking industry.

This strategy supports a consistently stronger earnings profile (ROA of approximately 1.8% in 2025) relative to peers, driven primarily by higher-than-average loan yields that more than offset its comparatively higher funding costs, in part, due to its focus on consumer digital banking. While these yields imply somewhat elevated credit risk, they also reflect a shorter-duration loan portfolio that benefited from the rising rate environment, as well as a more leveraged balance sheet, together contributing to a meaningfully higher net interest margin (nearly 5.0% in 2025). Earnings are further supported by a highly efficient operating model, evidenced by a 47% efficiency ratio for 9M25.

Although AX operates primarily as a spread-based revenue model, with noninterest income generally lower than peers, KBRA views the composition of this income favorably given its derivation from a variety of non-correlated sources. We also recognize management’s efforts to further diversify and grow fee income, notably through the securities business and the recent acquisition of Verdant Commercial Capital, LLC ("Verdant"), an equipment leasing platform.

The company’s funding profile has improved over time, with approximately 90% of total bank deposits insured or collateralized as of 3Q25, though the funding base remains interest-rate sensitive. Axos Securities further enhances funding flexibility, supported by approximately $450 million in off-balance-sheet deposits. Organic core deposit growth has lagged loan growth, contributing to elevated balance sheet leverage, as reflected in a loan-to-deposit ratio of 103% and a loan-to-core deposit ratio of 116% at 3Q25. Nevertheless, the company retains flexibility to de-lever if needed, supported by discretionary lending verticals and a shorter-duration loan portfolio.

Following a period of capital accretion in 2024, AX’s acquisition of Verdant, combined with robust loan growth, contributed to an 80 bp decline in core capital—most notably its CET1 ratio—in 3Q25, leaving it approximately 80 bps below peer medians. While capital metrics have moderated, KBRA expects capital levels to rebuild over the intermediate term, supported by strong internal capital generation. Given the company’s concentrated construction and development (C&D) and commercial real estate (CRE) exposures, KBRA expects AX to maintain capital levels more closely aligned with peer norms over time.

Despite elevated CRE and C&D concentrations, credit quality metrics have remained relatively strong in recent years, reflecting a conservative underwriting approach and proactive risk management practices. KBRA also takes comfort in the company’s solid loss-absorption capacity in the event of unforeseen credit stress, supported by above-peer earnings, ample reserve coverage, and a solid and growing capital base.

Rating Sensitivities

A positive rating action could be considered if the company builds and sustains risk-based capital ratios to above peer averages. KBRA would also view favorably lower CRE loan concentrations and greater revenue diversity, with noninterest income approaching 20% of total revenue. The ratings could come under pressure if credit quality materially deteriorates and adversely affects earnings, or if the consolidated CET1 ratio experiences significant, prolonged deterioration. Increased reliance on wholesale funding that negatively impacts NIM and/or unforeseen risk management or governance issues within the relatively newer broker-dealer business could also weigh on the ratings.

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