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Bank OZK Rides on High Rates, Fee Income Amid Weak Asset Quality
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Bank OZK (OZK - Free Report) remains well-positioned for growth on the back of a diversified loan portfolio, efforts to improve fee income and high interest rates. However, an elevated expense base and weak asset quality are headwinds.
OZK’s Growth Drivers
Solid Growth Strategy: Bank OZK’s growth is significantly driven by a de novo branching strategy alongside its inorganic measures. The bank’s revenues experienced a compound annual growth rate (CAGR) of 16.3% over the last three years ended 2023, primarily driven by steady loan growth (which witnessed a 10.8% CAGR over the same time frame) and a rise in fee income. The uptrend for revenues, loans and fee income continued in the first six months of 2024. The company will likely keep expanding through opportunistic expansions, given a solid balance sheet.
Revenue Growth
Image Source: Zacks Investment Research
Further, efforts to bolster fee income, increased emphasis on building a secondary mortgage banking business, and a diversified loan portfolio will likely aid top-line expansion. We project net revenues, fee income and loans to witness a CAGR of 3.3%, 1.1% and 5.9% by 2026, respectively.
High Interest Rates to Aid Net Interest Margin: Amid the current high-interest rate scenario, Bank OZK’s net interest margin (NIM) is likely to witness improvement in the upcoming quarters, though the pace might be subdued due to higher funding costs. In 2023, NIM increased to 5.16% from 4.82% in 2022 on the back of higher rates.
NIM Trends
Image Source: Bank OZK
Though the trend reversed in the first half of 2024, given increased funding costs, the metric is anticipated to stabilize in 2025 in light of decelerated funding cost growth in light of rate cuts. Our estimates suggest NIM to be 4.62% in 2024 and 2025 and 4.94% in 2026.
Strong Balance Sheet: As of June 30, 2024, Bank OZK’s total debt (comprising other borrowings and accrued interest payable and other liabilities) was $846.9 million, while cash and cash equivalents were $2.6 billion, demonstrating the strength of the balance sheet. Hence, a robust liquidity position and earnings strength enable the bank to address its debt obligations, even in the event of economic turmoil.
Challenges for OZK
Mounting Expense Base: Bank OZK has been witnessing a continuous increase in non-interest expenses. The metric experienced an 8.6% CAGR over the last three years ended 2023. The year-over-year uptrend continued during the first six months of 2024 as well. The increase was primarily driven by a rise in salaries and employee-benefit costs.
Expense Growth Trend
Image Source: Zacks Investment Research
Given the ongoing expansion measures, headcount is likely to increase, thus leading to higher expenses. Moreover, inflationary pressures are also likely to weigh on the company’s expense base. We anticipate non-interest expenses to witness a CAGR of 5.4% over the next three years.
Deteriorating Asset Quality: Bank OZK’s worsening asset quality remains another headwind. The bank recorded a provision for loss at a 12.5% CAGR over the past five years ended 2023, as the company continued to build reserves to tackle a tough operating environment. This continued in the first half of 2024.
Uncertain economic conditions and expectations of a slowdown are likely to keep the provisions elevated in the near term. We project provision for credit losses to increase 26.9% in 2024.
Bank OZK currently carries a Zacks Rank #3 (Hold). Over the past year, shares of the company have gained 20.1%, underperforming the industry’s growth of 29%.
Estimates for CNOB’s current-year earnings have been revised 1.2% upward in the past 60 days. The company’s shares have rallied 33.7% over the past six months.
Estimates for NECB’s current-year earnings have been revised 22.8% north in the past week. The company’s shares have soared 71.1% over the past six months.
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Bank OZK Rides on High Rates, Fee Income Amid Weak Asset Quality
Bank OZK (OZK - Free Report) remains well-positioned for growth on the back of a diversified loan portfolio, efforts to improve fee income and high interest rates. However, an elevated expense base and weak asset quality are headwinds.
OZK’s Growth Drivers
Solid Growth Strategy: Bank OZK’s growth is significantly driven by a de novo branching strategy alongside its inorganic measures. The bank’s revenues experienced a compound annual growth rate (CAGR) of 16.3% over the last three years ended 2023, primarily driven by steady loan growth (which witnessed a 10.8% CAGR over the same time frame) and a rise in fee income. The uptrend for revenues, loans and fee income continued in the first six months of 2024. The company will likely keep expanding through opportunistic expansions, given a solid balance sheet.
Revenue Growth
Image Source: Zacks Investment Research
Further, efforts to bolster fee income, increased emphasis on building a secondary mortgage banking business, and a diversified loan portfolio will likely aid top-line expansion. We project net revenues, fee income and loans to witness a CAGR of 3.3%, 1.1% and 5.9% by 2026, respectively.
High Interest Rates to Aid Net Interest Margin: Amid the current high-interest rate scenario, Bank OZK’s net interest margin (NIM) is likely to witness improvement in the upcoming quarters, though the pace might be subdued due to higher funding costs. In 2023, NIM increased to 5.16% from 4.82% in 2022 on the back of higher rates.
NIM Trends
Image Source: Bank OZK
Though the trend reversed in the first half of 2024, given increased funding costs, the metric is anticipated to stabilize in 2025 in light of decelerated funding cost growth in light of rate cuts. Our estimates suggest NIM to be 4.62% in 2024 and 2025 and 4.94% in 2026.
Strong Balance Sheet: As of June 30, 2024, Bank OZK’s total debt (comprising other borrowings and accrued interest payable and other liabilities) was $846.9 million, while cash and cash equivalents were $2.6 billion, demonstrating the strength of the balance sheet. Hence, a robust liquidity position and earnings strength enable the bank to address its debt obligations, even in the event of economic turmoil.
Challenges for OZK
Mounting Expense Base: Bank OZK has been witnessing a continuous increase in non-interest expenses. The metric experienced an 8.6% CAGR over the last three years ended 2023. The year-over-year uptrend continued during the first six months of 2024 as well. The increase was primarily driven by a rise in salaries and employee-benefit costs.
Expense Growth Trend
Image Source: Zacks Investment Research
Given the ongoing expansion measures, headcount is likely to increase, thus leading to higher expenses. Moreover, inflationary pressures are also likely to weigh on the company’s expense base. We anticipate non-interest expenses to witness a CAGR of 5.4% over the next three years.
Deteriorating Asset Quality: Bank OZK’s worsening asset quality remains another headwind. The bank recorded a provision for loss at a 12.5% CAGR over the past five years ended 2023, as the company continued to build reserves to tackle a tough operating environment. This continued in the first half of 2024.
Uncertain economic conditions and expectations of a slowdown are likely to keep the provisions elevated in the near term. We project provision for credit losses to increase 26.9% in 2024.
Bank OZK currently carries a Zacks Rank #3 (Hold). Over the past year, shares of the company have gained 20.1%, underperforming the industry’s growth of 29%.
Yearly Price Performance
Image Source: Zacks Investment Research
Banking Stocks Worth Considering
Some better-ranked banks worth a look are ConnectOne Bancorp, Inc. (CNOB - Free Report) and Northeast Community Bancorp, Inc. (NECB - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for CNOB’s current-year earnings have been revised 1.2% upward in the past 60 days. The company’s shares have rallied 33.7% over the past six months.
Estimates for NECB’s current-year earnings have been revised 22.8% north in the past week. The company’s shares have soared 71.1% over the past six months.