OZK Bank Expected to Reverse Underperformance as Loan Growth Accelerates (NASDAQ:OZK)


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With the prospect of many rate hikes over the next two years, not to mention improving loan growth, the outlook for bank overgrowth is looking better than it has for some time. time. The keys for this next part of the cycle will be the ability to grow lending, manage costs, and keep deposit costs low, and I think OZK Bank (NASDAQ: OZK) is well positioned to achieve two of three, making him an above-average prospect at this point.

When I last wrote about Bank OZK about a year ago, I thought the bank’s short-term outlook was more modest than for other banks I favored at the time, and the shares have slightly underperformed since then. At this phase of the cycle, however, I’m more bullish on Bank OZK, and I think it’s a name worth considering again.

Loans resume

Between intra-quarter updates from other banks and Fed H.8 data, loan demand continues to rise in commercial lending. Although C&I lending was not as strong in the first quarter, this is not a major issue for Bank OZK given that bank’s much stronger focus on commercial real estate and construction lending/ development.

OZK Bank has seen a good recovery in lending across its real estate specialty group in the second half of 2021, and while I’m concerned about continued high repayments in the first half of 2022, I believe the bank should be able manage large individual loans. – Single-digit loan growth in 2022 and double-digit loan growth in 2023. This also coincides with a recovery in commercial construction activity; activity has dwindled as projects have been canceled or delayed during the pandemic, but projects are moving forward again.

I’m also optimistic about the company’s other lending operations, including its still relatively new Corporate and Business Specialty Group (or CBSG), which offers asset-backed lending and other specialty lending to businesses, and its specialized consumer loans for recreational and marine vehicles.

Sensitivity is mixed and deposit fees are a key thing to watch

Bank asset sensitivities (the extent to which net interest income increases in relation to changes in interest rates) are always nuanced, but in the case of OZK Bank there is a little more to be said for middle back.

On the one hand, the bank’s loan portfolio is close to 80% at variable rates, which would normally lead to above-average sensitivity. On the other hand, the company does not have as much underutilized liquidity as other banks (about 9% of earning assets against a comparable average closer to 11%), the loan-to-deposit ratio is above average (about 90 % versus 75%), and the vast majority of the loan portfolio has floor rates. In fact, it will take 75 basis points or more of rate hikes to move around 60% of this part of the loan portfolio off their floors, so rate sensitivity won’t be a major driver for Bank OZK in the near term. .

One of the main things to watch as the cycle develops is Bank OZK deposit beta and costs. Deposit beta essentially measures how quickly deposits leave a bank in response to higher rates, and OZK bank’s beta was quite high in the last cycle. Management has taken steps to improve its core deposit growth, and I believe this bank will show one of the best cycle-to-cycle improvements in deposit beta, but it’s still likely to be high relative to its peers (I’m expecting something in the 40% range).

OZK Bank has narrowed some of the gap with its peers in terms of funding costs as it has increased core deposits, but the bank still has above-average deposit costs (0.24% for deposits bearing interest and approximately 0.19% for total deposits) and this is an area where increased management attention could pay off in the future. OZK bank already enjoys good spreads (a NIM above 4%) due to its well above average loan yields, but improving deposit costs would lead to even better profitability and also increase its business base potential (low yielding types of loans would become profitable enough to be worth it, allowing more capital to be deployed here).


I don’t have many operational concerns about OZK Bank heading into 2022. There are certainly more asset-sensitive banks out there, but I think this bank offers above-average loan growth opportunities and l one of the best efficiency ratios in the peer group. While inflation is an industry-wide threat, I’m not that concerned about operating expenses here.

OZK Bank will see lower profits in FY22 due to reduced provisioning benefits, but I expect mid-teen growth in FY23 and maybe be in the double digits in FY24, with a longer-term core earnings growth rate (compared to FY2019, before biased earnings provisioning) in the high single digits.

The essential

Between discounted basic earnings, ROTCE-based P/TBV and P/E, I believe these stocks are undervalued below the high $40s, with a range from the mid-$40s (ROTCE) to the mid $50’s (P/E). I wish OZK had a higher net promoter score (a measure of customer satisfaction) because that would put this bank in the upper echelon of banking stocks, but even as it stands I think it there are good reasons to want to own these stocks now.


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