Yahoo Finance Bank OZK (OZK) Rides on High Rates, Fee Income Amid Cost Woes
Bank OZK OZK 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.
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 an increase in fee income. The uptrend for revenues, loans and fee income continued in the first quarter of 2024. Given a solid balance sheet, the company is likely to keep expanding through strategic buyouts as well.
Moreover, in order to realign its business to cater to customer needs, the bank exited from certain branches. Efforts to bolster fee income, increased emphasis on building a secondary mortgage banking business and a diversified loan portfolio aid top-line expansion. We project total net revenues to increase 4.5% in 2024, 2.6% in 2025 and 1.7% in 2026.
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. Though the trend reversed in the first quarter of 2024, given increased funding costs, the metric is anticipated to stabilize in 2025 in light of decelerated funding cost growth due to probable rate cuts. Our estimates suggest NIM to be 4.64%, 4.63% and 4.60% in 2024, 2025 and 2026, respectively.
As of Mar 31, 2024, Bank OZK’s total debt (comprising other borrowings and accrued interest payable and other liabilities) was $715.4 million, while cash and cash equivalents were $2.32 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.
Bank OZK currently carries a Zacks Rank #3 (Hold). Over the past year, shares of the company have risen 16%, outperforming the industry’s growth of 13.8%.
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Nevertheless, 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 quarter of 2024 as well. The increase was primarily driven by a rise in salaries and employee-benefit costs. 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 4.5% over the next three years.
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 quarter 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 4.4% in 2024.
Banking Stocks Worth Considering
Some better-ranked banks worth a look are FB Financial Corporation FBK and Merchants Bancorp. MBIN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Estimates for FBK’s current-year earnings have been revised 2% upward in the past month. FB Financial’s shares have rallied 4.8% over the past six months.
Estimates for MBIN’s current-year earnings have been revised 6% north in the past 30 days. Merchants Bancorp’s shares have risen 16.6% over the past six months.
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