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On Nov 27, 2013, we downgraded our long-term recommendation on BOK Financial Corp. (BOKF - Analyst Report) to Underperform from Neutral based on disappointing third-quarter 2013 results. The company’s reported earnings were below the Zacks Consensus Estimate as well as the prior-year quarter earnings. Regulatory issues and a low-interest rate environment remain headwinds.

Why Underperform?

BOK Financial’s third-quarter 2013 earnings of $1.10 per share lagged the Zacks Consensus Estimate by a nickel. Moreover, results compared unfavorably with the prior-year quarter earnings of $1.27. Lower-than-expected results were primarily aided by reduced net interest revenues.

The company is experiencing a declining trend in the net interest margin (NIM), which fell 27 basis points (bps) year over year to 2.92% in the first quarter of 2013 and continued its downward trend with a decline of 49 bps to 2.81% in the second quarter of 2013 and 32 bps in the third quarter. Management expects NIM to continue to go down as chances of a further decrease in funding costs are limited. Though interest rates have started increasing, looking at the upcoming quarters, net interest margin is expected to remain under pressure due to the still low interest rate environment.

A significant part of BOK Financial’s loans are generated in Oklahoma and other markets in the southwest region. This increases the company’s risks related to concentration of business activities as any poor economic conditions in Oklahoma or other markets in the southwest region might lead to BOK Financial incurring losses associated with higher default rates and decreased collateral values in its loan portfolio.

Over the last 30 days, the Zacks Consensus Estimate for 2013 declined 2.5% to $4.62 per share. For 2014, the Zacks Consensus Estimate decreased 7.2% to $4.39 per share, over the same time frame. Hence, BOK Financial carries a Zacks Rank #4 (Sell).

Other Banks Worth Considering

Some better-ranked Southwest stocks in the banking sector include Southside Bancshares Inc. (SBSI - Snapshot Report), BancFirst Corporation (BANF - Snapshot Report) and First Financial Bankshares Inc. (FFIN - Snapshot Report). While SBSI carries a Zacks Rank #1 (Strong Buy), BANF and FFIN hold a Zacks Rank #2 (Buy).

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