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Bank OZK's (OZK) Restructuring, Loan Growth Offset Cost Woes
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Bank OZK’s (OZK - Free Report) business restructuring and branch consolidation initiatives, as well as solid loan balances, are expected to continue aiding top-line growth. The company is also anticipated to sustain its capital deployment activities followed by a solid liquidity position. However, a persistent increase in non-interest expenses is a matter of concern.
Bank OZK has grown substantially through a de novo branching strategy, as well as inorganically. Its revenues witnessed a compound annual growth rate (CAGR) of 8.2% over the last four years (2019-2022), mainly driven by steady loan growth and a rise in fee income.
The company also has a solid deposit balance. Of the total deposits, 19.8% comprised non-interest-bearing deposits as of Mar 31, 2023. This has aided revenue growth and the positive trend is expected to continue in the near term.
With the Federal Reserve expected to keep interest rates high in the near term, Bank OZK's net interest margin (NIM) is anticipated to witness improvement in the quarters ahead but the pace might slow down somewhat. We project NIM to be 5.40% in 2023.
The change in the operating backdrop in 2020 has led banks to realign their businesses per customer needs, with more emphasis on digitization. Bank OZK evaluated its branch network and as part of this effort, it has exited from the states of Alabama and South Carolina, while closing branches in Arkansas, Florida, Georgia, and New York.
Bank OZK’s capital deployment activities remain impressive. The company has been regularly increasing its quarterly dividend. In April 2023, it hiked its dividend for the 51st consecutive quarter.
In November 2022, Bank OZK announced a new buyback program, under which it is authorized to repurchase up to $300 million worth of shares. As of Mar 31, 2023, the plan (set to expire on Nov 9, 2023) had $199.6 million authorization remaining. Given a robust capital position and lower debt-equity and dividend payout ratios compared with peers, the company is expected to sustain its capital deployment activities.
However, Bank OZK has been witnessing a persistent rise in non-interest expenses. Over the last four years (2019-2022), expenses witnessed a CAGR of 4%. The rise was mainly due to an increase in salaries and employee-benefit costs.
As the company is expanding into newer areas organically, as well as through acquisitions, expenses are expected to continue rising. Also, inflationary pressure will likely weigh on the company’s expense base. We project non-interest expenses to rise 15%, 9.1% and 37.2% in 2023, 2024 and 2025, respectively.
Bank OZK’s substantial exposure to real estate loans is another headwind. Its exposure to these loans was 75.5% of total loans as of Mar 31, 2023. Though the housing and real estate sectors are holding up well amid the current economic slowdown, any deterioration in real estate prices will likely pose a threat to the company’s financials.
Currently, the company carries a Zacks Rank #3 (Hold). Shares of the company have declined 23.2% over the past six months compared with the 30% fall recorded by the industry.
Image Source: Zacks Investment Research
Bank Stocks Worth Considering
A couple of better-ranked bank stocks that investors can consider are JPMorgan (JPM - Free Report) and Pathward Financial, Inc. (CASH - Free Report) .
Earnings estimates for JPMorgan have been revised 2% upward for 2023 over the past 30 days to 14.33. Shares of JPM have gained 4.9% over the past six months. Currently, the company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for Pathward Financial have been revised 1.8% upward for 2023 over the past 30 days to 5.7. In the past six months, CASH’s shares have gained 5%. Currently, the company carries a Zacks Rank #2.
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Bank OZK's (OZK) Restructuring, Loan Growth Offset Cost Woes
Bank OZK’s (OZK - Free Report) business restructuring and branch consolidation initiatives, as well as solid loan balances, are expected to continue aiding top-line growth. The company is also anticipated to sustain its capital deployment activities followed by a solid liquidity position. However, a persistent increase in non-interest expenses is a matter of concern.
Bank OZK has grown substantially through a de novo branching strategy, as well as inorganically. Its revenues witnessed a compound annual growth rate (CAGR) of 8.2% over the last four years (2019-2022), mainly driven by steady loan growth and a rise in fee income.
The company also has a solid deposit balance. Of the total deposits, 19.8% comprised non-interest-bearing deposits as of Mar 31, 2023. This has aided revenue growth and the positive trend is expected to continue in the near term.
With the Federal Reserve expected to keep interest rates high in the near term, Bank OZK's net interest margin (NIM) is anticipated to witness improvement in the quarters ahead but the pace might slow down somewhat. We project NIM to be 5.40% in 2023.
The change in the operating backdrop in 2020 has led banks to realign their businesses per customer needs, with more emphasis on digitization. Bank OZK evaluated its branch network and as part of this effort, it has exited from the states of Alabama and South Carolina, while closing branches in Arkansas, Florida, Georgia, and New York.
Bank OZK’s capital deployment activities remain impressive. The company has been regularly increasing its quarterly dividend. In April 2023, it hiked its dividend for the 51st consecutive quarter.
In November 2022, Bank OZK announced a new buyback program, under which it is authorized to repurchase up to $300 million worth of shares. As of Mar 31, 2023, the plan (set to expire on Nov 9, 2023) had $199.6 million authorization remaining. Given a robust capital position and lower debt-equity and dividend payout ratios compared with peers, the company is expected to sustain its capital deployment activities.
However, Bank OZK has been witnessing a persistent rise in non-interest expenses. Over the last four years (2019-2022), expenses witnessed a CAGR of 4%. The rise was mainly due to an increase in salaries and employee-benefit costs.
As the company is expanding into newer areas organically, as well as through acquisitions, expenses are expected to continue rising. Also, inflationary pressure will likely weigh on the company’s expense base. We project non-interest expenses to rise 15%, 9.1% and 37.2% in 2023, 2024 and 2025, respectively.
Bank OZK’s substantial exposure to real estate loans is another headwind. Its exposure to these loans was 75.5% of total loans as of Mar 31, 2023. Though the housing and real estate sectors are holding up well amid the current economic slowdown, any deterioration in real estate prices will likely pose a threat to the company’s financials.
Currently, the company carries a Zacks Rank #3 (Hold). Shares of the company have declined 23.2% over the past six months compared with the 30% fall recorded by the industry.
Image Source: Zacks Investment Research
Bank Stocks Worth Considering
A couple of better-ranked bank stocks that investors can consider are JPMorgan (JPM - Free Report) and Pathward Financial, Inc. (CASH - Free Report) .
Earnings estimates for JPMorgan have been revised 2% upward for 2023 over the past 30 days to 14.33. Shares of JPM have gained 4.9% over the past six months. Currently, the company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for Pathward Financial have been revised 1.8% upward for 2023 over the past 30 days to 5.7. In the past six months, CASH’s shares have gained 5%. Currently, the company carries a Zacks Rank #2.