Tuesday, July 23, 2019

Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

I’ve been fairly bearish on Bank OZK (OZK) for some time, as I thought the bank’s heavy exposure to variable-rate construction and CRE lending was the wrong mix for this point in the cycle. With the shares down another 8% since my last update and down about 30% over the past year, that thesis has largely been playing out, and over the past quarter new concerns about spread compression have built up.

Oddly enough, I think Bank OZK may be better-positioned to resist spread compression than many investors might think. A high loan/deposit ratio (though far from the worst) and high-beta asset book are risk factors, but Bank OZK’s high-cost deposit base actually may give the bank more maneuvering room than banks like Commerce Bancshares (CBSH), Comerica (CMA), and M&T Bank (MTB) with low-cost deposit bases that probably can’t/won’t go too much lower.

I’m a little concerned there’s a future shoe to drop with respect to credit, but Bank OZK’s strong underwriting history should earn management more of a benefit of the doubt than they’re getting. Likewise, loan growth may not be spectacular in the near term, but management is working hard to diversify the loan business. I’m still worried about sentiment over the next couple of quarters, but the valuation is getting harder to ignore, and more patient (or aggressive) contrarian investors may want to sharpen up their due diligence.

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Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

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