Margin Pressure, High Costs Hurt Bank OZK: Time To Sell?

Bank OZK’s (NASDAQ:OZK) profitability will likely be hurt due to continuously increasing expenses. Moreover, a decline in interest rates is expected to hamper top-line growth to an extent in the near term.

The Zacks Consensus Estimate for the company’s current-year earnings has been revised 7.6% downward over the past 30 days, reflecting analysts’ pessimism regarding its earnings growth potential. As a result, the stock currently carries a Zacks Rank #4 (Sell).

Bank OZK’s price performance is also not encouraging. Its shares have lost 42% so far this year compared with a 47.4% decline recorded by the industry it belongs to. While most of the decline is primarily due to fears regarding the impact of the coronavirus outbreak along with expectations of an economic recession, the negative estimate revisions indicate that the stock has limited upside potential.

Looking at fundamentals, the company’s net interest margin (NIM) has been persistently declining over the past eight years from 5.91% in 2012 to 4.34% in 2019. Moreover, the recent decline in interest rates to near-zero amid the Federal Reserve’s accommodative policy stance, margin pressure is likely to persist in the near term.

Further, Bank OZK’s expenses have been continuously increasing over the past few years. Over the last six years (2014-2019), expenses witnessed a CAGR of 19.3% mainly due to an increase in salaries and employee benefits costs. As the company is expanding into newer areas organically as well as through acquisitions, costs are expected to remain elevated. For 2020, management anticipates non-interest expenses to increase in high-single-digit percentage on a year-over-year basis.

Bank OZK’s substantial exposure to real estate loans makes us apprehensive. The company’s exposure to these loans was almost 73% of total loans as of Dec 31, 2019. Significant exposure to risky loans might hamper financials.

Nevertheless, driven by rise in loans and the company's inorganic growth efforts, revenues are likely to continue improving. Also, its efficient capital-deployment activities indicate a strong balance sheet.

Stocks Worth Considering

Virtu Financial, Inc.’s (NASDAQ:VIRT) Zacks Consensus Estimate for current-year earnings has been revised upward by 34% over the past 60 days. The company currently sports a Zacks Rank #1 (Strong Buy).

Metropolitan Bank Holding Corp. (NYSE:MCB) has witnessed an upward earnings estimate revision of 5.5% for the current year over the past 60 days. At present, the company flaunts a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for earnings of Focus Financial Partners Inc. (NASDAQ:FOCS) has been revised 3.2% upward for the current year over the past 60 days. The company currently carries a Zacks Rank #2 (Buy).

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