BOK Financial Stock: Insufficient Loan Growth Forecasts (BOKF)

Earnings of BOK Financial Corporation (NASDAQ: BOKF) will likely dip this year due to lower mortgage bank revenue and derivatives losses in the first half of the year. Additionally, provisioning will likely increase, which will weigh on earnings. On the on the other hand, strong commercial loan growth and moderate spread expansion will improve the bottom line. Overall, I expect BOK Financial to report earnings of $6.83 per share for 2022, down 24% year-over-year. Compared to my last report on the company, I have increased my income estimate because I have reduced my provision expense estimate. For 2023, I expect the company to report earnings of $7.88 per share, up 15% year-over-year. The year-end target price suggests a slight decline from the current market price. Therefore, I maintain a holding rating on BOK Financial.

The Topline to continue at full steam

The loan portfolio grew by a remarkable 3.0% in the second quarter of 2022, or 12% annualized, which exceeded my expectations. Management mentioned in the earnings presentation that they expect loan growth to approach double digits for the full year of 2022. In my view, this can be achieved through healthy pipelines and growth momentum. Commitments to commercial real estate (“CRE”) increased by 7.5% during the second quarter, as mentioned in the conference call. Management expects these commitments to translate into balance sheet growth in the coming quarters.

In addition, economic factors will support loan growth. BOK Financial operates in several states in the Midwest and Southwest. Additionally, the company focuses on commercial and CRE loans. The purchasing managers’ index is therefore a good indicator of credit demand. The manufacturing and services PMIs are still in expansionary territory, which bodes well for loan growth.

On the other hand, the US leading economic index is constantly on the downtrend, which is bad news for loan growth.

Overall, I expect the loan book to grow 2% in the last two quarters of 2022, or 8% annualized. Beyond 2022, I expect loan growth to slow to 6%, which is closer to the historical norm.

In my last report on BOK Financial, I estimated loan growth at 7.1% for 2022. I increased my loan growth estimate due to second quarter performance and new management guidance. At the same time, I have reduced my estimates for other earning assets, as such high loan growth should crowd out securities growth. The following table shows my balance sheet estimates.

	EX18	FY19	FY20	FY21	FY22E	FY23E
Financial situation
Net loans	21,449	21,540	22,619	19,949	21,900	23,244
Net loan growth	26.7%	0.4%	5.0%	(11.8)%	9.8%	6.1%
Other productive assets	12,348	15,451	18,924	24,950	16,689	16,689
Deposits	25,264	27,621	36,144	41,242	38,774	40,348
Loans and sub-debts	7,419	8,621	3,821	2,494	878	913
Common Equity	4,432	4,856	5,266	5,364	4,932	5,318
Book value per share ($)	66.5	68.2	75.8	78.2	73.1	78.8
Tangible BVPS ($)	48.7	51.7	59.1	61.6	56.4	62.1
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

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In addition to loan growth, revenue will receive significant support from margin expansion in the second half of 2022. Due to the focus on commercial loans, approximately 70% of the total loan portfolio consists of variable rate loans, depending on the details given. in the 10-Q folder. As a result, the average loan yield is quite sensitive to rate increases. At the same time, management expects deposit beta to be moderate at 30%, which is close to the beta seen in the previous rate hike cycle.

Due to the combination of rate sensitivity of the loan and deposit portfolios, the margin is quite sensitive to changes in interest rates. Based on the results of management’s interest rate sensitivity analysis presented in the presentation, a 200 basis point increase in interest rates could increase net interest income by 5.19% in the first year. and 12.14% in the second year of the rate hike. .

Given these factors, I expect the margin to increase by 20 basis points in the second half of 2022 before stabilizing in 2023.

Probable resumption of provisioning from the third quarter

BOK Financial reported zero provisioning in the second quarter of 2022, for the second consecutive quarter, which surprised me. Management expects continued strong loan growth to lead to a resumption of provisioning in the coming quarters, as mentioned in the presentation. In addition, the possibility of a recession will force management to rebuild its reserves. Rising inflation also does not bode well for the financial health of borrowers; therefore, management will likely want to increase loan loss provisioning.

Overall, I expect the net provision charge to be 0.07% of total loans (annualized) each quarter through the end of 2023, which is identical to the average net provision charge from 2017 to 2019.

In my last report on BOK Financial, I estimated a net provision charge of $15 million for 2022. I reduced my net provision charge estimate to $8 million, mainly due to the surprise of the second trimester. Also, I reduced my estimate for the second half as I am now more optimistic than before.

Non-interest income to reduce this year’s gains

Non-interest income will most likely be much weaker this year compared to last year because mortgage refinance activity has plunged as market interest rates have risen. The following chart shows the Mortgage Bankers Association forecast for refinance and purchase volume.

In addition, significant losses recorded on derivatives and fair value option securities in the first half of the year will result in lower non-interest income this year compared to last year. I do not expect these losses to be repeated in the next few quarters.

On the other hand, projected loan growth and modest spread expansion will likely support earnings through the end of 2023. Overall, I expect BOK Financial to report earnings of $6.83 per share for 2022, down 24% year-over-year. For 2023, I expect the company to report earnings of $7.88 per share, up 15% year-over-year. The following table shows my income statement estimates.

	EX18	FY19	FY20	FY21	FY22E	FY23E
income statement
Net interest income	985	1,113	1,108	1,118	1,123	1,194
Allowance for loan losses	8	44	223	(100)	8	16
Non-interest income	617	694	844	756	594	684
Non-interest charges	1,028	1,132	1,166	1,178	1,116	1,176
Net income – Common Sh.	446	501	432	614	461	532
BPA – Diluted ($)	6.63	7.03	6.19	8.95	6.83	7.88
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

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In my last report on BOK Financial, I estimated earnings of $6.54 per share for 2022. I increased my earnings estimate as I reduced my provision expense estimate.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Maintain a holding rating

BOK Financial has a long tradition of increasing its dividend every year. Given the earnings outlook and payout trend, I expect the company to increase its dividend from $0.01 per share to $0.54 per share in the fourth quarter of 2022. Earnings estimates and dividends suggest a payout ratio of 27% for 2023, which is close to the five-year average of 30%. Based on my dividend estimate, BOK Financial offers a forward dividend yield of 2.4%.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value BOK Financial. The stock has traded at an average P/TB ratio of 1.50 in the past, as shown below.

	EX18	FY19	FY20	FY21	Medium
T. Book value per share ($)	48.7	52.1	59.1	61.6
Average market price ($)	95.7	81.2	60.2	90.6
Historical P/TB	1.96x	1.56x	1.02x	1.47x	1.50x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/TB multiple by the expected tangible book value per share of $56.4 yields a target price of $84.8 for the end of 2022. This price target implies a decline of 7.5% compared to the closing price on September 16. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB	1.30x	1.40x	1.50x	1.60x	1.70x
TBVPS – Dec 2022 ($)	56.4	56.4	56.4	56.4	56.4
Target price ($)	73.5	79.1	84.8	90.4	96.0
Market price ($)	91.6	91.6	91.6	91.6	91.6
Up/(down)	(19.8)%	(13.7)%	(7.5)%	(1.4)%	4.8%
Source: Author’s estimates

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The stock has traded at an average P/E ratio of around 11.5x in the past, as shown below.

	EX18	FY19	FY20	FY21	Medium
Earnings per share ($)	6.63	7.03	6.19	8.95
Average market price ($)	95.7	81.2	60.2	90.6
Historical PER	14.4x	11.5x	9.7x	10.1x	11.5x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/E multiple by the expected earnings per share of $6.83 yields a price target of $78.3 for the end of 2022. This price target implies a decline of 14.6% from at the closing price on September 16. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E	9.5x	10.5x	11.5x	12.5x	13.5x
EPS 2022 ($)	6.83	6.83	6.83	6.83	6.83
Target price ($)	64.6	71.4	78.3	85.1	91.9
Market price ($)	91.6	91.6	91.6	91.6	91.6
Up/(down)	(29.5)%	(22.1)%	(14.6)%	(7.2)%	0.3%
Source: Author’s estimates

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Equal weighting of target prices from both valuation methods gives a combined result target price of $81.5, implying a decline of 11.1% from the current market price. Adding the forward dividend yield gives an expected total return of minus 8.7%. Therefore, I maintain a holding rating on BOK Financial.