Neutral Stance on BOK Financial

Zacks

We have reiterated our long term Neutral recommendation on BOK Financial Corporation (BOKF) based on its solid fundamentals and recent acquisition in the midst of the current economic environment.

Aided by growth in mortgage banking revenue as well as expansion in all other categories of non-interest revenues, BOK Financial posted second-quarter 2012 earnings of $1.43 per share, well above the Zacks Consensus Estimate of $1.13. The company also reported improvements in credit quality, which in turn, had a positive impact of 21 cents per share on net income in the reported quarter.

Moreover, in August, BOK Financial announced the acquisition of Denver-based The Milestone Group Inc., a wealth management firm. Financial terms of the deal were not disclosed. The acquisition by BOK Financial demonstrates its aim of diversifying its revenue opportunities by augmenting its fee-based business. Previously, the company purchased United Banks of Colorado in 2007 and Colorado State Bank and Trust in 2003.

Having strengthened its foothold over the years through its local bank brand, Colorado State Bank and Trust, BOK Financial has a robust presence in Denver. Therefore, with the acquisition of Milestone Group, the company will expand further in Denver with the help of the acquired firm’s wealth management brand and proficiency. Furthermore, assets under management and administration for BOK Financial will sum up to about $50 billion.

There has been a positive development on BOK Financial’s ratings front as well. The long-term Issuer Default Ratings (:IDR) of BOK Financial and its lead bank subsidiary, BOKF, NA, have been upwardly revised to 'A' from 'A-' by Fitch Ratings. The outlook assigned is Stable.

A diverse earnings base, solid capital position and its healthy liquid profile are the positives behind the ratings upgrade of BOK Financial. According to Fitch, BOK Financial’s solid fundamentals are a consequence of its ownership as well as structure of governance.

Our Viewpoint

We believe BOK Financial’s diverse revenue mix and favorable geographic footprint would back its growth. In fact, strategic expansions and its local-leadership based business model aided it to expand into a leading financial service provider from a bank in Oklahoma.

Solid capital position and impressive capital deployment measures instill investors’ confidence in the stock. Notably, in May 2012, BOK Financial increased its quarterly cash dividend by a nickel to 38 cents per share, which marked the seventh consecutive annual increase since the company paid its first cash dividend in 2005.

However, the persistent low interest environment remains a matter of concern. Though there has been a slight uptick in the second quarter of 2012 (3.30%), we believe that with expectations of a continual low interest rate environment in the upcoming quarters, the pressure on the margin would persist owing to an increase in liquidity. Moreover, the company is subject to risks emanating from its private label mortgage backed securities portfolio.

In addition, with BOK Financial having substantial business concentration in the Oklahoma market and the energy sector, the company’s earnings are susceptible to any downturn in the region or in that particular sector. Hence, with such concentration risk, we remain cautious.

Also, the regulatory issues and stricter capital norms remain a headwind for the company and might limit the company’s top line growth, increase compliance cost and curtail flexibility with respect to business investments.

Hence, the risk-reward profile seems balanced for BOK Financial and therefore our long-term Neutral recommendation is reaffirmed.

However, BOK Financial currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. One of its closest peers, Texas Capital Bancshares Inc. (TCBI) also has a Zacks #2 Rank.

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