Neutral on BOK Financial
We have reiterated our long-term Neutral recommendation on BOK Financial Corporation (BOKF) based on its solid fundamentals and recent acquisition amidst the current economic environment.
In August 2012, BOK Financial announced the acquisition of Denver-based wealth management firm The Milestone Group Inc. The acquisition demonstrates BOK Financial’s aim of diversifying its revenue opportunities by augmenting fee-based businesses. Previously, the company purchased United Banks of Colorado in 2007 as well as Colorado State Bank and Trust in 2003, and continues to have a robust presence in Denver.
Therefore, with the acquisition of Milestone Group, BOK will expand further in Denver with the help of the acquired firm’s wealth management brand and proficiency. Furthermore, BOK Financial’s assets under management and administration 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 the company and its leading bank subsidiary, BOKF, NA, have been upgraded 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 factors behind the ratings upgrade. According to Fitch, BOK Financial’s solid fundamentals are a consequence of its ownership as well as structure of governance.
We believe that BOK Financial’s diverse revenue mix and favorable geographic footprint would support its growth. In fact, strategic expansions and local-leadership-based business model aided it to thrive as a leading financial service provider from a bank in Oklahoma.
Solid capital position and impressive capital deployment measures instill investors’ confidence in the stock. Even without participating in the Treasury's Capital Purchase Program or opting for a dividend cut, the company’s capital ratios were solid. Notably, in May 2012, the company increased its quarterly cash dividend by a nickel to 38 cents per share, which marked the seventh consecutive annual increase since it paid its first cash dividend in 2005.
However, the persistently low interest environment remains a matter of concern and continues to impact the margin of the company. 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 remain owing to an increase in liquidity.
Moreover, BOK Financial’s mortgage banking operations cause significant unpredictability in results. It has invested a substantial amount of its holdings in residential mortgage-backed securities. These securities are highly sensitive to changes in interest rates and are also subject to credit risks from delinquency or default of the underlying loans. 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 its top-line growth, increase compliance cost and curtail flexibility with respect to business investments.
However, BOK Financial currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. One of its closest peers, Texas Capital Bancshares Inc. (TCBI) also carries the same Zacks Rank.
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