Earnings of BOK Financial Corporation (NASDAQ: BOKF) will likely trend downwards this year relative to 2021. A higher provision expense and lower mortgage banking income will likely contribute to earnings decline in 2022. On the other hand, strong loan growth and the rising interest-rate environment will likely limit the earnings decline. Due to macroeconomic factors, my outlook on the net interest margin has improved. As a result, I’m now revising my earnings estimate upwards for 2022 to $7.02 per share from the previous estimate of $6.29 per share. The year-end target price is slightly below the current market price. Therefore, I’m downgrading BOK Financial Corporation to a Hold rating.
Loan Portfolio to Turn Around This Year
BOK Financial Corporation’s loan portfolio declined by 11.8% in 2021. As mentioned in the conference call, the loan decline was partly attributable to continued payoffs in the commercial real estate segment, CRE. Moreover, a substantial number of Paycheck Protection Program (“PPP”) loans were forgiven through 2021, especially in the fourth quarter, which pressurized the total loan portfolio size.
The management mentioned in the conference call that it expects CRE growth to resume after the first quarter, especially in the healthcare and energy segments. Moreover, after substantial forgiveness in 2021, the PPP portfolio is now quite small. PPP loans outstanding totaled $276 million at the end of December 2021, representing just 1.4% of total loans. As a result, the upcoming forgiveness of the remaining PPP loans will likely have only a small effect on the total loan portfolio size.
Further, the nationwide economic recovery will likely drive loan growth this year. The unemployment rate for the country is now close to the early 2019 level, which bodes well for credit demand. Further, the Purchasing Managers Index, PMI, continues to remain in the expansionary territory.
The management mentioned in the investor presentation that it expects loan growth of 6% to 7% in 2022, partly on the back of improvement in line utilization. Considering the factors mentioned above and management’s guidance, I’m expecting the loan portfolio to increase by 6% by the end of December 2022 from the end of December 2021.
Asset Mix Improvement, Higher Rates to Lift the Net Interest Margin
BOK Financial Corporation’s earning-asset mix continued to worsen through 2021. The average earning asset yields suffered as the proportion of higher-yielding loans declined and the proportion of lower-yielding securities increased in the total asset mix. Securities surged to 45% of total assets at the end of December 2021 from 39% at the end of December 2020 and 35% at the end of December 2019. The management mentioned in the presentation that it is targeting to decrease its deposits by around 2% in 2022. As the growth in loans will likely outpace the growth in deposits, there’s a chance that earning asset mix will improve this year. The following table shows my balance sheet estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | ||||
Financial Position | |||||||||
Net Loans | 16,923 | 21,449 | 21,540 | 22,619 | 19,949 | 21,173 | |||
Growth of Net Loans | 1.1% | 26.7% | 0.4% | 5.0% | (11.8)% | 6.1% | |||
Other Earning Assets | 12,257 | 12,348 | 15,451 | 18,924 | 24,950 | 24,950 | |||
Deposits | 22,061 | 25,264 | 27,621 | 36,144 | 41,242 | 41,573 | |||
Borrowings and Sub-Debt | 5,855 | 7,419 | 8,621 | 3,821 | 2,494 | 2,596 | |||
Common equity | 3,495 | 4,432 | 4,856 | 5,266 | 5,364 | 5,703 | |||
Book Value Per Share ($) | 53.9 | 66.5 | 68.2 | 75.8 | 78.2 | 83.1 | |||
Tangible BVPS ($) | 46.6 | 48.7 | 51.7 | 59.1 | 61.6 | 66.6 | |||
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
The margin will likely also benefit from the rising interest-rate environment. The Federal Reserve last projected a 75 basis points increase in the federal funds rate in 2022 (or three rate hikes). BOK Financial Corporation’s balance sheet is well-positioned to benefit from higher interest rates, partly because most loans are to the commercial and industrial segment, C&I. As these loans, by nature, reprice quicker than other loans, like residential mortgage loans, the average yield will likely reprice soon after an interest-rate hike. Moreover, non-interest-bearing deposits made up a substantial 37% of total deposits at the end of December 2021. The high proportion of non-interest-bearing deposits in total deposits will make the average deposit cost upwards sticky in a rising interest-rate environment.
The management’s interest-rate sensitivity analysis shows that a 100-basis points increase in the interest rate can boost the net interest income by 4.72% over 12 months and 11.25% in the second year of the rate cuts, as mentioned in the presentation.
Considering these factors, I’m expecting the net interest margin to remain mostly stable in the first half and increase by four basis points in the second half of 2022.
Loan Growth to Drive Provisioning
BOK Financial has released a large part of its loan loss reserves in the last four consecutive quarters. As allowances comfortably cover the existing potential problem loans, further reserve releases cannot be ruled out. Potential problem loans made up 1.1% of total loans, while allowances made up 1.29% of total loans, excluding PPP loans, at the end of December 2021, as mentioned in the presentation. Moreover, the management mentioned in the conference call that it expects net charge-offs to remain at the lower end of the historical loss range, which means that provisioning should remain below normal this year.
Nevertheless, the provisioning for 2022 will most probably be higher year-over-year because of loan growth. As loans declined in 2021, it was natural that BOK Financial reversed some of its provisionings last year. As I’m expecting loans to grow in 2022, the provision expense will likely also turn positive.
The management mentioned in the presentation that the allowances will likely drop to 1.20% of total loans by the end of 2022 from 1.29% at the end of December 2021. This anticipated drop in relative allowances can be fully explained by loan growth of 6%. Therefore, this means that the management is expecting provision reversals to cancel out provision expenses for the year.
Considering the factors mentioned above and management’s guidance, I’m expecting the provision expense, net of reversals, to make up around 0.09% of total loans in 2022. This estimate is much below the average net provision expense of 0.15% of total loans from 2016 to 2019.
Increasing my Earnings Estimate to $7.02 per Share
Earnings will likely decline in 2022 relative to 2021 because of a higher provision expense. Further, the non-interest income will likely decline because of lower mortgage banking revenue. A higher interest rate will discourage mortgage refinancing activity, which will reduce mortgage revenues. Further, the trading and brokerage income was at an unsustainable level last year; therefore, it will likely decline by the mid-to-upper single-digit range in 2022, as mentioned in the conference call. Moreover, the non-interest income for 2021 included a $31 million gain from the sale of an alternative investment, which will not recur this year.
On the other hand, strong loan growth and margin expansion will likely limit the earnings decline. Overall, I am expecting the company to report earnings of $7.02 per share in 2022, down 22% year-over-year. The following table shows my income statement estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | ||||
Income Statement | |||||||||
Net interest income | 842 | 985 | 1,113 | 1,108 | 1,118 | 1,186 | |||
Provision for loan losses | (7) | 8 | 44 | 223 | (100) | 20 | |||
Non-interest income | 695 | 617 | 694 | 844 | 756 | 649 | |||
Non-interest expense | 1,026 | 1,028 | 1,132 | 1,166 | 1,178 | 1,203 | |||
Net income – Common Sh. | 335 | 446 | 501 | 432 | 618 | 481 | |||
EPS – Diluted ($) | 5.11 | 6.63 | 7.03 | 6.19 | 8.95 | 7.02 | |||
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
The earnings estimate for 2022 given above is much higher than the estimate of $6.29 per share that I gave in my last report on BOK Financial Corporation. I have revised the earnings estimate upwards because of a better outlook on interest rates and the net interest margin.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic, especially the Omicron Variant.
Downgrading to a Hold Rating After the Market Price Rally
BOK Financial is offering a dividend yield of 2.1% at the current quarterly dividend rate of $0.53 per share. The earnings and dividend estimates suggest a payout ratio of 30% for 2022, which is the same as the five-year average. Therefore, I’m not expecting any change in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value BOK Financial. The stock has traded at an average P/TB ratio of 1.56 in the past, as shown below.
FY17 | FY18 | FY19 | FY20 | FY21 | Average | ||
T. Book Value per Share ($) | 46.6 | 48.7 | 52.1 | 59.1 | 61.6 | ||
Average Market Price ($) | 83.7 | 95.7 | 81.2 | 60.2 | 90.6 | ||
Historical P/TB | 1.80x | 1.96x | 1.56x | 1.02x | 1.47x | 1.56x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $66.6 gives a target price of $104.0 for the end of 2022. This price target implies a 3.2% upside from the January 21 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.36x | 1.46x | 1.56x | 1.66x | 1.76x |
TBVPS – Dec 2022 ($) | 66.6 | 66.6 | 66.6 | 66.6 | 66.6 |
Target Price ($) | 90.7 | 97.3 | 104.0 | 110.6 | 117.3 |
Market Price ($) | 100.8 | 100.8 | 100.8 | 100.8 | 100.8 |
Upside/(Downside) | (10.0)% | (3.4)% | 3.2% | 9.8% | 16.4% |
Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 12.4x in the past, as shown below.
FY17 | FY18 | FY19 | FY20 | FY21 | Average | ||
Earnings per Share ($) | 5.11 | 6.63 | 7.03 | 6.19 | 8.95 | ||
Average Market Price ($) | 83.7 | 95.7 | 81.2 | 60.2 | 90.6 | ||
Historical P/E | 16.4x | 14.4x | 11.5x | 9.7x | 10.1x | 12.4x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $7.02 gives a target price of $87.3 for the end of 2022. This price target implies a 13.4% downside from the January 21 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 10.4x | 11.4x | 12.4x | 13.4x | 14.4x |
EPS 2022 ($) | 7.02 | 7.02 | 7.02 | 7.02 | 7.02 |
Target Price ($) | 73.3 | 80.3 | 87.3 | 94.3 | 101.3 |
Market Price ($) | 100.8 | 100.8 | 100.8 | 100.8 | 100.8 |
Upside/(Downside) | (27.3)% | (20.3)% | (13.4)% | (6.4)% | 0.6% |
Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $95.6, which implies a 5.1% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 3.0%. In my last report, I adopted a bullish rating on BOK Financial. The stock price has rallied since the issuance of that report, resulting in a small downside to the year-end target price. As a result, I’m now downgrading BOK Financial Corporation to a Hold rating. I wouldn’t consider investing in the stock unless its market price dipped by more than 15% from the current level.