Rawf8
Bank of Korea earnings (NASDAQ: BOKF) is likely to plunge this year due to lower mortgage banking revenues and derivative losses recorded in the first half of the year. In addition, provisions are likely to increase, putting pressure on earnings.Above On the one hand, strong growth in commercial loans and modestly widening margins will boost earnings. Overall, BOK Financial expects his 2022 earnings to be $6.83 per share, down 24% year-over-year. Compared to our previous report on the company, we have significantly reduced our estimates of set-up costs, so we have increased our estimates of revenues. In 2023, we expect the company to report earnings of $7.88 per share for him, up 15% year over year. The year-end price target suggests a slight drop from the current market price. Therefore, I maintain his hold rating on BOK Financial.
A top line that continues to advance with all its might
The loan portfolio grew a staggering 3.0% in Q2 2022, or an annualized rate of 12%. This exceeded my expectations. Management said on the earnings call that he expects loan growth to approach double digits for the full year of 2022. In my opinion, this target is achievable thanks to a healthy pipeline and growth momentum. As noted on the conference call, commercial real estate (“CRE”) commitments increased by 7.5% during the second quarter. Management expects these commitments to lead to balance sheet growth over the next few quarters.
In addition, economic factors will sustain loan growth. BOK Financial has operations 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 measure of credit demand. His PMI indicators for manufacturing and services are both still in expansion territory, which bodes well for lending growth.
Meanwhile, key US economic indicators are in a sustained downtrend, which is bad news for loan growth.
conference committee
Overall, we expect our loan portfolio to grow 2% in the last two quarters of 2022, or 8% annualized. After 2022, he expects loan growth to slow to 6%, which is closer to historical norms.
In my previous report on BOK Financial, I estimated 7.1% loan growth in 2022. At the same time, it lowered estimates for other earning assets as such high loan growth should crowd out securities growth. The following table shows my balance sheet estimates.
| FY18 | FY19 | 2020 | 21st year | FY22E | FY23E | |||||
| financial position | ||||||||||
| net loan | 21,449 | 21,540 | 22,619 | 19,949 | 21,900 | 23,244 | ||||
| net lending growth | 26.7% | 0.4% | 5.0% | (11.8)% | 9.8% | 6.1% | ||||
| Other earning assets | 12,348 | 15,451 | 18,924 | 24,950 | 16,689 | 16,689 | ||||
| deposit | 25,264 | 27,621 | 36,144 | 41,242 | 38,774 | 40,348 | ||||
| Borrowings and Subdebt | 7,419 | 8,621 | 3,821 | 2,494 | 878 | 913 | ||||
| common stock | 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 | ||||
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Source: SEC filing, author’s estimate (Millions of U.S. dollars unless otherwise specified) |
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Apart from loan growth, the top line should be well supported by margin widening in H2-2022. Approximately 70% of total loans consist of variable rate loans, according to the details, due to its concentration on commercial loans. in the 10-Q filing. As a result, average loan yields are highly sensitive to rising interest rates. Meanwhile, management expects a deposit beta of around 30%, which is close to the beta observed in the last upcycle.
Margins are highly sensitive to changes in interest rates due to the combination of interest rate sensitivities of the loan and deposit books. According to 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 of the rate hike and by 12.14% in the second year. There is a nature. .
Given these factors, we expect margins to increase by 20 basis points in the second half of 2022 before stabilizing in 2023.
Provisioning likely to resume in Q3
BOK Financial surprised us by reporting zero provisioning for the second consecutive quarter in the second quarter of 2022. Management expects continued loan growth, as noted in the presentation, to lead to the resumption of reserves in future quarters. Additionally, a possible recession will require management to build up reserves. Rising inflation also doesn’t bode well for borrowers’ finances. Therefore, management will want to increase its allowance for doubtful accounts.
Overall, we expect net provisions to represent 0.07% of total annualized lending volume quarterly through the end of 2023. This is the same as the average net provision expense from 2017 to 2019.
A previous report on BOK Financial estimated net reserve costs for 2022 at $15 million. In addition, we have lowered our estimates for the second half of the year as we are more optimistic than before.
Non-interest income will reduce profits this year
Non-interest income will probably drop significantly this year compared to last year as mortgage refinancing activity plummeted as market rates rose. The chart below shows the Mortgage Bankers Association refinancing and purchase volume projections.
Mortgage Bankers Association
In addition, non-interest income will be lower this year compared to last year due to the large losses recorded on derivatives and fair value option securities in the first half of the year. We do not expect these losses to reoccur in future quarters.
Meanwhile, expected loan growth and slightly higher margins could support earnings through the end of 2023. Overall, BOK Financial expects him to report earnings of $6.83 per share in 2022, down 24% year-on-year. In 2023, we expect the company to report earnings of $7.88 per share for him, up 15% year over year. The following table shows my income statement estimates.
| FY18 | FY19 | 2020 | 21st year | FY22E | FY23E | |||||
| Profit and loss statement | ||||||||||
| net interest income | 985 | 1,113 | 1,108 | 1,118 people | 1,123 | 1,194 | ||||
| Bad debt allowance | 8 | 44 | 223 | (100) | 8 | 16 | ||||
| non-interest income | 617 | 694 | 844 | 756 | 594 | 684 | ||||
| non-interest expenses | 1,028 people | 1,132 | 1,166 | 1,178 | 1,116 | 1,176 | ||||
| Net profit – Ordinary Sh. | 446 | 501 | 432 | 614 | 461 | 532 | ||||
| EPS – diluted ($) | 6.63 | 7.03 | 6.19 | 8.95 | 6.83 | 7.88 | ||||
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Source: SEC filing, author’s estimate (Millions of U.S. dollars unless otherwise specified) |
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My previous report on BOK Financial estimated earnings per share in 2022 at $6.54.
Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and the resulting timing and magnitude of interest rate increases. In addition, if the recession is stronger or lasts longer than expected, the provision for expected credit losses could increase beyond my estimates.
Maintain hold rating
BOK Financial has a long-standing tradition of increasing dividends every year. Given the earnings outlook and dividend trends, we expect the dividend to increase by $0.01 per share to $0.54 per share in the fourth quarter of 2022. Earnings and dividend estimates suggest a payout ratio of 27% in 2023. approaching the 5-year average of 30%. Based on my dividend forecast, BOK Financial offers his futures dividend yield of 2.4%.
BOK Financial’s valuation uses historical price-to-tangible assets (“P/TB”) and price-to-earnings (“P/E”) multiples. The stock has historically traded at an average P/TB ratio of 1.50, as shown below.
| FY18 | FY19 | 2020 | 21st year | average | ||
| T. Book value per share ($) | 48.7 | 52.1 | 59.1 | 61.6 | ||
| Average Market Price ($) | 95.7 | 81.2 | 60.2 | 90.6 | ||
| Past P/TB | 1.96 times | 1.56 times | 1.02 times | 1.47 times | 1.50 times | |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple by the projected tangible book value of $56.4 yields a target price of $84.8 at the end of 2022. This target price represents a 7.5% drop from the September 16 closing price. The following table shows the target price sensitivity to the P/TB ratio.
| P/TB multiple | 1.30 times | 1.40 times | 1.50 times | 1.60 times | 1.70 times |
| TBVPS – December 2022 ($) | 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 |
| Upside/(Downside) | (19.8)% | (13.7)% | (7.5)% | (1.4)% | 4.8% |
| Source: Author’s estimate |
As you can see below, the stock has historically traded at an average P/E of around 11.5x.
| FY18 | FY19 | 2020 | 21st year | average | ||
| Earnings Per Share ($) | 6.63 | 7.03 | 6.19 | 8.95 | ||
| Average Market Price ($) | 95.7 | 81.2 | 60.2 | 90.6 | ||
| Past PER | 14.4 times | 11.5 times | 9.7 times | 10.1 times | 11.5 times | |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple by the projected earnings per share of $6.83 yields a target price of $78.3 at the end of 2022. This target price represents a 14.6% drop from the September 16 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| PER Multiple | 9.5 times | 10.5 times | 11.5 times | 12.5 times | 13.5 times |
| EPS 2022 ($) | 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 |
| Upside/(Downside) | (29.5)% | (22.1)% | (14.6)% | (7.2)% | 0.3% |
| Source: Author’s estimate |
Equally weighting the target prices from the two valuation methods yields a total Target price $81.5, which represents an 11.1% drop from the current market price. Add future dividend yields and the total expected return is -8.7%. Therefore, I maintain my hold rating on BOK Financial.