Markets

BOK Financial's Q4 Provision Outlook Triggers Sell-off

On Wednesday, Oklahoma-based BOK Financial CorporationBOKF became the third bank after Associated Banc-Corp ASB and Hancock Holding Company HBHC to announce additional reserve building against its energy loan book.

Notably, BOK Financial expects to record provision for credit losses at $22.5 million when it reports fourth-quarter earnings results on Jan 27. This reflects an almost four-fold increase from the midpoint of its previous guidance of $3.5−$8.5 million for the same.

Current weakness in the energy sector, triggered by the consistent fall in oil prices , is likely to emerge as a major factor influencing banking sector results in the upcoming earnings season. Though the stressed energy sector has been affecting the profitability of banks since the past few quarters, the situation has likely worsened, given that oil is currently trading near its 12-year low.

Banks engaged in energy lending continue to witness significant credit migration in the related loan portfolios. This calls for a spike in provision against such exposure, which, in turn, drags down profits of these companies.

In a recent press release, Stacy Kymes, executive vice president, Corporate Banking at BOK Financial, stated that the company experienced credit grade migrations and higher loan impairment during the fourth quarter. Notably, "A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to impairment on the loan."

This apart, the company also estimates lower fee income and higher-than-expected rise in expenses in the to-be reported quarter. Taking into account all these factors, management expects net income in the range of $58−$61 million or 87−91 cents per diluted share. This compares unfavorably with earnings of 93 cents recorded in the year-ago quarter.

According to Michael Rose, an analyst at Raymond James Financial, Inc. RJF , the situation is "going to get worse before it gets better". However, given the increased provisions, he expects regional banks to be capable of weathering a potential downturn. Nevertheless, commercial and residential real estate loan made to communities whose jobs are tied to the energy sector can likely become a major concern for banks.

As of Sep 30, 2015, energy loans constituted approximately 18% of BOK Financial's total loan portfolio. Moreover, the company generates over 70% of its total loans from Oklahoma and Texas, which are primarily oil-driven economies. As such, a further fall in oil prices is expected to substantially alter the bank's performance. In fact, given such exposure, Macquarie Group recently downgraded the company's stock to "Underperform" from "Neutral".

More importantly, a discouraging outlook by the company, followed by the above-mentioned rating downgrade triggered a massive sell-off in the company's stock. Notably, this Zacks Rank #3 (Hold) company's shares plunged 8.3% (with heavy volume of 1.4 billion) to close at $50.02 per share at the end of yesterday's trading session.

Earlier this month, Associated Banc-Corp disclosed an additional provision of $13 million towards bad loans. Prior to that, in Dec 2015, Hancock raised its allowance for loan and losses by $42 million.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

ASSOC BANC CORP (ASB): Free Stock Analysis Report

HANCOCK HLDG CO (HBHC): Free Stock Analysis Report

BOK FINL CORP (BOKF): Free Stock Analysis Report

RAYMOND JAS FIN (RJF): Free Stock Analysis Report

To read this article on Zacks.com click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

BOKF RJF ASB

Other Topics

Stocks