A double downgrade raised concerns. Did it also create a buying opportunity?
Shares of Bank OZK (OZK 3.76%) plunged on Wednesday after a Wall Street analyst moved it to a sell on loan concerns. To some, the fall looked like a buying opportunity.
As of midday Thursday the stock was down 11.3% for the week, according to data provided by S&P Global Market Intelligence, as investors try to make sense of the warning and what it means for Bank OZK’s long-term future.
A rare double downgrade to a sell
Bank OZK operates from 228 branches spread across five Southeastern states, and provides commercial loans all over the U.S. It is the loan book that caught the eye of Citigroup analyst Benjamin Gerlinger, who downgraded the bank stock from buy to sell due to concerns about the health of some of the bank’s biggest credits.
Specifically, Gerlinger called out vacancies at Bank OZK-financed multi-use development Echo Street West in Atlanta, and concerns about the viability of a large San Diego life sciences development. Together, the two projects account for about 3.8% of the bank’s nonpurchased loan portfolio, and if life sciences projects are struggling it could ripple through Bank OZK’s loan book.
On Thursday, Bank OZK worked to ease concerns. The bank, in a regulatory filing, reiterated its guidance and said in the case of both the Atlanta and San Diego developments, “management is confident in the project.”
Is now the time to buy Bank OZK stock?
The information Bank OZK provided should be reassuring. In the case of the San Diego project, the developers have only drawn a little over half of the $915 million loan, and the sponsor has nearly $1 billion in equity tied up in the deal. That lessens the likelihood of the developer walking away from the project and leaving lenders holding the bag.
The Atlanta project loan is much smaller, with a total commitment of just $135 million, and Bank OZK said the sponsor is making progress leasing the building.
If the buildings find tenants Citi’s concerns will prove to be unfounded. If they do not, the loans could weigh on earnings at Bank OZK in the years to come.
Investors need to understand there is risk here, and it will likely be years before we know for certain whether Citi’s concerns were justified. This could be a buying opportunity, but only for those willing to be patient and who have a tolerance for further potential volatility up ahead.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.