One Wall Street analyst is sounding the alarm on two high-profile loans.
A Wall Street analyst has lowered his rating on Bank OZK (OZK -14.27%) to sell from buy due to concerns about some of the bank’s largest loans.
Investors are heeding the alarm, sending shares of Bank OZK down 16% as of noon ET.
Big projects, big risk
Bank OZK, formerly known as Bank of the Ozarks, operates from 228 branches spread across five Southeastern states.
On Monday, Citigroup analyst Benjamin Gerlinger downgraded the bank stock to sell from buy and lowered his price target to $37, from $57. The analyst is concerned about potential risk tied to large loans on projects in Atlanta and San Diego, as well as broader concerns about lending to the life sciences construction market.
In Gerlinger’s report, he noted that Bank OZK has done a lot of commercial lending “with minimal total loss content,” but said he has “newfound, but substantial concerns” over what he believes to be Bank OZK’s largest individual loan: a multiuse project in Atlanta known as Echo Street West.
Gerlinger said a separate San Diego project, the Research and Development District, is “indicative of a difficult life science construction lending market.” Together, the two projects account for about 3.8% of the bank’s nonpurchased loan portfolio.
Is Bank OZK a buy following the downgrade?
Bank OZK’s loan book has held up well so far, with the company recording an annualized ratio of net charge-offs to average loans of just 0.11% in its most recent quarter. Gerlinger’s concerns stem from the lack of tenants at the Atlanta and San Diego projects, which could make it hard for the building owners to make payments on the loans down the line.
Bank OZK has a geographically diverse lending portfolio, and there is nothing in the report to suggest the institution could fail over these loans. But significant underperformance of large loans could eat into earnings for an extended period, impacting the stock price.
The best-case scenario from here is that tenants are eventually found, rendering Gerlinger’s estimates conservative. But until more is known, investors would be wise to watch this situation play out from the sidelines.
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.