BOK Financial Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

BOK Financial Corporation is a regional financial services company operating primarily in the Oklahoma, Texas, Kansas, and Arizona areas, offering a diverse range of banking, brokerage, insurance, and investment management products and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BOK Financial’s core business lies within traditional banking services, including commercial and retail lending, treasury management, and wealth management. Their business model is heavily intertwined with regional economic conditions, and their ability to generate above-average returns will rely heavily on its strategy execution.

Business Overview

BOK Financial operates through three main segments:

  • Commercial Banking: This segment provides lending, deposit, and treasury management services to large and mid-sized companies. It is the company’s largest segment, accounting for a substantial portion of revenues.
  • Consumer Banking: The consumer banking segment offers products such as mortgages, credit cards, loans, deposit accounts, and other retail services to individuals. This segment is heavily dependent on consumer sentiment and the housing market.
  • Wealth Management: This division focuses on investment management, brokerage, trust, and financial planning for high-net-worth individuals and institutional clients. This segment is highly dependent on market performance.

Geographic Presence: While BOK Financial operates primarily in Oklahoma, Texas, Kansas, and Arizona, the specific economic situations and market dynamics of these regions have a significant impact on the company’s performance. For example, housing market trends in Texas could affect loan portfolio quality and, consequently, profits.

Revenue Trends: Net interest income is a primary source of revenue for BOK Financial, so interest rate levels are crucial for profitability. Trading, brokerage, and insurance revenue also contribute, but tend to be more volatile than net interest income. Overall operating revenue has shown a trend upward the last few years, though this was largely driven by the recent increases in interest rates.

Margins: The net interest margin of BOK Financial has expanded due to the increases in interest rates. Despite that, the margin fell in the last three quarters of 2023, showing the effects of increasing deposit costs and competition for deposits. We can also see the difference between net interest margins earned by the various segments. Commercial banking had a spread of 1.52%, while Consumer banking showed only 0.61%, and Wealth Management had even a negative spread of 0.04% for the second quarter of 2023.

Competitive Landscape: The financial industry is highly competitive, with regional and national banks vying for customers. As an example, the mortgage market, is particularly competitive, which can result in lower margins for the origination business. BOK Financial must face competition from local banks, national players, credit unions, and other financial service providers.

Notably, local and regional banks are seeing an increase in competition. Regional banks are seeing increased pricing pressure, because they are more dependent on loan volumes. This is creating an intense competition for loan growth, as bigger banks are trying to take their market share. BOK Financial’s strategy seems to be to maintain an attractive level of funding while trying to pursue growth in different regions of the southwest. They seem to want to capitalize on their existing customer relationships and target profitable growth rather than trying to gain large increases in market share.

Financials

  • Income Statement: Net income in the recent quarters had a big decline, driven by decreased net interest margin, increased loan loss provisions, and an increase in noninterest expense. Net income for the first quarter of 2023 decreased by 16% year-over-year. That decline continued over the following quarters as net income decreased 15% for second quarter and 32% for third quarter, respectively.
  • Balance Sheet: Total assets are about $53.88 billion as of September 2023. There has been considerable fluctuation in the asset amounts over the last few years. This is a very strong amount, though, considering the company’s mid-sized regional presence. Their capital ratios are generally above minimum regulatory requirements, a sign of reasonable strength.
  • Cash Flow: BOK Financial continues to show healthy cash flow from operations. This allows for continued investments in growth and an acceptable return of cash to shareholders. However, net income is a key driver of cash flow from operations and recent decreases will have a large effect on cash flow from operations.

Recent Concerns/Problems:

The company is concerned with the recent drop in deposit amounts, while the cost of those deposits has been increasing, significantly affecting the company’s profitability. This is a growing worry in the banking industry.

BOK Financial’s CEO expressed concern with increased competition in banking, and a decrease in loan demand, and believes these trends will continue for the next few quarters.

  • In the most recent earnings call, the company highlighted the importance of maintaining its existing liquidity and being selective in new loans. It also mentioned that they expect loan growth to be low for the foreseeable future.
    • Management also stated they’re reducing their securities portfolio.

Moat Rating: 2 / 5 BOK Financial has some aspects that could create a moat, but also significant weaknesses. Here is why we gave it a 2 out of 5.

  • Weaknesses:
    • Lack of Pricing Power: BOK Financial is in the financial services industry, where there’s little product differentiation. They cannot significantly raise rates on its products without losing customers. As a result, the company can only manage and control expenses (but has little control of revenue).
    • Regional Dependence: Their business is strongly tied to the regional economic conditions. As such, any downturn in the key markets of Oklahoma, Texas, Kansas, and Arizona will likely affect performance.
    • Competition: Intense competition from larger national banks, and other financial providers, limits the company’s ability to attain a high ROIC.
  • Strengths:
    • Sticky Deposits: The company seems to be able to retain deposit customers, due to its long-established local relationships. These tend to produce sticky deposits and a relatively predictable source of funding.
    • Brand Recognition: BOK Financial, although a regional bank, has developed a reliable brand throughout its operational markets. However, it is not a national brand. It must be able to continually create awareness among its customer base and retain loyal customers to maintain this aspect of their moat.

Although BOK Financial has established itself as a consistent regional player, it struggles to develop long-term advantages over its competitors. Many of its advantages are limited by geography, and its industry is also highly competitive.

Understandability Rating: 3 / 5 BOK Financial is not exceptionally complex, but not simple either. Here’s why we gave it a 3 out of 5.

  • Easy Elements:
    • Their core business as a bank is easy to understand. They provide loans and collect deposits.
    • Their revenue source comes from lending and fees.
    • Their business is similar to most of their peers.
  • Complicating Aspects:
    • The details of their financial statements can be complex. Figuring out the different parts and their effect on cash flow requires some accounting knowledge.
    • Their operations with the Wealth Management subsidiary have a less apparent benefit to revenue and require a higher level of analysis.
    • They have a large number of complex interest rate models and calculations which requires a solid financial understanding to dissect.
    • Banks are highly dependent on the direction of economic activity and rates. Thus, there are factors outside of management control that affect results.

Balance Sheet Health: 4 / 5 The company has a decent balance sheet position. Here’s why we gave it a 4 out of 5. * Strengths: * Capital ratios are above regulatory minimums, indicating a strong ability to withstand losses. * The company is highly liquid with more than enough to cover its obligations. * Weaknesses: * The company has seen decreasing deposits while its net interest margin falls. * Loan portfolio concentrations could leave the company vulnerable to risk.

Legitimate Risks to the Business and Moat

  • Interest Rate Risk: As a financial company, BOK Financial is highly dependent on interest rates. Rising rates could increase their costs of funding while declining rates could negatively affect margins. A shift in either direction can impact their profitability.
    • The company’s focus on earning assets like variable rates loans can help mitigate this, but not remove the risk.
  • Credit Risk: A significant portion of BOK Financial’s assets comes from loans. Any economic downturn will likely increase the probability that some loans will default, decreasing the value of the portfolio and the company’s overall profits.
  • Regulatory and Political Risk: Financial firms must be careful to follow regulations and the compliance costs can be a drag on profitability. Additionally, changes in regulation can sometimes hurt the core operations of the business.
  • Economic Cycles: The bank has very high correlations to the areas it serves. If Oklahoma, Texas, Kansas, or Arizona see an economic downturn, then the bank is likely to as well.
    • The effects of this can be compounded by the intense competition in the industry.
  • Competition: BOK Financial needs to compete against large national banks with access to deeper credit markets, and smaller regional players with an established customer base. This results in significant pressure on the margins they can charge, and the growth they can sustain.
  • Acquisition Risk: Because a part of the growth strategy is acquisition, management needs to have an effective process to merge businesses without destroying value.

    • Specific Issues: In 2008, BOK Financial acquired Colorado State Bank, which produced significant nonperforming assets, and a sharp decrease in earnings per share.

    • Technological Disruption: If technology rapidly changes the banking industry, BOK Financial could be at risk if their tech is unable to compete with other players.

BOK Financial seems to be well-managed and run within the framework of the law. However, the inherent volatility in the financial industry and their high dependency on the local economy make it very important to carefully track developments in their market. * The largest risk is probably an economic downturn in the areas they serve, which will significantly reduce earnings. This could also hurt their credit quality.