Bank OZK (OZK) Ratings Affirmed by Moody's Amid CRE Concerns

Core Viewpoint - Moody's has affirmed all ratings for Bank OZK, including a long-term local currency deposit rating of A3 and a short-term local currency deposit rating of Prime-2, but the outlook remains negative for the long-term deposit and issuer ratings [1][11][16] Capital Ratios and Profitability - Bank OZK's tangible common equity (TCE) to risk-weighted assets (RWA) ratio has significantly declined since 2021, but Moody's expects improvement in the next 12 to 18 months, supported by the bank's decision to halt share buybacks for the year [2][11] - The bank's TCE is currently at 12.4% of tangible assets, with a three-year average return on assets of 2.1%, which are seen as mitigating factors against concentration risks [13][16] Risk Factors - The affirmation of Bank OZK's ratings reflects a mix of positive financial performance and significant risk factors, primarily due to high concentration in commercial real estate (CRE) loans, especially construction loans, in a challenging interest rate environment [6][8][17] - As of March 31, 2024, CRE loans represented 455% of Bank OZK's TCE, with total CRE exposure nearly double this amount, posing risks to asset quality and profitability as interest rates remain high [17] Funding and Risk Management - Bank OZK's core deposit funding is robust, with about 81% of deposits insured or collateralized, and low reliance on wholesale borrowing, providing a buffer against funding pressures [7][8] - The bank's high-yielding, mostly floating-rate loans and low-duration securities portfolio have supported strong net interest margins, a key driver of profitability [7][8] Outlook and Potential Rating Changes - A downgrade could occur if the TCE/RWA ratio falls below 10%, TCE to tangible assets ratio drops under 11%, underwriting standards weaken, or reliance on confidence-sensitive funding increases significantly [3] - The negative outlook indicates that an upgrade of Bank OZK's ratings is unlikely in the near term, but stability could be achieved if the bank maintains robust profitability and capital ratios without significant deterioration in asset quality [11]