JPMorgan Upgrades Live Oak Bancshares (LOB) to Neutral, 'With NIM Pressure Mounting at a Much Faster than Expected Pace, Trough Is in Sight

JPMorgan analyst Steven Alexopoulos upgraded Live Oak Bancshares (NASDAQ: LOB) from Underweight to Neutral with a price target of $26.50 (from $25.00).

The analyst comments "We downgraded LOB shares in December 2022 as we saw Live Oak as among the more vulnerable across our coverage universe to seeing negative EPS revisions from both a NIM and credit point of view. To this end, with the company’s NIM declining 30 bps in 1Q23 and then guided to decline by another 20-25 bps in 2Q23 (as a result of boosting rates paid on deposits much further following the collapse of SVB/SBNY), Live Oak is experiencing more NIM pressure in two quarters than we had previously expected over the course of two years. In fact, Live Oak’s interest bearing deposit costs were 3.09%, which compares to our average bank paying in the 1.8% range in 1Q23. With LOB’s deposit costs moving closer to market rates at a faster than expected pace, however, what is also now moving at a faster pace is the eventual peak in deposit costs and, tied to this, eventual inflection point in NIM (particularly with new loan yields of 8.5% well above the portfolio loan yield at 7%). While there is still likely a quarter (or two) of remaining intense downward pressure on the company’s NIM, our negative thesis tied to potential NIM pressure is already reaching the later innings. On the expenses front, given the revenue headwind the company is also now more focused on managing expenses. On credit, the bank’s reserve for unguaranteed loans was reported at 2.31% (well above the peers). Moreover, LOB is an outlier with no material office CRE exposure. Tied to this, whereas many banks could potentially see a sharp increase in reserve levels through a recession, in a severe stress scenario, its reserve would likely need to increase in the 20% range (likely to be at the very low end of the peer range). While the potential for the Fed to start cutting rates in 2H23 would be a favorable catalyst for LOB, with us being in the “higher for longer” camp on rates, we see this eventual favorable catalyst for LOB shares being in the distance. As a result, even with the NIM storm likely to pass at LOB more quickly than expected, we are only upgrading from Underweight to Neutral. With LOB shares trading at 1.2x 2023e TBV or a 13% premium to peers, while this premium will likely see somewhat of an overhang while the storm clouds continue to linger, once the NIM bottom is reached, however, this premium is likely to expand considerably given the strong organic growth potential of the franchise. Case in point, in 1Q23 LOB grew loans at a 19% annualized pace and deposits at a 24% annualized pace."

For an analyst ratings summary and ratings history on Live Oak Bancshares click here. For more ratings news on Live Oak Bancshares click here.

Shares of Live Oak Bancshares closed at $30.54 yesterday.

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