Bank OZK: Emerging Credit Risks, Margin Compression, and Muted Growth Drive Sell Recommendation

In a report released today, Ben Gerlinger from Citi maintained a Sell rating on Bank OZK, with a price target of $40.00.

Ben Gerlinger has given his Sell rating due to a combination of factors tied to Bank OZK’s growth outlook and emerging credit risks. He highlights that while there have been some recent resolutions in the foreclosed and substandard loan book, the sizable balance of special mention credits—concentrated in life sciences and office properties—could offset those gains and potentially drive higher credit costs into 2026. In his view, the sale of a large, near‑vacant life science construction loan underscores both management’s proactive stance and the underlying vulnerability in that niche, raising concerns about broader mark‑to‑market implications for similar exposures. In parallel, he notes that a softer short‑term rate environment is likely to compress core net interest margin more than the market is assuming, which, combined with a shrinking loan portfolio from payoffs and loan sales, weighs on his net interest income and pre‑provision profit forecasts.

Ben Gerlinger also points to muted near‑term balance sheet expansion as a key constraint on earnings momentum. Recent RESG loan commitments fell below historical norms, and while a rebound in commitments is expected, he emphasizes that these new credits are unlikely to fund meaningfully until the back half of 2026, leaving a gap where older vintage payoffs become a headwind to loan growth. Even as the commercial and industrial business is expected to take on a larger role in driving lending, his projections remain below management’s mid‑single‑digit growth targets for 2026. Taken together—rising potential credit pressure, weaker margin dynamics, below‑consensus profitability modeling, and limited visibility on near‑term growth—he concludes that the risk‑reward profile does not justify owning the shares at current levels, supporting his Sell recommendation and an implied negative expected return.