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J.P. Morgan upgraded Live Oak Bancshares (NYSE:LOB) stock to Neutral from Underweight on Friday on expectations that the regional lender’s net interest margin will reach a bottom sooner rather than later as pressures on the profitability metric accelerated at a much faster pace than expected.
Battered by higher average liquidity levels and higher interest rates, the bank’s NIM dropped to 3.46% from 3.76% in the prior quarter. Moreover, its average cost of interest-bearing liabilities (deposits) for Q1 jumped by 71 basis points, while the average yield on interest-earnings assets increased by 41 bps.
The company then guided for NIM to fall by an additional 20-25 bps in Q2, due to raising rates paid on deposits after last month’s banking turmoil.
LOB “is experiencing more NIM pressure in two quarters than we had previously expected over the course of two years,” analyst Alex Lau wrote in a note. “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.”
He contended that NIM pressure will likely persist for up to two more quarters, though “our negative thesis tied to potential NIM pressure is already reaching the later innings.”
LOB inched up 0.1% in late morning trading.
The Neutral rating disagrees with the Quant system rating of Strong Sell and converges with the average Wall Street analyst rating of Hold.
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