Bank of Queensland Limited (BOQ)
HOLD

First signs of margin improvement

 12 Oct 2022
Sector: Financials

Need To Know

  • Result in-line with market expectations.
  • First evidence of higher net interest margins
  • Positive share price reaction, BOQ most heavily shorted bank stock.

Investment implications

2H Cash earnings 5% below market (looks like $20m of investment spend expensed vs capitalised), bad debts in-line, operating costs flat.

2H dividend 24cps in line with market.

2H Net Interest Margins (NIM) flat 1.74% on 1H (guidance was for down in the half). NIM within the half improved; 3Q 1.67% lifted to 4Q 1.81%. Exit run-rate comments point to further improvement in coming periods.

Capital levels in line at 9.6% in line with market.

Outlook 2023: Expecting 3.5% housing credit growth, 6.5% in business credit growth. Expect to grow ahead of market, with positive NIM momentum continuing into 1H23.

Result Implications: Overall, an in-line result from BOQ. Importantly the exit run-rate on net interest margins suggests that market estimates for FY23E could be too low at ~1.70% vs 4Q22 at 1.81%.

BOQ will have some higher funding costs which will eat into some of benefits from higher interest rates and the client move away from fixed to floating rate mortgages. 

Stock price reaction of +5% reflects a stronger than expected NIM outcome, and a short covering rally given the high level of investor short positions (~6%).

BOQ has been the worst performing bank over the last 12mths (-30%).

Looking further ahead, BOQ continues to target a return on equity of >9% and cost of income of <50% over the medium term.

We rate BOQ a HOLD.

Figure 1: BOQ price/book ratio at 0.7x suggests very little earnings improvement is factored in the share price

Figure 1

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Stock overview

Stock Overview

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Company overview

Bank of Queensland is an Australian regional Bank.

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