Bank of Queensland

Fat Prophets

Friday 23rd October 2015

Hot Stock – Bank of Queensland (BOQ.ASX)

Sunny side up

What’s new?

Bank of Queensland recently released its full year results, unveiling a solid financial and operating performance with strong lending growth of 7 percent over the past year. Total revenue of $2,227 million was 5.5 percent or $115 million above FY14, while cash earnings after tax increased 19 percent to $357 million. The record result was underpinned by an expansion in the bank’s mortgage broker distribution network and the successful acquisition of BOQ Specialist.

Total operating expenses as a result increased to $500 million in 2015. However, excluding one-off costs, the Group cost to income ratio was 44.5 percent which was in line with market expectations. We remain encouraged by management’s digitisation program to deliver further bottom line improvements, and which seeks to reduce the cost to income ratio towards the low 40s over the long term.

Bank of Queensland’s balance sheet meanwhile is good shape, as evidenced by large cash reserves and a steady increase in the customer deposits. The year-end Liquidity Coverage Ratio (LCR) of 125 percent was well above the 2015 LCR minimum requirement outlined in the Basel III global banking regulatory framework.

Importantly, a strong financial performance and balance sheet has enabled the bank to set a final dividend of 38 cents per share, taking full year dividends to 74 cents and resulting in a total return to shareholders of 6.3% during the financial year. This was the highest return of any listed Australian bank during this period.

Outlook

We expect deposits will continue to grow steadily with the bank maintaining a high level of customer satisfaction. Based on analysis from Roy Morgan Research, Bank of Queensland’s Main Financial Institution Net Promoter score has increased by 36.7 points over the last 2.5 years. This is by far the biggest improvement in the Australian banking sector.

Furthermore, and in terms of capital adequacy, we believe that Bank of Queensland is well positioned to deal with the changing regulatory environment, with this potentially providing the bank with a competitive advantage versus its ‘big four’ peers, which are facing tighter capital impositions from the middle of next year.

Price

From a technical perspective, the upward momentum in Bank of Queensland’s share price has slowed over the past seven months. However, following the record full-year profit, there is the prospect that momentum could begin to reverse. In our view, a swift return north of resistance at $13 will likely to trigger a new leg to the upside over the medium term. This is consistent with our fundamental view that Bank of Queensland remains attractively priced on 13.7 times forward earnings with a 5.7 percent yield.

Worth buying

Bank of Queensland has delivered a robust and sustainable operating and financial performance in the past year, driven by an expansion in its mortgage broker distribution network and the successful acquisition of BOQ Specialist. With management aiming to reduce the cost to income ratio towards the low 40s, further margin gains are in the wind in our view.

Bank of Queensland also has a strong balance sheet, with a large cash reserve and underpinned by a steady increase in customer deposits. The bank is therefore well placed in the light of regulatory capital tightening, and will arguably be better positioned than its ‘big four’ peers. The bank is also more weighted towards Queensland than competitors, which we view as a relative advantage given the region’s leverage to a weakening Australian dollar.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Bank of Queensland is held within the Fat Prophets Concentrated Australian Share, Australian Share Income and Small & Mid cap models.

Comments from our readers

No comments yet