A banking Sector Stock at bottom - 5 Aspects to look at for BOQ

Recently, the central bank in Australia has slashed the interest rates by 0.25% to a new record low of 0.75% for the third time in the last six months in order to boost the economy of the country amidst sluggish mortgage demand, therefore, recording the lowest annual growth rate in the past 10 years.

Many economists further expect a cut of 0.5% in the upcoming year, the economy thus appearing to have reached the turning point. The dip in interest rates, rising housing prices and a respectable outlook is expected to drive growth in the economy. Interest rates are dropping in Australia and in several other countries across the globe in an attempt to boost economies and create employment. While it is difficult to predict the future with the trade war between the two major economies of the US and China, the increased speculation can lower the interest rate even further.

BOQ Earnings Over the years (Source: BOQ’s Annual Report)

One of the Big 4’s suggests that the banking sector in Australia would be simpler and less complicated and would offer better services to its customers. The low interest rates in the environment will lower down the margins and hence would reduce the earnings power of the banks. The benefits of bank revenues are likely to offset by the pressure of the decreasing interest rates. The big 4 banks of Australia delivered poor performance and reported a plunge in its profits with a fall in its dividend pay-outs and a challenging outlook.

Lower interest rates with a tight regulation is making conditions for the financial sector difficult to perform. It is becoming difficult for them to retain their employees and the banks are fighting for the survival and it is expected that this condition will continue for a few years. This would result the economy to deteriorate, especially if there is an increase in unemployment. Whatever market conditions may follow, it is their responsibility to act in a responsible way and make sure that a right balance is maintained between the needs of customers and for those who borrow.

Let us look at one banking sector stock!

Bank of Queensland Limited (ASX: BOQ)

Challenging year for BOQ

Bank of Queensland Limited is one of leading regional banks in Australia with the market capitalisation of $3.25 billion (as on 19 December 2019). In the recently held Annual General Meeting of the company, the top management stated that the bank gave disappointing results owing to a challenging operating environment. This underscores the need to bring the change in the culture of the company.

During the year ended Statutory net profit after tax went down by 11% to $298 million, forcing the Board to follow the prudent approach to maintain the dividend pay-out ratio, with a second half dividend of 31 cents resulting in a full year dividend per share at 65 cents, with a fall of 14% on pcp.

For the year, Common Equity Tier 1 ratio stood at 9.04%, down by 27 basis points. In terms of the drivers of the results, total lending grew by 937 million dollars, or 2% during the year, with the first half slightly stronger. This was primarily driven by the Business Bank, with mortgages underperforming.

Financial Performance (Source: Company’s Report)

Dividend/Distribution – BOQ

The bank has recently paid a fully franked dividend of 31 cents per share on ordinary fully paid on November 27, 2019.

Analysis of 5-year performance

In the span of 5 years from FY15 to FY19, Total income was more or less constant and stood at $1,089 million in FY19. In the same time period, net profit tax went down from $318 million to $298 million. Also, the company did not dilute much of its holding and was almost same in the 5 years.

BOQ Successfully Completes $250M Institutional Placement

The bank has successfully completed the institutional share placement of $250 million. As a consequence, BOQ would issue around 32.1 million new fully paid ordinary securities for $7.78/new share. Notably, it further revealed that the stakeholders would be able to apply for up to $30k of new fully paid ordinary securities. This can be done without sustaining brokerage or transaction costs considering its aim to garner circa $25 million under SPP. The company has also witnessed a change in its leadership with the resignation of its Managing Director & CEO Jon Sutton. It appointed its new Managing Director & CEO, George Frazis in June 2019.

Initiatives under four key pillars

Owing to the changing environment, the bank needs to take decisive action to transform to a more sustainable business model with a clear strategy to return to growth. During the year, the bank undertook several initiatives under its four key pillars of Customer in charge; Grow the right way; Always a better way; and Loved like no other. In the upcoming year, the bank will introduce a new online and mobile banking application for BOQ Retail that will offer a better digital experience for shoppers.

What to Expect from BOQ Going Forward

The bank is investing in modern technology infrastructure and digital platforms and expects the upcoming year to be a difficult one. It also expects a lower year on year cash earnings due to rising costs of regulatory compliance and increased technology investment. Bank of Queensland Limited is planning transformation strategy update for late February 2020 by focusing on business simplification and productivity improvement.

Stock Performance

As per ASX, the stock of BOQ gave a negative return of 22.61% on the YTD basis and a negative return of 14.12% in the past 30 days. This led the stock to trade very close to its 52-weeks’ low level of $7.110. In terms of valuation, the stock of BOQ was trading at a P/E multiple of 9.920x and is earning a dividend yield of 8.83%. Also, BOQ stock was trading at $7.430, marginally up by 0.951% (as on 19 December 2019, at AEDT 3:55 PM).

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