Shares in Bank of Queensland Limited (ASX: BOQ) have surged by the most in two years after management unveiled a record full year profit.
The stock jumped as much as 4.1% in early trade to $12.09 as the bank reported a 19% increase in post-tax cash earnings of $357 million.
The result may only be a modest 2.3% ahead of consensus forecasts, but I suspect the stock is heading higher over the short-term for a number of reasons.
Firstly, Bank of Queensland's cash margin expansion is very encouraging as the margins for the Big Four banks have been under pressure due to the challenging trading environment.
The difference between how much it costs for the Bank of Queensland to borrow and how much it charges for loans actually expanded 15 basis points (0.15 of a percentage point) to 1.97%.
The uplift has been credited to the recent acquisition of Investec Bank's specialist financing business for $440 million in April last year, which focuses on lending to medical and accounting professionals and asset leasing solutions.
This business is performing better than what management had envisioned with the division contributing $43 million to group earnings compared with its original forecast of around $38 million.
A 14% drop in loan impairment expense due to the improving quality of its loan book is also helping to drive earnings growth and dividend-hungry investors will be pleased that the bank is lifting its final dividend by 2 cents a share to 38 cents.
This puts its full year payout at 74 cents, which equates to a yield that's close to 9%.
History has shown that bank stocks tend to outperform in the run-up to their ex-div date and the analysts at Macquarie Group Ltd (ASX: MQG) believe that investors will be increasingly focused on the high yields offered by the sector this time round.
Bank of Queensland will trade without its dividend entitlement on October 29 and I think the stock will remain well bid because of the payout.
Further, the stock hasn't been this cheap in a long while as it has collapsed by around 17% over the past seven months.
Bank of Queensland is trading on a 2015-16 consensus price-earnings (P/E) multiple of around 11.5x, and that's right at the bottom of it five-year P/E range.
While similar observations can be made of its larger rivals like National Australian Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), Bank of Queensland showed today that it can hold its own and that's why I think there is at least another $1 upside to its current share price.
