Time to buy Bank of Queensland?

Stronger capital management and a firm strategy seem to have Bank of Queensland (ASX: BOQ) on course to maintain its steady lift in fortunes. The stock has been recovering strongly since its profit slump brought about by lending losses incurred in the 2010-11 Queensland floods.

After earlier outperforming and then tracking along with its S&P/ASX 200 Financials Index (ASX: XFJ), Bank of Queensland has been trading below its peers since that slump. However, its price has now risen by 35% in the past year and by more than 24% in the year to date, among the best returns in the S&P/ASX 200 Index (ASX: XJO).

That’s a big turnaround from its disastrous fall to $6.66 exactly a year ago because of those bad debts. Its price has retraced from a year-high of $10.08 at the end of May to hover above $9, the price at which analyst Morningstar ascribes its intrinsic value.

Now Standard & Poor’s might upgrade the bank’s BBB+ long-term issuer credit rating. Its decision to put the stock on positive credit watch had affirmed the bank’s “strategic direction and the progress it has made over the last 18 months”, chief financial officer Anthony Rose said, adding, “Under its new management team, BOQ has strengthened its balance sheet and capital position, reduced costs by focusing on operational efficiency and improved asset quality by introducing a new risk appetite framework and loan origination strategies.”

The agency’s decision on the long-term rating should be known within 90 days, probably before the bank’s October annual report. At the end of this month, current director Roger Davis will take over as chairman. His appointment follows the retirement of Neil Summerson, under whom the bank made a number of key acquisitions, including Virgin Money Australia.

Analysts cited by Comsec — Bell Potter, CBA Institutional Equities, JP Morgan and Morningstar  — are neutral overall on the stock, with two recommending a hold, one a strong buy and one a strong sell.

Because of the bank’s better financial position, reporting strong first-half 2013 profits (compared to a previous $72 million first-half loss), Morningstar upgraded its rating to hold. Activo changed its view from unfavourable to neutral at the end of May. Columbine’s capital methodology had earlier downgraded it from a hold to sell (trading at $9.09) because it found it cash flow indicators unattractive. Technical analyst Trading Central believes the stock will rise short-term but that it’s becoming overbought.

Capitalised at $2.9 billion, Bank of Queensland has a 6.1% dividend yield and a 13.7 price to earnings ratio.

Foolish takeaway

Bank of Queensland is more solid than when it was caught short with bad debts a couple of years. You’d expect a credit rerating and a new chairman would help. It’s a worthy addition to any long-term portfolio, but investors need to be careful to not pay too much. Best to buy in an overall market dip.

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Motley Fool contributor Andrew Ballard own shares in Bank of Queensland. 

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