Let's look at one of only two remaining regional banks in Australia, the Bank of Queensland Limited (ASX: BOQ). Its strengths are brand, customer loyalty, niche businesses and its innovative, owner managed branch franchise network. Bank of Queensland has a strong presence in Queensland and pursues interstate expansion through its owner managed branch franchise network.
Like the four major banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), residential mortgages comprise the largest part of the balance sheet for the Bank of Queensland. Growth in provision of finance for residential housing is paramount for earnings growth for banking. Having recently been very subdued, the Queensland housing market is showing firm signs of recovery, suggesting sustained growth in the future. Therefore prospects for the Bank of Queensland are now looking very promising.
In addition to housing finance, Bank of Queensland has several products that will positively impact earnings growth. These include personal loans, credit cards, savings and investment accounts, phone and internet banking, insurance and international services. There are several online applications, such as Virgin Money, which offers insurance, superannuation and credit cards. Bank of Queensland purchased Virgin Money Australia twelve months ago for $40 million, which was a good price to pay for such a product. This initiative gave Bank of Queensland access into untapped, complementary customer and market segments. It gave the bank access to an iconic brand with proven capability in online acquisition and product distribution.
On April 4 this year, Bank of Queensland invested $440 million in the acquisition of Investec Bank (Australia) Limited's Professional Finance and Asset Finance & Leasing division. As a market leading provider of specialised banking solutions to medical and accounting professions this acquisition represents a major growth initiative for Bank of Queensland. Its loan portfolio will increase the size of the Bank of Queensland's commercial loan portfolio by approximately 38%, providing greater industry and geographic diversity. The $2.2 billion Professional Finance loan portfolio is a relatively high margin and high credit quality portfolio that has demonstrated relatively strong historical growth with low historical arrears. The clients that are targeted by the Professional Finance business work in industries characterised by predictable and recurring cash flows and capital requirements.
Foolish takeaway
Based on expected earnings of 88.8 cents per share for the financial year ending in August, at a current price of $12.72, the price to earnings ratio is a respectable 14.3 times. I expect that the earnings figure is conservative and, based on improving economics in Queensland, earnings will exceed expectations of 88.8 cents, 98.6 cents and 103.6 cents for the financial years, 2014, 2015 and 2016, respectively.
Total dividend this year is expected to be 64.5 cents, representing an annual rate of 5.1%. I would probably wait till June 30 to make a purchase of Bank of Queensland for growth and dividends over the long term.
