Why Bank of Queensland Limited shares are tanking 

Credit: BOQ

Investors in Bank of Queensland Limited (ASX: BOQ) copped a rude surprise on Tuesday morning. BOQ released a one-page strategy update which raised troubling questions about the bank’s direction.

Investors have spent the last two days washing their hands of BOQ. The bank’s share price tumbled by a total of more than 14% from Tuesday morning to Wednesday night.

Does this savage price action suggest more pain to come, or have Bank of Queensland shares overshot into value territory?

Why Did This Happen to BOQ Shares?

On Tuesday, BOQ announced that it would reshape its organisational structure to support its strategy. The bank plans to spend $15 million of pre-tax earnings over the next six months to ‘implement the change initiatives’.

That’s a nice way of explaining that BOQ needs to cut its cost to income ratio and that its first steps may be to make around 50 jobs redundant.

Investors can understand downsizing as a fact of life in modern corporate Australia. Most punters would likely approve of BOQ’s plan to automate back office functionality and digitise the business. But BOQ’s next comment about the restructure spooked the market:

The uncertainty in the global economic outlook over recent months has resulted in a significant increase in volatility in funding markets. While strong competition for new business remains, this creates headwinds for our margin outlook.’

Basically, the markets where Bank of Queensland sources its funds got increasingly tough over the second half of 2015. The cost of borrowing on jittery international markets has risen for the firm.

At the same time, competition for home loans has intensified, with smaller lenders offering cheap rates to grab market share from the major banks. These factors have combined to pressure Bank of Queensland’s profitability.

What’s Next for Bank of Queensland Limited?

Volatility in funding markets is bad news for all Aussie banks, but it’s even worse for a second-tier lender like Bank of Queensland. BOQ has done a decent job of closing the gap to its peers’ profit margins over the last few years, but this week’s outlook statement suggests that the catch-up theme could be set to reverse.

On that basis, this week’s share price tumble seems justified — and although BOQ has dropped to a two-year low, it’s hard to see the stock as great value just yet.

Foolish takeaway

Bank of Queensland’s admission of margin pressure could spell bad news for shareholders of the big four Aussie banks: National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA).

Weakness in the global economic outlook has caused the banks’ wholesale funding markets to deteriorate. It’s an environment likely to throw up more losers than winners in the financial services sector. That means now is not a time to sit idly by with your portfolio loaded full bank stocks — a tactical reweighting away from the banks could be wise.

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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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