This stock could be a safer alternative to the Big Banks

You are right to feel nervous about the share prices of the Big Banks with looming softness in the property market, a slowdown in lending growth and a rising cost of capital. If you regard the Big Banks as a proxy for our domestic economy, then the growing divergence between business and consumer confidence that was released today won’t be giving you much comfort either.

The latest reading on business confidence hit a post-GFC high but consumer sentiment is stuck in the pits with the number of pessimists outnumbering optimists for the eighth straight month.

Shares in our biggest mortgage lenders have suffered in this climate of uncertainty. Commonwealth Bank of Australia (ASX: CBA) is the best performer this calendar year but it’s still 0.4% in the red. But that’s still much better than National Australia Bank Ltd.’s (ASX: NAB) 3.3% decline, Westpac Banking Corp’s (ASX: WBC) 5.9% drop and Australia and New Zealand Banking Group’s (ASX: ANZ) 6.5% slump.

However, there’s a quiet overachiever that could prove to be a much better alternative to the Big Boys. I am referring to Bank of Queensland Limited (ASX: BOQ). While the recent focus has squarely been on the four largest banks, the regional lender has largely fallen off the radar of most investors.

But you shouldn’t ignore Bank of Queensland. Macquarie believes that the regional bank’s relative returns profile is looking more favourable than the Big Four after all the banks started hiking interest rates on their mortgages to protect their precious net interest margins.

This is particularly so for interest only loans as the repricing will benefit lenders like Bank of Queensland far more, being a small lender and more exposed to mortgages, than the Big Four.  Macquarie believes that the repricing measures will result in a 4 to 6 basis point uplift to margins, which equates to around a 4%-7% increase in earnings for Bank of Queensland and Bendigo and Adelaide Bank Ltd (ASX: BEN)

Further, the federal government’s bank levy is only targeted at the Big Four plus Macquarie Group Ltd (ASX: MQG). Then there is the overhang from South Australia with the state government threatening to implement its own bank levy on the big banks.

It’s not only the fact that they are better placed to protect margins and their immunity from bank levies that makes regional banks attractive. The broker believes that Bank of Queensland and Bendigo Bank will be able to deliver underlying earnings growth of around 15% to 18% between FY17 and FY20.

These factors have driven the broker to upgrade Bank of Queensland to “outperform” and Bendigo Bank to “neutral”.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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