The share price of Bank of Queensland Limited (ASX: BOQ) is leading bank stocks higher after the stock got upgraded by Credit Suisse because it has become too cheap to ignore.
The stock surged 3% to $10.21 in after lunch trade, which is well ahead of its bigger rivals as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) are up by around 1% plus each.
But Bank of Queensland is still down 8% for the year and this makes it a good entry point for investors, according to Credit Suisse, which lifted its recommendation on the stock to “outperform” from “neutral”.
“Whilst acknowledging a challenging macro backdrop (with weaker revenue and loan growth outlook) for the banking sector (including BOQ), we believe that the recent sector de-rate has overshot BOQ’s fair value,” said the broker.
“BOQ currently sits near trough valuations across most metrics (P/E, P/B, dividend yield and P/E relative to non-bank industrials).”
The latest Queensland budget has also bolstered my confidence in the stock. About a year ago, the economic outlook for the resources driven state looked pretty dire with slumping oil prices impacting on its large gas projects owned by Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG).
I was worried about growing housing loan defaults, which would hit Bank of Queensland harder than the other banks due to its exposure to its home market.
But crude prices have surged around 50% since and the state government’s coffers are flushed with cash (not that that will stop the Palaszczuk government from taking on more debt to pay for infrastructure, which should also create more jobs to stave off mortgage delinquencies).
Management has also managed to keep a lid on costs and has managed to grow its loan book in this challenging environment.
I am not sure if Bank of Queensland can be called the best-placed bank in the sector as I think that title should go to UK bank CYBG PLC/IDR UNRESTR (ASX: CYB), more commonly called Clydesdale Bank, but the stock could be a better bet than the big four, which are still under the Banking Royal Commission spotlight.
Credit Suisse has a price target of $11.40 on the stock and that’s above the circa 8% dividend yield (before franking).
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, CYBG Plc, 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 Scott Phillips.