We are not used to getting good news from banks these days but Bank of Queensland Limited (ASX: BOQ) managed to pull a rabbit out of its hat yesterday that sent its share price jumping by over 2% since.
Investors are excited after management delivered a better than expected full-year profit result that didn’t come with the usual bogeymen that the market is getting accustomed to these days, although there are doubts whether the bank’s outperformance can last.
To put things in context, its share price is still down 14% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up by over 9%.
Bank of Queensland’s fall is worse than the big banks 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).
This probably explains the relief rally as Bank of Queensland has bested its bigger rivals by delivering a net interest margin expansion, producing a better than expected underlying profit result and avoiding any real fallout from the Banking Royal Commission.
But despite these positives, analysts aren’t swayed with a number sticking to their “sell” recommendation on the stock even as supporters get googly-eyed over its low valuation and juicy 7% yield, which goes up to nearly 10% if franking is included.
Bank of Queensland could be a dividend trap and its profits could decline in the current financial year, warns Macquarie Group Ltd (ASX: MQG).
“BOQ’s treatment of compliance spend as a non-recurring item was surprising in the current environment. We continue to see earnings pressure emerging in FY19 as competition in mortgage market intensifies,” said the broker, who reiterated its “underperform” rating on the stock with a $10.50 price target.
“Furthermore, with an elevated payout ratio and low return on capital, we see a risk that BOQ would need to cut its dividend.”
UBS is also critical of management not to include $9 million in compliance costs, $11 million in software write-downs and $5 million in legal costs in its underlying profit calculation. These expenses represent around 7% of the bank’s FY18 cash profit and management has a habit of not including such items.
“Unfortunately, BOQ has a track record for taking items below-the-line. Since the Financial Crisis BOQ has taken a net -$355m in below-the-line charges across 57 items which it believed were ‘one-off’ in nature,” said UBS.
“This equates to 16% of the profit BOQ has reported over the last decade. We believe a better indication of BOQ’s 2H18 result was that CET1 fell 11bp to 9.31%.”
The saving grace is that the bank has long done a full verification of borrowers’ income and living expenses.
This had put Bank of Queensland at a disadvantage to the big banks, who’ve done little to verify the data, but its rivals will now be forced to do the same checks.
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