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Top broker says sell this ASX bank share before it releases its results

One ASX bank stock is underperforming its peers today after a broker downgraded it ahead of its full year profit results on Thursday.

The Bank of Queensland Limited (ASX: BOQ) share price slumped 1.1% to $9.59 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is trading flat.

BOQ is underperforming its peers as well. The Westpac Banking Corp (ASX: WBC) share price, the National Australia Bank Ltd. (ASX: NAB) share price, and the Australia and New Zealand Banking Group (ASX: ANZ) share price have made modest gains, while the Bendigo and Adelaide Bank Ltd (ASX: BEN) fell 0.9% to $11.22 at the time of writing.

Additional risk factor for BOQ

All of these banks are scheduled to report their results over the coming months and investors are on edge as falling interest rates and regulatory/political risks are threatening to crimp their profits.

However, Bank of Queensland is facing an extra headwind – and that’s a new chief executive. History shows it’s always a trying time for shareholders whenever new leadership takes the helm – particularly if the ASX entity is struggling as BOQ is.

This is enough reason for Morgans to cut its recommendation on the stock to “reduce” from “hold” as it believes the bank could be close to announcing a painful restructure.

“By way of recap, one of the key priorities laid out at the 1H19 result was to have a systemic approach to restoring earnings growth and returns,” said Morgans.

“The Company said at the time that such an approach will include: a segment-by-segment review of return on tangible equity (ROTE); retail banking strategy redevelopment; business simplification; a focus on capital/resource allocation; and an execution roadmap.

“Two points from us on this: firstly, this priority highlights the extent of challenges facing BOQ; secondly, the points laid out sound like the remit the Board would have handed to the new CEO George Frazis upon his commencement on 5th of September 2019.”

Significant risk of write-downs

What this means is that there is significant scope for a major restructure as the new CEO is likely to clear the deck to give himself room to turn the ship around.

“However, given that the new CEO only commenced last month (and after the end of FY19), it may be too early for significant restructuring to be announced alongside the FY19 result release,” added Morgans.

“We believe it is more likely that significant restructuring and kitchen-sinking may be announced later in 1H20.”

The broker is forecasting 1% gross loan growth and a flat net interest margin of 1.94% for 2HFY19. Morgans has a target price of $8 a share.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Westpac Banking. Connect with him on Twitter @brenlau.

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.

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