While the big four banks are usually the ones stealing the limelight in the financial sector, I believe regional retail banks such as Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) remain desirable as investment prospects.
Both of these blue-chip institutions have some of the highest fully-franked trailing dividend yields going around, representing a historically strong income source for shareholders. Likewise, these banks are currently facing similar headwinds that include COVID-19, the weaker national economic environment and the financial recovery from Australia’s unprecedented bushfire season in regional communities.
Despite facing profound challenges, are either of these banks a prudent investment right now?
Bendigo and Adelaide Bank
The slightly larger of these banks, Bendigo maintains a market capitalisation of approximately $3.77 billion and is the largest retail banking institution outside of the big four.
The Bendigo and Adelaide Bank share price at the time of writing is trading at $7.13, thus representing a price-to-earnings (P/E) ratio of 12.04. This P/E sits at a discount to major competitors such as National Australia Bank Ltd (ASX: NAB), which has a P/E of 16.4, and Westpac Banking Corp (ASX: WBC), with a P/E of 13.6, suggesting that Bendigo may be slightly better value at its current share price.
In addition, Bendigo’s trailing dividend yield sits at 9.26%, having paid out a healthy last dividend of 31 cents per share in March. Of course, COVID-19 has chewed up most of the company’s profits and many institutions are seeking to preserve cash. As such, market consensus is that the bank will likely severely cut its final FY20 dividend by as much as 75%. Only time will tell if this proves to be the case with Bendigo reporting its full-year FY20 results next week on 17 August.
In the meantime, brokers from Citi last week placed a price target on the bank of $7.25, rating the company as ‘neutral’. The broker cited concerns over Victoria’s stage 4 lockdowns as a major headwind, particularly in H2 of FY20, highlighting that this may lead to higher loan deferrals and tighter lending margins.
Although the bank’s share price has struggled in recent times due to its exposure to lending in regional areas, worsened by this year’s bushfires, I remain optimistic that heightened domestic travel and spending in regional areas due to COVID-19 may offset some of the losses taken on by Bendigo.
The bank has a long way to get back to its 52-week high of $11.69, but investors with a long-term view will likely see significant upside from a combination of capital gains and upper-end dividend distributions.
Bank of Queensland
This slightly smaller bank comes in at a market capitalisation of $2.8 billion. The Bank of Queensland share price currently trades at $6.17 at the time of writing. Notably, Bank of Queensland’s P/E ratio sits at under 10, making it a slightly less expensive option compared to other financial institutions.
Similarly to Bendigo, the current Bank of Queensland share price is trading at a sizeable discount of 38% to its 52-week high of $9.98, which was achieved in September last year. Bank of Queensland also maintains a fully-franked trailing dividend yield of over 10%, despite choosing to defer its dividends as of April this year.
According to its results for the first-half of FY20, Bank of Queensland saw its net profit slashed by as much as 40%, and earnings per share withdraw by 16%. Operating expenses also grew by 9% due to a deteriorating economic environment.
Despite poor first-half results in what management dubbed a ‘transitional’ year, Bank of Queensland remained positive regarding its strong balance sheet, aided by a $340 million equity raising.
But according to reporting by the Australian Financial Review, last month Bank of Queensland reported a $112 million increase in loans over 90 days overdue, and provided loan deferrals to over 21,000 customers. This is largely inevitable due to the current difficulties facing the institution and it is great to see the bank helping out its customers in their time of need. It may, however, lead to severe write-downs on some of the company’s loans and a slashed valuation of the bank.
Some short-term pain will undoubtedly be felt for shareholders of both banks but, over the long term, I believe these regional institutions will eventually make a comeback. If I had to pick one, I’d go with Bendigo. It’s a bigger player overall and its loan books appear to be holding up marginally better in the current economic climate. In addition, I get to hear from Bendigo and re-evaluate my thesis on it as of next week, rather than waiting until October for Bank of Queensland.