Analysts believe the Bank of Queensland Limited (ASX: BOQ) share price and dividend will both rise from the current levels.
BOQ is one of the 'challenger' banks on the ASX. According to the ASX, it has a market capitalisation of more than $5 billion. But, it's still nowhere near as big as the big four ASX bank shares of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and Australia and New Zealand Banking Group Ltd (ASX: ANZ).
But the acquisition of ME Bank has increased the size of the business, giving it more financial firepower to challenge in the sector.
ME Bank to help profit?
Just over a year ago, BOQ announced it was buying ME Bank for $1.325 billion, to create a compelling alternative to the big banks.
BOQ said it was a transformational acquisition that is strategically aligned.
At the time, BOQ said the deal was expected to deliver material scale, broadly doubling the retail bank and providing geographic diversification. It believed the deal would combine strong complementary trusted brands, with shared customer-centric cultures and differentiated customer segments.
Management said there was a clear pathway to a scaled, cloud-based digital retail bank technology platform.
The acquisition was expected to be financially compelling, adding to cash earnings per share (EPS) by low double-digits to mid-teens, including full run-rate synergies in FY22. It was also expected to add to the cash return on equity (ROE) by over 100 basis points including the full run rate of first-year synergies. Synergies were expected to reach between $70 million and $80 million pre-tax by year three.
Analyst thoughts on the BOQ share price
Morgan Stanley is one of the brokers that likes the look of BOQ. It has a price target of $10.20, suggesting an upside of around 20% on the current share price of $8.45.
BOQ's recent performance update showed that ME Bank only returned to growth in the month of November. But the bank did say its growth momentum continued in the first quarter of FY22, with strong application volume across both the housing and business lending portfolios.
The BOQ, Virgin Money, and BOQ specialist housing portfolio increased by around $1 billion for the quarter. Business banking lending grew by around $200 million in the first quarter, with the asset finance business also performing "well".
The broker noted that BOQ is focused on delivering "positive jaws". FY22 expenses are expected to be around 1% lower than FY21, reflecting additional productivity benefits. The ME Bank integration program remains "on track", with approximately $23 million of full-year synergies delivered during the first quarter.
It was also noted the banking industry is experiencing net industry margin (NIM) headwinds as a result of more challenging trading conditions, partly due to price competition.
In terms of projections, Morgan Stanley thinks the current BOQ share price is valued at 11x FY23's estimated earnings, with profit growth expected in FY23. The FY23 grossed-up dividend yield is expected to be 8.6%.
At the time of writing, the BOQ share price is up 0.24% today at $8.45.
