The Bank of Queensland Limited (ASX: BOQ) share price has been falling in recent weeks. It's down almost 10% since August 2022 and this year it has dropped by 17%.
As one of S&P/ASX 200 Index's (ASX: XJO) bank shares, readers may be wondering why BOQ shares are falling when interest rates are rising. Aren't banks meant to earn more profit in a rising interest rate environment?
It's true that bank profitability has been falling as interest rates hit record lows. The competition was and perhaps is, fierce in the sector. This was hurting the net interest margins (NIM) of the banks.
What's a NIM? It's a profitability measure to show the difference between the interest rate that banks are lending out money for, compared to the interest rate cost of funding those loans (funding can come from sources like savings accounts).
NIMs may well rise in the coming reporting periods for banks like BOQ, however, investors may have been initially taken off guard by how quickly central banks were planning to increase interest rates.
Some investors may be worried about how Australian households are going to manage significantly higher mortgage payments.
Image source: Getty Images
Is this bad news for the BOQ share price?
Tim Haselum from Catapult Wealth doesn't think so, in-fact he rated BOQ as a buy on The Bull. Why? Haselum said:
We believe the banks are facing reducing loan volumes, but we aren't concerned about impairments, as households appear to be in sound financial shape. We like the ME Bank recovery story and see further synergies ahead. Potential net interest margin improvements amid the company's undemanding price/earnings multiple presents a buying opportunity.
So, in his opinion, investors have become too fearful about the financial consequences of rising interest rates.
What is the valuation?
Haselum mentioned that the company has an "undemanding' price/earnings (P/E) ratio.
According to the estimates on CMC Markets, the bank is expected to generate earnings per share (EPS) of 74 cents in FY22 and 73.1 cents in FY23.
So, based on those numbers, the BOQ share price is valued at 9.3 times FY22's estimated earnings and 9.4 times FY23's estimated earnings.
Don't forget about the BOQ dividend
Banks like to pay attractive dividends to shareholders, so let's have a look at what BOQ is expected to pay over the next couple of financial years.
According to CMC Markets, BOQ is expected to pay a grossed-up dividend yield of 9.5% in FY22 and 10.1% in FY23.
