Bank of Queensland Ltd (ASX: BOQ) shares outperformed the big four ASX bank shares on Friday.
The Bank of Queensland share price finished the day at $5.70, up 1.79%.
By comparison, Commonwealth Bank of Australia (ASX: CBA) shares and ANZ Group Holdings Ltd (ASX: ANZ) shares gained 0.6% and 0.8%, respectively, while National Australia Bank Ltd (ASX: NAB) scraped into the green by 0.15%. Westpac Banking Corp (ASX: WBC) finished in the red.
Meantime, Bank of Queensland today increased the maximum savings interest rate on its Future Saver account by 0.15% to 5.3%.
This is the highest ongoing savings interest rate available today, according to RateCity.
It is being offered to customers aged 14 to 35 years who have up to $50,000 in a Future Saver account.
Future Saver account holders aged 18 and over have to deposit $1,000 into a linked transaction account and make a minimum of five purchases per month to qualify for the 5.3% savings interest rate.
What does this mean for Bank of Queensland shares?
Well, offering the best savings interest rate around is a pretty good look for Bank of Queensland.
It's no doubt doing this in the hope of attracting more depositor customers.
This is important to help the bank fund new home mortgages and business loans for borrowers.
You see, ASX banks can fund their loans using your savings and money borrowed from other institutions. Some of those institutions are overseas.
Borrowing externally is typically a more expensive way of funding loans than using deposited funds in savings accounts.
So, doing things that attract more depositors is a necessary part of banking.
But there's a cost to the bank in the form of the interest it has to pay to its depositors.
So, by offering the best savings interest rate around, the Bank of Queensland is also paying more than other banks to access their savings customers' money.
So, it's a delicate balancing act.
All of these decisions made by the banks determine their net interest margins (NIMs).
What is the net interest margin (NIM)?
The NIM is an important metric in terms of bank earnings.
It's the amount of money ASX banks earn from the interest they are paid by borrowers minus the interest they pay to their savings deposit holders.
The higher the NIM, the better it is for earnings.
The ASX banks typically get a share price bump when they report improving NIMs or NIMs that are higher than expected.
That's what happened to Bank of Queensland shares last October when the junior lender became the first ASX bank to announce a substantially improved NIM on the back of all those RBA rate rises.
Bank of Queensland revealed a 1.81% NIM for 4Q FY22, well up on its 2H FY22 overall result of 1.75%.
This was better than the analysts expected, and Bank of Queensland shares skyrocketed 11.3% that day.
RBA, the gift that keeps on giving to ASX banks
You can imagine how happy the ASX banks are every time the Reserve Bank puts up the official cash rate.
Every RBA move gives the ASX banks the green light to raise their interest rates on loans. In other words, they get a pay rise every time the RBA strikes.
And the RBA has put rates up by a whopping 3.75% over the past 12 months.
Of course, most lenders have been very quick to pass on these rate rises to their borrowers because they can make more money out of their loans that way.
They haven't been so quick to pass them on to savings account holders because that costs them money.
Stingy.
Anyway, the result of all these rate changes has been improving NIMs across the board for the banks.
Let's take a look at the latest figures.
What are the NIMs of the major banks?
The latest NIMs reported by the Bank of Queensland and some of its competitors are:
- Commonwealth Bank NIM of 2.1% for 1H FY23, up 0.23% on 2H FY22
- Westpac Banking Corp (ASX: WBC) NIM of 1.96% for 1H FY23, up 0.05% on 2H FY22
- Bendigo and Adelaide Bank Ltd (ASX: BEN) NIM of 1.88% for 1H FY23, up 0.19% on 2H FY22
- Bank of Queensland NIM of 1.79% for 1H FY23, up 0.04% on 2H FY22
- National Australia Bank Ltd (ASX: NAB) NIM of 1.77% for 1H FY23, up 0.14% on 2H FY22
- ANZ Bank NIM of 1.75% for 1H FY23, up 0.07% on 2H FY22.
Obviously, there are many factors contributing to an ASX bank's overall earnings. NIM is just one of them.
But given how leveraged our banks are to the residential property market, this is a metric worth keeping an eye on.
Bank of Queensland shares snapshot
The Bank of Queensland share price is down 16.2% in the year to date.
In fact, Bank of Queensland shares hit a new 52-week low of $5.60 yesterday.
Like every other ASX bank share, its price decline is more to do with market sentiment than anything else.
The collapse of Silicon Valley Bank and Signature Bank in the United States in March made global shares investors very nervous.
Then Credit Suisse was taken over by UBS due to a bunch of operational difficulties, which created more uncertainty.
As my colleague James reported earlier today, broker Ord Minnett says Bank of Queensland shares are a buy at this level. It reckons the stock will go to $8.50 within the next 12 months.
That's an almost 50% potential upside for investors who buy Bank of Queensland shares now.
As James reported, the broker "made the move on valuation grounds following significant share price weakness in 2023".
Ord Minnett believes the Bank of Queensland is well-placed to grow its loans business and boost its margins once competition eases and the ME Bank integration is completed.
