The Bank of Queensland Ltd (ASX: BOQ) share price has sunk 20% this year. It's actually down 26% from 9 February 2023, as we can see on the chart below.
It has been a rough period for one of Australia's larger challenger banks. It's suffering from strong competition in the banking sector, which is hurting margins.
However, it's also facing regulatory heat from the Australian Prudential Regulation Authority (APRA) as well as the Australian Transaction Reports and Analysis Centre (AUSTRAC).
Let's quickly remind ourselves about what the bank has recently announced.
Earnings recap
Around two months ago, the bank reported its FY23 half-year result which showed a 4% decline in cash earnings after tax to $256 million. The statutory net profit after tax (NPAT) declined by 98% to $4 million.
Despite all of the interest rate rises, BOQ said that its net interest margin (NIM) of 1.79% only improved by 4 basis points (0.04%) compared to the second half of FY22. BOQ said that its housing loan growth was only 0.6% from the second half of FY22, while the business loan growth was 6%.
Lending revenue may have increased, but operating expenses increased by 7% year over year to $495 million.
BOQ's board decided to declare an interim dividend of 20 cents per share, which was down 9% year over year.
In its outlook commentary, BOQ said that it expects "heightened mortgage competition continuing as well as escalated deposit competition due to term funding facility refinancing, with interim margin compression anticipated." This could be, or has been, bad news for Bank of Queensland shares.
Regulator attention
Internal and external reviews led to "identification of deficiencies in its operational resilience, risk culture and governance and anti-money laundering and counter-terrorism financing program and BOQ's ongoing engagement with APRA and AUSTRAC."
BOQ has entered into voluntary enforceable undertakings with APRA and AUSTRAC to address mediation. APRA also added $50 million to its minimum capital requirements.
The bank needs to prepare a remedial action plan, which needs to be lodged within 120 days of the enforceable undertakings.
In the FY23 half-year result, BOQ booked large, one-off non-cash items, including a $60 million provision for the integrated risk program and a $200 million impairment of goodwill.
Is the Bank of Queensland share price an opportunity?
BOQ says it's doing work on simplifying the bank, reducing duplication and utilising more automation for its processes. It's trying to reduce costs and improve productivity in a number of different ways, which will be realised in FY24, according to the bank.
Investors face a tricky conundrum – things are looking tough for BOQ shares, but does this lower valuation now represent an opportunity?
According to projections on BOQ, in FY24 it could generate earnings per share (EPS) of 59 cents, and pay an annual dividend per share of 42 cents. That would mean the current BOQ share price is valued at 9 times FY24's estimated earnings with a possible grossed-up dividend yield of 11%. But, these are just projections.
The BOQ share price is now a lot cheaper and could represent good value at these levels if it's able to deliver some sort of earnings and dividend growth in the subsequent years. Sometimes the best time to invest in a business is when most investors are avoiding it.
I don't think it's worth investing in a business unless its underlying earnings are going to grow over time.
BOQ is not the first bank I'd choose to invest in. I think Macquarie Group Ltd (ASX: MQG) and National Australia Bank Ltd (ASX: NAB) shares could deliver more earnings growth compared to Bank of Queensland shares over the next few years because of their higher-quality performance and strong management teams.
