Bank of Queensland Ltd (ASX: BOQ) shares have had a terrible time since February, falling over 20%. With the 2024 Australian financial year now here, how could things go for the ASX bank share?
The first half of FY23 was rough for the bank, with statutory net profit down 98% to just $4 million and the interim dividend being cut by 9% to 20 cents per share. BOQ said that two large one-off non-cash items hurt the net profit figure, being a $60 million provision for its integrated risk program provision and a $200 million impairment of goodwill.
Ignoring those factors, the cash earnings after tax still fell by 4% to $256 million following a 7% increase in operating expenses to $495 million.
What could happen in FY24?
BOQ's FY23 annual result is yet to be reported, so that will be the first thing that could influence how the next 12 months go.
The ASX bank share recently noted that the mortgage market was highly competitive in the first six months of its financial year, and it was focused on protecting shareholder value and it didn't participate where mortgages were being written below the cost of capital. Hence, its mortgage growth was "relatively flat" over the period.
BOQ warned that:
We expect to see heightened mortgage competition continuing as well as escalated deposit competition due to term funding facility refinancing, with interim margin compression anticipated.
While it can't control what its lending competitors are doing, it is benefiting from "improving processes, reducing the number of products and decommissioning redundant technologies." This will hopefully indirectly help the BOQ share price time over time.
It's now focusing on aligning the structure of the organisation, reducing duplication through a 'horizontally integrated model' and leveraging the automation of its processes.
The latest reading of annual inflation was 5.6% which continues to be above the RBA's target range. It does seem that interest rates are going to keep going higher. This could be tricky for lenders because an increasing number of borrowers may not be able to cope, which could lead to arrears and reduced cash flow.
With BOQ's housing arrears that are at least 90 days overdue, the percentage increased from 0.55% in August 2022 to 0.60% in February 2023. If this keeps worsening, it could be bad news for the BOQ share price.
Commentary by BOQ and other ASX bank shares suggests that the net interest margin (NIM) could face headwinds for the foreseeable future from competition. Lenders no longer need a branch network to compete effectively thanks to online banking and digital processing of loans.
Can the earnings revitalise the Bank of Queensland share price?
Commsec numbers currently suggest that BOQ could generate 67 cents of earnings per share (EPS), which would place the bank at just 8 times FY23's estimated earnings.
However, profit is projected to fall in FY24 as possible higher arrears and competition become stronger headwinds. EPS is projected to fall by 12% in FY24 to 67 cents per share, which is negative for the BOQ share price. This would put BOQ shares at just over 9 times FY24's estimated earnings.
Unless competition reduces and interest rates fall significantly in FY24, it could be a troublesome time for BOQ shares over the next 12 months, though the end of the period could start to show a recovery of earnings and market sentiment. I think there's potential for the share price to rise to a P/E of around 10 by the end of the Australian FY24, which would be a rise of 10% over 12 months.
