Could it be time to buck the trend on Bank of Queensland shares?

Is this a deep-value opportunity?

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The Bank of Queensland Ltd (ASX: BOQ) share price is down around 20% since the start of 2023, as we can see on the chart below.

It's a tricky time for banks at the moment with strong competition a headwind for the net interest margin (NIM). Higher interest rates may also hurt arrears and dampen demand for credit.

The FY23 result saw a number of negatives for the ASX bank share.

Earnings recap

It said that the NIM was down 2 basis points (0.02%) to 1.69%, and housing loan growth was negative 1% compared to FY22, or down $0.7 billion in dollar terms. The NIM dropped on competition and higher funding costs.

BOQ's cash earnings after tax fell 8% to $450 million and the statutory net profit after tax (NPAT) sank 70% to $124 million. The board decided to decrease the full-year dividend by 12.5% to 21 cents per share and the full-year dividend fell by 11% to 41 cents per share.

Profit and the dividend is normally key for Bank of Queensland shares.

The bank said that as pressures on the mortgage market persisted through the year, management made a decision to moderate growth where economic returns "could not be achieved", resulting in a contraction of the mortgage lending portfolio.

However, the bank also said that the portfolio quality remains "well secured and sound" with prudent provisioning and forward-looking overlays "considering the uncertain economic climate".  

BOQ said that it's anticipating "increasing risk" into FY24 due to the "elevated cost of living, lagged impact and sustained higher interest rate".

But, the bank said that it's anticipating that mortgage pricing will need to "adjust at some point to provide returns above banks' cost of capital". But, deposit competition is "expected to remain". Inflationary pressures will be "partially offset" by its simplification program and it's expecting low single-digit cost growth to its underlying cost base.

BOQ is expecting its capital position to remain "strong" and expects its common equity tier 1 (CET1) ratio to remain "comfortably within" the target range of between 10.25% to 10.75%, with its dividend payout ratio targeted to be between 60% to 75% of cash earnings.

Is the Bank of Queensland share price an opportunity?

After looking intently at the BOQ result, the broker UBS has a sell rating on the ASX bank share.

The price target is $5, which suggests that the broker believes the BOQ share price could fall by 9% over the next year.

UBS suggests there are risks related to possibly failing to deliver on its digital transformation and cost reduction efforts, a potential negative surprise on possible remediation costs, and the broker is "mindful of the normalising credit cycle."

BOQ share price valuation

UBS has forecast that BOQ could generate 44 cents of earnings per share (EPS) in FY24. That puts the forward price/earnings (P/E) ratio at 12 times.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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