Bank of Queensland Ltd (ASX: BOQ) shares are not liked by the fund manager Plato Investments. In this article, we'll look at what Plato dislikes about the ASX bank share and whether the bank has any positive attributes.
BOQ has been one of the more shorted ASX stocks in recent times. According to ASIC, BOQ had 6.4% of its shares shorted as of 5 January 2024. This has reduced from 9.9% of shares being shorted in November.
What is shorting? It's basically investors betting that the BOQ share price is going to go down. The higher the percentage of shares that have been shorted, the more investors are betting that it will fall.
Plato has been one of the shorters of the ASX bank share.
Why doesn't Plato like the ASX bank share?
The AFR reported the fund manager of Plato Global Alpha Fund, David Allen, thinks structural headwinds will hurt BOQ's profit and mean the regional bank can't compete effectively with the big ASX bank shares of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
Allen said:
As they say, quantity has a quality all of its own.
BoQ will always struggle to have the scale to compete with competitors. On our numbers, the return on equity of BoQ is less than its cost of equity, and this means that asset growth will actually destroy value.
The financial year earnings forecasts have been downgraded from 58 cents per share in June to 46 cents per share today.
Despite this, BoQ trades at a forward price-to-earnings (P/E) ratio of 13.2, which is bang in line with the peer median. Of all the Australian companies that we analyse, BoQ ranks 422nd worst of 560 and 56th worst of the 59 financials.
Our base case is that BoQ will come under increasing pressure in 2024, particularly if the macro environment deteriorates.
What were the latest financial numbers?
FY23 was a difficult year for the business. Cash earnings after tax fell 8% to $450 million and statutory net profit after tax (NPAT) sank 70% to $124 million. Shareholders saw the dividend per share decrease by 11% to 41 cents. Profit and dividends are obviously a key focus for investors looking at BOQ shares.
Statutory profit after tax suffered from a $200 million goodwill impairment, a $42 million risk remediation provision, a $35 million restructuring charge and $57 million of ME Bank integration costs.
The FY23 net interest margin (NIM) – a key measure of bank profitability – fell 2 basis points to 1.69%.
BOQ said at its AGM that it's expecting "continued revenue and margin pressure from slower credit growth, ongoing heightened competition" and its "higher relative cost of funding."
The increasing regulatory impost will lead to "low single-digit growth" of its underlying cost base.
BOQ is expecting "lower returns" in FY24, with a return to profitable growth in FY25 and FY26 when it expects the economic cycle to turn.
Its dividend payout ratio will be at the "lower end" of its target range during this period.
Are there any positives about BOQ shares?
The bank is facing a difficult environment, but it's taking a number of actions to try to combat the headwinds.
BOQ said it's uplifting its operational resilience, risk culture and compliance.
The bank also said it's "simplifying and optimising" its business for growth with a lower cost to serve when the cycle turns. The simplification program is expected to partially offset the cost inflation.
While the short-term may be challenging, BOQ shares can benefit in the longer term if its operations improve.
BOQ shares are down heavily and the market is not expecting much of the company in the long term. But profit could materially improve in FY26, which could be a catalyst for the company. Investors are also expected to keep receiving dividends, which may offset some of the pain.
However, BOQ is certainly not on my want-to-buy list at the moment.
