Can things get better for BOQ shares in FY25?

Can BOQ shareholders bank on a turnaround next financial year?

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The Bank of Queensland Ltd (ASX: BOQ) share price underperformed the S&P/ASX 200 Index (ASX: XJO) during the last year. In the 12 months to 30 June 2024, the BOQ share price rose 5.8% while the ASX 200 went up 7.8%.

BOQ has a different financial year from the regular Australian tax year. The Bank of Queensland's financial year runs to 31 August each year, so there are still a couple of months left to run.

We recently heard from the bank about how it performed in the six months to February 2024, which saw a number of financial measures go the wrong way. The market also heard several interesting comments about the bank's outlook.

Earnings recap

BOQ reported that its HY24 cash earnings after tax fell 33% to $172 million. The ASX bank share reported its housing loan portfolio saw a 1% decline in the second half of FY23 or $411 million in dollar terms. It said a continued focus on economic return resulted in a contraction of the housing portfolio.

The company said its net interest margin (NIM) dropped by 3 basis points (0.03%) – compared to the second half of FY23 – to 1.55%. That means it's making a smaller amount of profit on each dollar it lends.

BOQ blamed "competitive pressures" for its lower margins and the weak lending growth performance. Cash operating expenses also grew by 6% year over year to $524 million.

BOQ also reported that its cash return on equity (ROE) dropped to 5.8%, down from 8.4% in the first half of FY23.

Thankfully, asset quality remains "sound", despite the higher interest rate environment.

The managing director and CEO Patrick Allaway said at the time of the result announcement:

This result has been impacted by continuing industry headwinds, with heightened competition for lending and deposits and higher funding costs. Pleasingly, in a reduced revenue and high inflation environment, we have held BAU [business as usual] cost growth at just 1.2% in the half.

Outlook for BOQ shares

When the bank announced its HY24 first-half result, it also provided some outlook commentary that could apply to the rest of FY24 and FY25.

BOQ said its loan impairment expense is expected to remain below long run averages, which sounds positive. The bank said it remains "optimistic on the long-term view".

However, the regional bank said it expects revenue and margin pressures "to moderate" in the second half of 2024, though deposit competition "to continue." It's also expecting the home lending decline "to moderate", and that business banking growth can increase.

The bank's costs are expected to keep increasing due to inflation and continued investment in the business. BOQ said it's on track to deliver single-digit business as usual (BAU) expense growth in the second half of FY24.

In terms of analyst expectations, the broker UBS is expecting BOQ's cash earnings to drop from $450 million in FY23 to $294 million in FY24. However, the ASX bank share could then see cash profit recover to $320 million, though it would still be lower than FY23.

In fact, while UBS has pencilled in a steady recovery of profit in the coming financial years, FY28 is still only expected to show a cash profit of $406 million – lower than FY23.

The broker suggested that a higher return on equity (ROE) and BOQ share price re-rating depends on improving the NIM and costs.

According to UBS, the BOQ share price is valued at 14x FY25's estimated earnings.

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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