Over the past year, the Bank of Queensland Ltd (ASX: BOQ) share price has lagged behind the S&P/ASX 200 Index (ASX: XJO). From July 2023 to June 2024, BOQ shares rose by 5.8%, while the ASX 200 saw a 7.8% increase. This underperformance has left shareholders wondering if a turnaround is possible in the upcoming financial year.
Unique Financial Year and Recent Performance
BOQ operates on a financial year that concludes on 31 August, differing from the standard Australian tax year. This unique timing means there are still a couple of months remaining in their fiscal year. In the six months leading up to February 2024, several key financial metrics took a downturn, contributing to the bank's recent struggles.
Earnings Recap and Financial Challenges
BOQ reported a 33% drop in cash earnings after tax for the first half of FY24, totalling AU$172 million. Additionally, the bank's housing loan portfolio declined by 1% or AU$411 million in dollar terms during the second half of FY23. The net interest margin (NIM) decreased by 3 basis points to 1.55%, indicating a smaller profit on each dollar lent. Competitive pressures were cited as a primary reason for the lower margins and weak lending growth. Furthermore, cash operating expenses rose by 6% year-over-year to AU$524 million, and cash return on equity (ROE) fell to 5.8%, down from 8.4% in the first half of FY23. Despite these challenges, the bank maintained sound asset quality.
Management's Perspective
Patrick Allaway, BOQ's Managing Director and CEO, acknowledged the difficulties faced by the bank, attributing the results to industry headwinds such as heightened competition for lending and deposits and higher funding costs. He expressed satisfaction with the bank's ability to keep business-as-usual (BAU) cost growth at just 1.2% despite reduced revenue and high inflation.
Outlook for BOQ Shares
Looking ahead, BOQ provided an outlook that includes both challenges and opportunities for the rest of FY24 and into FY25. The bank expects loan impairment expenses to remain below long-term averages, a positive indicator for future stability. However, revenue and margin pressures are anticipated to moderate, while deposit competition is expected to persist. BOQ also predicts a moderation in the decline of home lending and potential growth in business banking.
Cost increases are projected to continue due to inflation and ongoing investments in the business. The bank aims to achieve single-digit BAU expense growth in the second half of FY24.
Analyst Expectations and Valuation
UBS, a leading broker, forecasts a drop in BOQ's cash earnings from AU$450 million in FY23 to AU$294 million in FY24, with a potential recovery to AU$320 million in the following year. Despite this, the projected cash profit for FY28 remains lower than FY23 levels, at AU$406 million. UBS suggests that an improvement in NIM and cost management is crucial for a higher return on equity (ROE) and a positive re-rating of BOQ's share price. The current valuation of BOQ shares is at 14 times the estimated earnings for FY25.