A spot on BoQ’s day in the sun

The lender has charged ahead of its regional peers but is overshadowed by banking's Big Four, and is highly leveraged to the Queensland retail market.

Bank of Queensland has staged a stunning turnaround, reporting full-year after tax cash earnings of $250.9 million, or 78 cents a share. Investors are euphoric, sending the regional lender up over 6 per cent.

This time last year it was a different story for the Queensland bank. Back then, it was plagued by legacy issues, with investors questioning the future of the bank.

The results confirm the team at Bank of Queensland can execute a carefully thought out plan which is going to be critical moving forward. It is inevitable we are going to be facing low interest rates globally for some time yet, which can limit profitability for financial institutions.

Underlying profit before tax came in 8 per cent higher, short of the 10 per cent growth the Commonwealth Bank saw for the same measure. An impressive result for the regional bank, but this clearly shows there is a gap between the regionals and Big Four.

Chief executive Stuart Grimshaw commented that the current regulatory system favours the Big Four banks. While this could change in the future, the Bank of Queensland must focus on controlling its operations and not on worrying about what it may feel is an unfair regulatory environment. Grimshaw’s comments almost overshadow the impressive results.

The Bank of Queensland is claiming the Big Four can earn up to three times more than it can on a $300,000 loan. Being a smaller, less diversified bank, Bank of Queensland carries different risk exposure to the Big Four.

A key area of focus for the Bank of Queensland is going to be lifting mortgages as growth for the full year just gone only came in at 2.3 per cent. Over the past twelve months, its mortgage growth has lagged other financial institutions.

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As the graph explains, fellow regional bank Bendigo Bank also lagged larger financials.

Still, it is not as simple as generalising and assuming this is the path for regional banks. Crucially, the geographic focus of Bank of Queensland and Bendigo Bank is very different.

Over half of Bank of Queensland’s loans come from Queensland, a market that has been struggling. For more sustainable long-term growth, it will be beneficial for the lender to focus on other states to smooth out issues central to a particular market. 
Importantly, the Bank of Queensland is well placed. Standard & Poor's have upgraded its credit rating to A- from from BBB over the last 15 months, which will help its funding profile and put it on a more competitive footing with the Big Four. Cheaper long-term funding costs will help with growth and all-important margins.

Bank of Queensland’s result easily puts it well ahead in the regional bank space, especially after Bendigo’s lacklustre result. However it is highly leveraged to the retail market in Queensland and not in the same league operationally as the Big Four.