BOQ leaves the big four in the cold

After a tough couple of years Bank of Queensland is rewarding investors with staggering returns, outshining the major banks in the process.

Bank of Queensland has been the best performer of all the banks this year, delivering a staggering total return of 64 per cent. In second place is National Australia Bank, with 43 per cent. These are impressive returns against the index total return of just 16 per cent.

It's generally the big four banks that capture investors' attention. Their sheer size and record dollar profits give the illusion they are exciting investments, while the tangibility of the brand helps too. Despite this, the turnaround at BOQ confirms there are opportunities to be had outside of the favoured four.

For BOQ, the past two years have been somewhat of a rollercoaster. In early 2012, it was a ride investors wanted to get off as the bank booked losses and raised capital to bolster the balance sheet. However, this year managing director and chief executive Stuart Grimshaw lead the bank to a recovery and returned it to profitability.

Gains in the share price simply reflect the execution of a sound strategy, which focused on improving the quality of the retail portfolio. Across the retail side of the bank, the majority of the leadership group joined in the past year and have remained on point. The strategy and staff have been instrumental to the turnaround.

Moving forward, upside potential for BOQ’s share price will come about from its ability to continue growing its owner-managed branches. The beauty of the OMB lies in the ability of each branch to grow its balance sheet, and subsequently that of the Bank of Queensland, by increasing both deposits and loans. It also provides an opportunity to cross-sell other financial solutions and services – the silver bullet of retail banking.

Growing the distribution network will provide BOQ with a wider geographical footprint. At the moment over half of the credit risk is in Queensland. It would be preferable to have more customers in different locations. Gaining new customers would be a step in the right direction to help it achieve continued growth in mortgages.

For investors, it is a risk-return trade off when comparing BOQ with the big four. The yield is similar, but the reality is there is a different type of risk with BOQ due to slightly lower performance metrics and its increased sensitivity to broader macro-economic conditions.