Shares surge despite muted results for Bank of Queensland as competition squeezes margins

Bank of Queensland shares surged on Wednesday after the company reported full year earnings that showed a strong improvement in net interest margin in the fourth quarter.

Bank of Queensland shares surged on Wednesday after the company reported full year earnings that showed a strong improvement in net interest margin in the fourth quarter and a return to dividends in its target range.

The Brisbane-based company reported a 1 per cent drop in full year net interest income to $1.5bn as a result of tough competition that squeezed margins, but NIM jumped from 1.74 per cent in the first half, to 1.81 per cent in the fourth quarter.

“It was a result of two halves really with the whole industry impacted by fixed rate home loans so margins dropped and … then in the fourth quarter where you’ve got the full benefit of us being able to manage margins in a more normalised environment,” chief executive George Frazis said.

BoQ shares rose 11 per cent – or 76c – to close Wednesday at $7.59. It was the biggest riser on the ASX 200, and the speed of improvement in its NIM helped drive up ANZ and Westpac.

Wilson Asset Management’s Matt Haupt, a BoQ investor, said this was positive for all banks.

“It’s really shown the acceleration in exit NIM,” Mr Haupt said, referring to the margin reported at the end of the period. “All the banks will be enjoying this environment … it shows the trajectory of their business.”

Macquarie analysts said NIM in the last three months of the year to August 31 was ahead of margins for the entire second half of the financial year, “suggesting that the outlook for (the start of 2023) remains favourable and likely to lead to upgrades”.

“We expect small consensus upgrades for BoQ driven by better revenue performance partly offset by higher expenses,” the analysts said in a note.

Shares in BoQ had been under pressure in the past six months on concerns that it is struggling with competition in the sector against the major banks and failing to deliver the promised benefits of its $1.33bn acquisition of ME Bank.

Cash net profit after tax for the full year ended August 31 fell five per cent to $508m on the back of declining margins and lower balances at ME prior to the acquisition, though its statutory net profit after tax increased 15 per cent during the year.

The result had been largely in line with expectations.

Mr Frazis told investors he was focused on sustainable growth in a competitive market with swap rate volatility on its NIM.

“We have continued to support more Australians into their homes during the year, returning the ME home loan book to growth and the BoQ and Virgin Money brands have continued to deliver above system growth,” Mr Frazis said.

While BoQ should earn more in a rising rate environment, there has been tough competition for $500bn of refinancing that is expected to take place as fixed rate contracts expire.

A record $18.9bn of refinancing took place in August alone, according to data from the Australian Bureau of Statisics. The Reserve Bank last week lifted the cash rate by 25 basis points to 2.6 per cent – the sixth rise this year, leaving rates at their highest level since July 2013.

“Lenders are actually aggressively pricing for refinance as well as new business,” MA Financial’s John Kolenda told The Australian last week.

BoQ is likely to see lower value mortgage loans and a decline in housing transactions as the property boom ends.

Mr Frazis said mortgage growth would slow from current rates of above 7 per cent to as low as 3.5 per cent the current year ending September 30, but predicted his bank could beat the market.

“BoQ can grow ahead of market and that’s our objective,” Mr Frazis said. “We remain firmly focused on delivering on our strategy to create real competitive advantage, transform BoQ into a future fit digital bank and create a compelling proposition for our shareholders, customers, people and the community.”

The Brisbane-based bank will pay a final fully franked dividend of 24c a share, which represents a 65 per cent payout ratio for second half of the financial year. This puts the bank in its target dividend range, after dropping below its in the first half.

But Azib Khan, an analyst at E&P Financial, said costs had remained higher than expected and were the “disappointing area of the result”.

“We continue to believe the NIM upside for BoQ is less than that for the major banks in general,” Mr Khan. “We expect rising cost of term deposits to be a greater NIM headwind for BoQ than the majors and we believe BoQ has less leverage to a rising cash rate than the majors.”