BOQ’s share price has fallen 11% this year. Is it in the money?

Consider investing in Bank of Queensland Limited (ASX:BOQ) shares, or a competitor like Bendigo & Adelaide Bank Ltd (ASX:BEN)? With the BOQ stock price trading at $7.44, it’s a great time to take a closer look.

BOQ is one of Australia’s largest regional banks, with nearly 200 bank branches across Australia. Unlike most major banks, many BOQ branches are managed by their “owner-managers”. This means they are small business owners themselves. Most BOQ loans consist of mortgages.

BOQ’s share price has fallen 11% this year. Is it in the money?

1. Management and Workplace Assessment

For long-term investors looking to invest in great companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and a good staff can lead to better retention of high quality staff and, in turn, the long term financial success of a company.

One way for Australian investors to peek inside a company like Bank of Queensland Limited or Bendigo & Adelaide Bank Ltd is to use HR/jobs websites such as Look for. Seek’s website includes company human resources data, including things like employee reviews. According to the most recent data we pulled from BOQ, for example, the overall workplace culture rating of 3/5 was not as much as the industry average of 3.71.

2. Look at bank margins

ASX bank stocks such as BOQ need debt and good profit margins to make their business profitable. This means that a bank receives money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank is pay to savers and what made of mortgage holders (for example) is the net interest margin or NIM. Remember: when it comes to NIMs, the wider the margin, the better.

If you plan to estimate the profits of a bank like BOQ or Westpac Banking Corp. (ASX: WBC), knowing how much money the bank lends and what it earns per dollar lent to borrowers is critical. This is why the NIM is arguably the most critical measure of BOQ profitability. Across major banking stocks on the ASX, we calculated the average NIM to be 1.92%, while Bank of Queensland Limited’s lending margin was 1.91%, highlighting that it offered a below-average loan performance relative to its peer group. This can happen for many reasons, which are worth investigating.

The reason analysts study the NIM so closely is that Bank of Queensland Limited earned 90% of its total income (income-like) from lending alone last year.

3. What is the ER?

Return on equity or simply “ROE” helps you compare a bank’s profit to its total equity as shown on its balance sheet. The highest the RE the best. Bank of Queensland Limited’s ROE over the last full year was 7.1%, meaning that for every $100 of bank equity, it produced $7.10 in annual profit. This figure was lower than the industry average of 11.33%.

4. Buffer against losses

For Australian banks, the CET1 ratio (aka “common equity tier one”) is essential. CET1 represents the bank’s capital buffer that can help protect against financial collapse. According to our figures, Bank of Queensland Limited had a CET1 ratio of 9.78%. It was below the industry average and below the commonly accepted “unquestionably strong” level of 10%.

5. Put an approximate valuation on BOQ shares

A Dividend Discount Model or DDM is one of the most effective ways to create an ASX bank stock calculation. To do a DDM, we need to arrive at a calculation of the bank’s dividends in the future (i.e. the next dividend for the full year) and then apply a risk rating. Assume that the BOQ dividend payment climbs at a constant rate each year into the future, somewhere between 2% and 3%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.

According to this quick and easy DDM model, a BOQ stock valuation is $2.04. However, using an “adjusted” or expected dividend payment of $0.00 per share, which is the preferred metric because it uses expected dividends, the valuation changes to $0.07. The valuation compares to BOQ’s current stock price of $7.44. Since the company’s dividends are fully franked, we can make an additional adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payouts, which factor in franking credits, the valuation calculation is $0.09.

This means that although the BOQ stock price may look expensive using our simple DDM model, do not make a decision based on this article. Please go now and consider all the risks and ideas we have presented here, including the benefit of better dividends and the attractive impact of franking credits. Consider receiving our free investment report by email (keep reading).


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