Bank of Queensland Limited (ASX: BOQ) just reported its FY20 result to the market. Should investors be interested?
The FY20 numbers
Some elements of the FY20 report were decent, but the profit numbers were disappointing.
BOQ revealed that its cash earnings after tax dropped 30% to $225 million. Cash profit/earnings per share (EPS) fell 36% to 51.1 cents. Its statutory profit after tax plunged 61% to $115 million.
Its gross loans and advances increased by $827 million to $47 billion. Customer deposits rose by $2.3 billion to $35 billion.
However, its net interest margin (NIM – a key profitability measure), was 1.91%. That NIM was 2 basis points lower than FY19. But, net interest income rose by 3% to $986 million.
A key part of the profit decline was the loan impairment expense of $175 million, with a $133 million COVID-19 collective provision.
Operating expenses also increased by 7% to $594 million with investments in a digital transformation and $21 million invested in risk and regulatory programs.
BOQ’s dividend cut
BOQ’s balance sheet improved over the year. The common equity tier 1 (CET1) capital ratio increased by 74 basis points (0.74%) to 9.78%.
The board decided to pay a full year dividend of 12 cents per share, representing 6 cents per share from the first half and 6 cents from the second half. That’s a cut of 82%.
BOQ also announced the sale of its St Andrew’s Insurance to Farmcove Investment Holdings for $23 million. It’s part of the bank’s strategy of simplifying the business.
This is expected to result in a loss on sale of between $27 million to $30 million and broadly neutral to BOQ’s CET1 capital ratio.
Should investors be interested?
BOQ’s management believe that Australia is well positioned to get through this COVID-19 period because of the government’s management of the health crisis and economic stimulus.
BOQ said it expects to deliver better-than-system loan growth, a NIM decline of within 2 basis points to 4 basis points, and cost growth of around 2%.
The bank said it’s committed to delivering long term value through sustainable and profitable growth, as well as attractive returns. BOQ said it understands the importance of dividends for shareholders.
But I don’t think the regional bank offers long term market-beating growth potential. Banks face a difficult environment with low interest rates and rising bad debts. I only think banks will be worth owning when interest rates start rising again, which could be years away.