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Is the Bank of Queensland Limited share price good value?

With the BOQ share price trading around $6.76, are Bank of Queensland Limited (ASX: BOQ) shares today, tomorrow or next month is as good as a guess. However, over the longer term, shares with a consistent track record of profits, dividends and/or cash flow will often revert to their underlying analyst price target.

BOQ is one of Australia’s largerst regional banks, with nearly 200 bank branches throughout Australia. Unlike most large banks, many of BOQ’s branches are run by their ‘owner-managers’. Meaning, they’re effectively small business owners themselves. Most of BOQ’s loans are made up of mortgages.

Is the Bank of Queensland Limited share price good value?

What’s going on inside

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 staff culture can lead to improved retention of high-quality personnel and, in turn, long-term financial success of a company.

One way Aussie investors can take a ‘look inside’ a company like Bank of Queensland Limited or Bendigo & Adelaide Bank Ltd is to use a HR/jobs websites such as Seek. Seek’s website includes data on the HR of companies, including things like employee reviews. According to the most recent data we pulled on BOQ, for example, the company’s overall workplace culture rating of 3/5 was below the sector average of 3.71.

Watch those (net) margins

ASX bank shares such as BOQ need debt and good profit margins to make their business profitable. Meaning, a bank gets money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank pays to savers and what it makes from 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 are planning 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 makes per dollar lent to borrowers is critical. That’s why the NIM is arguably the most important measure of BOQ’s profitability. Across the ASX’s major bank shares, we calculated the average NIM to be 1.92% whereas Bank of Queensland Limited bank’s lending margin was 1.91%, highlighting it delivered a lower-than-average return from lending compared to its peer group. This may happen for many reasons, which are worth investigating.

The reason analysts study the NIM so closely is because Bank of Queensland Limited earned 90% of its total income (akin to revenue) just from lending last year.

Return on shareholder equity (ROE)

Return on shareholder equity or just ‘ROE’ helps you compare the profit of a bank against its total shareholder equity, as shown on its balance sheet. The higher the ROE the better. Bank of Queensland Limited’s ROE in the latest full year stood at 7.1%, meaning for every $100 of shareholder equity in the bank it produced $7.10 in yearly profit. This was below the sector average of 11.33%.

BOQ’s back-up bank capital

For Australia’s banks the CET1 ratio (aka ‘common equity tier one’) is paramount. CET1 represents the bank’s capital buffer which can go towards protecting it against financial collapse. According to our numbers, Bank of Queensland Limited had a CET1 ratio of 9.78%. This was below the sector average and under the commonly accepted ‘unquestionably strong’ level of 10%.

BOQ’s dividend valuation – a few tricks for bank stocks

A dividend discount model or DDM is one of the most efficient ways to create a calculation of ASX bank shares. To do a DDM we have to arrive at a estimate of the bank’s dividends going forward (i.e. the next full-year dividend) and then apply a risk rating. Let’s assume the BOQ’s dividend payment climbs at a consistent 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 simple DDM model, a valuation of BOQ shares is $2.04. However, using an ‘adjusted’ or expected dividend payment of $0.39 per share, which is the preferred measure because it uses forecast dividends, the valuation goes to $6.63. The valuation compares to BOQ’s current share price of $6.76. Since the company’s dividends are fully franked, we can make a further adjustment and do a valuation based on a ‘gross’ dividend payment. Using gross dividend payments, which take into account franking credits, the valuation estimate to $9.47.

What this means is, although the BOQ share price might seem expensive using our simple DDM model, don’t make a decision based on this article. Please go away now and consider all of the risks and ideas we presented here, including the benefit of improving dividends and the attractive impact of franking credits. Consider getting our free investment report emailed to you (keep reading).

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