Shares of Bank of Queensland Limited (ASX: BOQ) are trading 2.4% lower today at $11.18 after the company released its 2016 financial year (FY16) results.
Here are the main highlights that investors might be interested in:
- Total income up 2% to $1.11 billion
- Operating expenses up 4% to $520 million
- Statutory net profit after tax up 6% to $338 million
- Cash Earnings after tax up 1% to $360 million
- Cash basic earnings per share (EPS) down 2% to 95.6 cents
- Net Interest Margin (NIM) down 3 basis points to 1.94%
- Total lending growth up 5%, but 0.8x system growth
- Loan impairment expense down 9% to $67 million
- Common equity tier one capital ratio up 9 basis points to 9%
- Return on Equity (ROE) down 40 basis points to 10.3%
- Final fully franked dividend of 38 cents per shares, taking the full year dividend to 76 cents per share, up 3%
Overall, a fairly uninspiring result and one that seems to have come in well below market expectations.
Nevertheless, CEO Jon Sutton was pleased with the result, saying "BOQ has delivered increased cash earnings after tax for the fourth consecutive year, a significant achievement in an environment of low interest rates and intense competition".
The low interest rate environment is certainly having an impact on the banking sector as a whole and this is perhaps best highlighted by the decline in net interest margins. In fairness, BOQ isn't the only bank that is struggling to improve this metric, with the big four banks also struggling to boost their margins in a environment of record low rates.
Unfortunately, the outlook for interest rates is not looking favourable for the entire sector and investors should expect to see further competition and declines in margins if the RBA cuts rates again.
The regional bank has also been unable to grow it loan book as fast as the rest of the sector and this would be a major concern for investors.
One of the positive points from BOQ's result was the continued improvement in the company's asset quality. Impaired loans and assets continued to trend downwards aided by lower interest rates and the bank's continued focus on diversifying its operations away from Queensland. BOQ now writes more than half of its gross loans outside of Queensland.
Outlook
BOQ's management team expects another difficult year ahead as they continue to grapple with an unfavourable operating environment. Although the company did not provide any specific guidance for FY 2017, I would not be surprised if the company delivers slightly negative or flat earnings growth in 12 months time.
Valuation
At the current share price of $11.18, BOQ trades on a price-to-earnings ratio of 11.5x and offers a fully franked dividend yield of 6.9%.
Should you buy?
The is no doubt that the current dividend yield is attractive, but investors need to consider whether this will be offset by a lower share price over the next 12 months. Considering there is a good chance that operating conditions could deteriorate further over the next 12 months, investors might want to sit this one out for now.
