The Bank of Queensland Limited (ASX: BOQ) share price is down 3.9% this year following the conclusion of the Royal Commission and a weaker than expected half-year trading update.
What has sent the BOQ share price lower?
The regional bank's share price fell 16.6% in the space of just two weeks in February following the trading update in which BOQ announced expected half-year cash earnings after tax of $165 million – $170 million, a decrease of 6.6% – 9.3% on 1H18's $182 million figure.
The reduction in half-year income has been primarily driven by lower non-interest income which is $8 million – $10 million lower than the $75 million recorded in 1H18 due to continued downward pressure across fee, trading and insurance income lines.
The bank also announced its net interest margin (NIM) is expected to be in the range of 1.93% – 1.95% (compared to 1.97% in 1H18) as a result of continued funding cost pressures, with the Bank Bill Swap Rate (BBSW) continuing to rise in 2H18, as well as price competition for new loans.
Why do I prefer BOQ's term deposits in 2019?
One of the key reasons for BOQ's lower NIM is the juicy 2.65% per annum rate it offers on its long-term (12-month) term deposits (TDs) in a bid to attract more consumer deposit funding in a competitive, low-interest rate environment.
The BOQ share price is down 16.8% over the last year and 26.7% over the last 5 years as headwinds continue to build for the Australian banking sector.
BOQ, alongside fellow non-major banks Bendigo and Adelaide Bank Ltd (ASX: BEN) and Suncorp Group Ltd (ASX: SUN), is currently at a competitive disadvantage to the likes of Commonwealth Bank of Australia Ltd (ASX: CBA) and its fellow Big Four members due to regulatory funding requirements.
While the major banks can use the Basel III advanced internal ratings-based (IRB) approach to calculate their required risk-weighted assets (RWAs), BOQ and its non-major peers must use the standardised approach which inevitably leaves the bank hamstrung in its ability to grow its loan book and generate returns.
While ING Bank Australia received advanced accreditation from APRA in March 2018, allowing it to use the IRB approach, it is still the only non-major to receive such approval and BOQ isn't looking likely to be granted the same in the near-term.
With the Royal Commission and rising funding costs having hit BOQ hard in 2018, I wouldn't be surprised to see a disappointing result when BOQ reports on April 11.
As a regional bank, I'd be worried about BOQ's impairment rates given its Queensland concentration following the Townsville floods and challenging economic conditions across regional Australia in 2019.
So in my opinion, that 2.65% return on the TDs isn't looking so bad after all.
