Australia | Oct 10 2008
By Greg Peel
For a bank to post an earnings result better than guidance in the current climate is nothing less than remarkable. For a regional bank to suggest 10% earnings growth in FY08 and achieve 11% is laudable. The only problem is, FY08 was an eternity ago.
In actual fact, Bank of Queensland’s financial year ended in August. That might be less than six weeks ago, but we’ve all grown a few years older since then. In August the ASX 200 was still banging around the 5000 mark and volatility was beginning to ebb. It was September when all hell broke loose, and looking at the screen we are now down at 4200. Make that 4100. Um, 4000.
The BOQ result matched or beat broker expectations, and analysts were heartened to note that not only did deposits grow, so did lending margins. The bank kept its cost increases under reasonable control given acquisitions, and once the convertibles on issue are adjusted, BOQ will boast 7.7% of tier one capital, which is at the top end of its preferred range. The bank also managed to acquire funding at a reasonable level given tightness in credit markets and while bad loans are higher, they were not overwhelming. Management does not expect bad loan growth in FY09 to be any worse than in FY08.
Tell him he’s dreamin’.
The problem is that that there’s no way analysts can see BOQ putting in another FY08 in any way, shape or form. That is not to say the bank is in any sort of danger, but performance in FY09 is going to be greatly compromised by the deterioration in credit conditions we have witnessed since August. Analysts are simply remaining cautious in the uncertain environment, and management concurs. It decided not to provide ongoing guidance for the first time because to do so at the moment would be potentially misleading.
In a case of Catch-22, some analysts found this lack of guidance disturbing, and more reason not to recommend investors pour into BOQ shares at present. But how does a bank provide guidance right now?
The problem for BOQ is it is not one of the big boys. While deposits may be increasing, the bank remains firmly reliant on securitised funding. Not only is that market now shut, someone has painted a big red X on the door. We are still nervously waiting to see whether Paulson’s TARP – which may see the US government buy up all the toxic debt that is keeping securitisation closed – has any impact.
And the latest financial meltdown has brought with it drastic reductions in forecast economic growth across the globe, including in Australia. Most economists, including those of the IMF, expect Australia not to slide into actual recession, but take resources out of the equation and what are you left with? I don’t think restaurants and furniture sellers are going to pull us out of this one. The level of bad debt charges can only rise. As to how much is dependent on whether any of the global rescue packages announced, but not yet implemented, can make any difference.
There is one aspect in BOQ’s favour however, as suggested by UBS. The Australian financial sector is currently undergoing a consolidation, with Westpac about to merge with St George, CBA taking out BankWest and Suncorp-Metway up for sale. When the dust settles, there will be fewer “small” bank alternatives to challenge the restored hegemony of the Big Four. Bank of Queensland is one bank that will survive and may yet be an acquirer itself, but it will also be one of few options for customers opposed to the Big Four’s oligopoly. This may provide a boost to deposits and banking business.
Forget the government’s $4bn dollar non-bank support package. That’s just throwing good money after bad. Non-bank lending is gone, kaput, deceased.
BOQ’s result does provide the Australian market with some glimmer of hope leading into the upcoming Big Bank profit results. But even those will have only had a glimpse at what is potentially going to be a very different and disturbing landscape.
There was only one ratings change flowing from the brokers in the FNArena database this morning, but it was a notable one. Credit Suisse had marked its BOQ earnings expectations down to the low end of FY08 guidance, and so the forecast was beaten by some 7%. Under normal circumstances, Credit Suisse works off a formulaic ratings policy that is dependent mathematically upon the difference between a stock’s traded price and the analyst’s valuation and target price. However, analysts are allowed to “use discretion” if they feel it is warranted.
Hence this morning CS upgraded BOQ straight from Underperform to Outperform without changing its $15.00 target. The database now shows a B/H/S ratio of 1/6/3 and an average target of $13.62. Yesterday the average target was $14.73. Irrespective of the solid result, most analysts took the opportunity to move their targets closer to market reality.