BOQ’s update yesterday had more to like than Westpac’s, but the underlying message was similar. Management announced a ~$295 million capital return via a special dividend and buyback, but also flagged a $47 million impairment charge and softer-than-expected net interest income. Importantly, while BOQ avoided making explicit comments on the housing market, its decision to return excess capital rather than deploy it into loan growth suggests it sees limited opportunities in a slowing mortgage market. With almost 74% of its loan book exposed to residential housing, the result reinforces the view that earnings growth for Australian banks is likely to remain constrained by weaker credit demand and ongoing margin pressure.
BOQ presents one of the more unusual valuation profiles in global banking. Despite trading on the highest forward P/E of its regional peer group at 13.3x, it is also the only bank trading below book value (0.76x), while comparable US regional banks trade on lower earnings multiples but comfortably above book. This reflects a market that is willing to look through near-term earnings but remains unconvinced about the long-term profitability of their asset base.
The missing ingredient is returns. BOQ’s ~6% return on equity is anaemic. US regional peers generate 8–12%, while CBA generates ~14% ROE, explaining why investors continue to discount its balance sheet despite the recent capital return announcement. In our view, the market is pricing in an eventual earnings recovery that has yet to materialise, making the trajectory of ROE, not earnings alone, the key metric to watch over the next 12 months.
- We believe BOQ’s relative underperformance has reached its nadir, but it’s hard to get excited about a bank so dependent on property loans.
MM is neutral towards BOQ around $7
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