Big 4 banks rally on upbeat Bank of Queensland results: ANZ and Westpac shares up 3%

Bank of Queensland (ASX: BOQ) has reassured nervous investors that the banking sector can leverage tailwinds from rising interest rates and continue to grow in the face of falling property prices and a weakening global economy.

The Big 4 banks appear to have taken the upbeat announcement as a cue to rally, with all four names up between 1-3% in afternoon trade.

The S&P/ASX 200 Financials sector is up around 1.5%, which has helped the broader market trade around breakeven.

An upbeat Bank of Queensland

Bank of Queensland shares rallied almost 10% in afternoon trade. The company posted a -5% decline in cash earnings for its financial year ended 31 August 2022 but its forward looking commentary was perhaps more positive than what most would expect. Some notable areas of interest from the bank's results include:

The economy

"Australia remains relatively well placed for continued economic recovery, with low unemployment, high level of built up household saving, strong business order books, robust growth in capex spending plans and high terms of trade," said CEO George Frazis.

"Growth across all brands in FY22 provides a revenue tailwind moving in to FY23."

Net interest margins

In FY22, Bank of Queensland's net interest margins - the amount of money the bank is earning on loans versus the amount its paying on deposits - fell 12 basis points to 1.74%.

In the second-half of FY22, margins rose 1 basis point to 1.75%.

"We have positive net interest margin momentum, with tailwinds from rising interest rates partly offset by headwinds from rising funding costs," Frazis said.

Arrears improving

"Portfolio arrears remain low given high levels of employment – no impacts yet seen from either interest rate rises or fixed rate to variable rate conversions," Bank of Queensland noted in its earnings presentation.

Arrears since Feb 2021 (Source: Bank of Queensland)

Much needed outlook boost for banks

National home values fell -4.1% in the September quarter, the biggest quarterly decline in home values since the 1980s, according to CoreLogic.

Demand for new housing finance is also rolling over, down -3.4% in August to $27.4bn, a milder decline than the -8.5% fall in July.

Coupled with the usual headlines about near record low consumer confidence, high inflation and slowing economic growth - there hasn't been a whole lot to be bullish about for banks.

Bank of Queensland's results has served as a catalyst and reminder that the underlying economy is still solid - at least for now. Its also pointed to a turn in net interest margins in the second-half after several years of decline.

If you look at a major bank like Commonwealth Bank (ASX: CBA), its margins have declined for four consecutive years, from 2.15% in FY18 to 1.9% in FY22. So its rather interesting to see margins turn after such a prolonged decline due to falling interest rates.

That isn't to say FY23 will be a clear cut year for margin expansion and declining arrears, with Bank of Queensland management acknowledging the risks surrounding "elevated inflation, rising interest rates, weakening global economy, geopolitical tensions and supply chain and labour disruptions."

At least for today, banks can solid rally.