Why Bank of Queensland is crushing doubters and short sellers on Wednesday

Bank of Queensland (ASX: BOQ) is widely viewed by analysts as the bank facing a myriad of challenges – margin deterioration, market share losses, below system lending growth, a potential dividend cut – the list goes on.

But more often than not, a bearish consensus view opens the room up for an unexpected surprise. And that's what happened when the bank released its first-half FY24 results on Wednesday.

Bank of Queensland's first-half

The year-on-year comparisons aren't pretty. But these numbers have largely been baked into expectations. From a share price performance perspective, Bank of Queensland is down 0.9% in the past twelve months while the largest rival, Commonwealth Bank, is up 12.7%.

Here are the key numbers for the first half of FY24:

• Cash net profit after tax down 33% to $172 million, driven by lower revenue and higher operating costs

• Net interest margin down 3 bps (half-on-half) to 1.55% due to further competition for deposits, higher funding costs

• Cash earnings per share down 33% to 26.2 cents per share

• Interim dividend of 17 cents per share, representing a 65.2% payout ratio

• Common equity tier 1 (CET1) ratio of 10.76% vs. a target of 10.25% to 10.75%

The numbers appear quite bearish at face value but managed to track ahead of consensus expectations.

• Cash net profit beat consensus by 5.7% ($162.7 million)

• Net interest margins beat consensus by 3 bps (1.52%)

• Cash EPS was 8.3% ahead of consensus (24 cents per share)

• Interim dividend was in line with market expectations

The banking industry is currently facing downward pressure on margins due to fierce competition for loans and deposits as well as higher funding costs. Management noted plans to shift the business mix towards higher returning sectors and explore additional pathways to meet return targets.

Best day since October 2022

Bank of Queensland is on track to have its best day since 12 October 2022, when the company reported its full-year FY22 results.

The stock opened 1.7% higher ($5.90) on Wednesday, rallied to a brief session high of 8.3% ($6.28) and currently up 6.1% ($6.16) around noon.

Bank of Queensland 5-year price chart (Source: Market Index)

Some of the key drivers (beyond the better-than-expected numbers) include:

BOQ is a heavily shorted stock: Bank of Queensland is the eighth most shorted stock on the ASX, where 7.8% of its outstanding shares are shorted. Interestingly, short interest has been progressively trending higher in the lead up to its half-year result. Short interest in the stock was 6.75% at the start of the month and 6.59% at the beginning of the year.

Brokers are overly bearish: On 8 April 2024, Goldman Sachs retained a SELL rating on the stock with a $5.04 target price. The investment bank expected first-half earnings to fall 40% year-on-year to $152 million alongside further net interest margin deterioration and poor lending growth. Around the same time, Citi also published a SELL-rated note with a $5.05 target price.

Where to from here

The better-than-feared result has pushed back against short sellers and bearish analysts. But the regional bank isn't out of the woods just yet.

It's outlook statement flagged a number of offsetting factors: "We anticipate revenue and margin pressures to moderate in the second half of 2024. Deposit competition to continue ... home lending margin compression to stabilise and BOQ’s home lending decline to moderate, with business banking growth to increase. While our cost base will be impacted by ongoing inflation and continued investment in the business."

Encouraging, Citi analysts expect FY24 to be the trough in both earnings and dividends. Much like the outlook statement, they expect the margin decline to stabilise as well as the early emergence of the company's $200 million in productivity benefits.