Bank of Queensland share price: why Citi remains bullish on the sector

We examine APRA’s recent regulatory directive concerning loan deferrals as well as revisit BOQ’s H1 results.

Bank of Queensland share price rebounds, APRA’s guidance in focus

Though the Bank of Queensland (BOQ) share price has recovered strongly from its March lows – along with the rest of Australia’s banking sector – uncertainty continues to hang over the regional as well as equities as a whole.

This comes as the coronavirus pandemic has seen Australian banks in total make billions of dollars’ worth of Covid-19 related provisions. More recently, the Australian Prudential Regulation Authority (APRA), provided Authorised Deposit Taking Institutions (ADIs) with updated regulatory guidance for accepting customer loan holiday extension requests.

These loan holidays, at first expected to last six months, were initiated by the banks soon after the on-set of the virus and aimed at helping customers manage their finances during these stressful, unprecedented times. Specifically, APRA’s latest regulatory update provides banks with guidance on extending these loan holidays for a further four months.

One interesting point made by APRA as part of this guidance was that:

‘Where an ADI restructures an affected borrower’s facilities before 31 March 2021 with a view to putting the borrower on a sustainable financial footing, the loan may continue to be regarded as a performing loan for capital and regulatory reporting purposes.’

Analysts from Citi described APRA’s treatment of non-performing loans as a favourable outcome for the sector; while further adding that these developments are

‘Particularly beneficial for smaller lenders – With less capital and provisioning buffers and stronger lending growth leading into this COVID-led crisis, this announcement is welcome relief for smaller lenders.’

Adding to this, Citi analysts described APRA’s regulatory guidance as ‘incrementally positive’ given the possibility that ‘milder than expected loan losses will drive higher than expected dividends out to FY22.’

The investment bank continues to like the sector overall, assigning Buy ratings to the big four banks, as well as the regionals: the Bank of Queensland and Bendigo and Adelaide Bank.

First-half results revisited

In spite of those developments, the lingering impact of low interest rates, the expectation of weak earnings and lower dividends remain a troublesome theme for investors across the sector.

In saying that, while BOQ reported that its cash profits fell by 10% to $151 million in the first-half of FY20, the bank reported robust balance sheet growth and said its funding position was strong.

Strength or not, prudently the bank deferred its interim dividend while also noting that it had increased its ‘collective provision by $10m in response to COVID-19 uncertainty.'

Finally and speaking to the bank's capacity to withstand an uncertain economic environment, Managing Director and Chief Executive Officer George Frazis said:

'BOQ is well capitalised, providing us with the necessary buffer to respond to rapidly changing economic conditions. We moved early to strengthen our capital position, raising a total of $340 million in the recent capital raising.’

BOQ is set to report its full-year and final dividend results in October.

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