BOQ/Bank of Queensland

The BOQ result was out yesterday, the stock had a little pop, as the result was ahead of expectations. In general, bank shares have enjoyed a very good quarter.

As a reminder, BOQ is at the bottom of the pack for Australian banks by way of profitability. Banking is essentially a game of scale.

Loan loss provisioning remains low, as it does for all the majors, albeit rising off a low base.

But it remains the case that arrears are rising. I think they will be “most noticeable” across the smaller banks, and, for the most part, this is the key driver of the bear case view for the sector. Arrears will rise, provisioning for loan losses will rise, and that’ll put a dent in any forward earnings growth estimates.

Loan growth remains hard to come by, given interest rates have gone up a lot (which weighs on the demand for credit).

Rising cost of debt funding (i.e. both wholesale debt funding costs, and what you’ve gotta pay away on deposits and TD’s etc) combined with a competitive mortgage market place pressures on NIMs…

…and so on the whole you get a broadly unpleasant forward looking view on the banks.

We are underweight, and have exposure to the cheaper end, with ANZ and WBC.

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