Bank of Queensland Limited

BOQ Details

Better positioned for the current business environment: Recently, Standard & Poor’s (S&P) has downgraded its long-term credit rating of Bank of Queensland Limited (ASX: BOQ) to ‘BBB+’ from ‘A-’ as part of a downgrade of ratings on 23 Australian financial institutions, while maintaining a stable outlook. S&P’s decision is based on its view that continued build-up of economic imbalances in the country due to a rapid rise in private sector debt, house prices and exposure of Australian financial institutions to systemic risks. However, S&P expects the conditions to unwind in an orderly fashion. Further, BOQ seems to have a significantly lower level of exposure to the Sydney and Melbourne property markets than many other industry participants and the bank’s loan book has performed well in the central Queensland and northern WA.  During H1FY17, BOQ has faced several industry headwinds including low credit growth and intense competition for both loans and deposits. This has placed increasing pressure on Bank margins and reduced overall revenue. Despite the tough operating environment, banks focus on asset quality and expense management coupled with growth in lending segment is expected to deliver earnings growth in FY17. The stock has declined by 7.8% in the last one month owing to fears over recent regulations on home loans. However, given the optimistic prospects over peers, we give a “Buy” recommendation on the stock at the current price of $ 10.89

Bendigo and Adelaide Bank Ltd

BEN Details

S&P down grade in line with the sector: Results impacted by rising competition: Recently, in line with other banks, BEN’s long term credit rating was downgraded by S&P to BBB+/Stable, while the short-term rating was unchanged at A-2. Further, the major banks’ stand-alone credit ratings have also been downgraded by one notch. However, they will receive the benefit of a three-notch upgrade to their stand-alone rating (instead of two notches) due to the implicit guarantee from the Australian government and indicates their rating remains unchanged. During H1FY17, the bank reported an after tax statutory profit of $209.0 million, while the underlying cash earnings rose 0.4% year on year (yoy) to $224.7 million. The bank’s net interest margin witnessed pressure as it was impacted by additional liquidity for the Keystart portfolio acquisition, while the increasing competition remains a concern despite the group’s focus on customers.

Recently, the Sandhurst Trustees Limited estates and trusts business of Bendigo and Adelaide Bank was acquired by EQT Holdings Limited (ASX: EQT) for $5 million. The acquisition adds more than 140 perpetual and ongoing trusts with $140 million in funds under management and more than 25,000 wills to the EQT business, bringing its total will bank to 55,000. Further, it includes a five-year referral arrangement through which Equity Trustees will provide estate planning, estate management and administration support for Bendigo and Adelaide Bank customers throughout Australia.

The stock has fallen 12.6% over the last one month, while it was up 12.8% in the last one year (as on June 09,2017). However, given the tepid prospects, we maintain an “Expensive” rating on the stock at the current market price of $ 10.57

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