Analysts like BOQ's result, but don't rate the stock a Buy

Sell-side analysts were impressed by the improvements in asset quality, capital strength and cost management that emerged as the highlights of the Bank of Queensland's 2012/13 results presentation last week.

However, most say the bank's stock is not a Buy because the good news is already priced in.

UBS downgraded the bank from Buy to Neutral, while Goldman Sachs, JP Morgan and CBA Equities all maintained Neutral ratings. CLSA went against the trend, giving BOQ an Outperform recommendation.

BOQ reported a net profit of $A$185.8 million for the year to August, compared with a loss of $17.1 million in the previous year. Cash earnings were $250.9 million, compared with $30.6 million in the previous corresponding period.

UBS banking analyst Jonathon Mott said the result was in line with guidance but the quality was better than expected. The net interest margin was up six basis points and asset quality had improved.

In terms of asset quality, there was a 20 per cent reduction in non-performing loans in the second half.

"BOQ now appears to have broken the back of its asset quality issues," Mott said.

Offsetting this, however, Mott said volume growth was subdued, as the bank allowed high-risk assets, such as commercial personal loans, to run off. Interest earnings assets were up only 0.7 per cent in the second half.

Moving into the growth phase will be a "new challenge".  

"BOQ has underperformed in retail, and the market is getting more competitive. Improving assets without sacrificing net interest margin is no easy task," he said.

UBS sees BOQ as a turnaround stock, which since the end of June has rallied 28 per cent.

Goldman Sachs agreed that the quality of the result was better than expected, with a strong margin and improved asset quality.

It also pointed to good cost management. Revenue growth exceeded expense growth by 2.1 percentage points in the second half, while the cost-to-income ratio fell from 44.7 per cent in the first half to 43.9 per cent in the second half.

Goldman Sachs maintained a Neutral recommendation on BOQ stock, saying that future returns implied in the share price were "overly aggressive".

JP Morgan's banking analyst, Scott Manning, said BOQ's result was "a significant turning point" in the market's assessment of management's capacity to deliver on its targets.

He highlighted the fact that a recent Standard & Poor's ratings upgrade to A- had given the bank an improved funding profile that would facilitate growth.

Manning said: "The increase in net interest margin reflects lower wholesale spreads, active management of government guaranteed maturities, reduced hedging costs and a reduced reliance on higher cost segments of the deposit market.

"Importantly, this does not take into account the full benefit from the recent upgrade in BOQ's credit rating.

"This now leaves BOQ in an advantageous position to access wholesale markets at reasonable spreads and to pick and choose when it accesses the competitive domestic deposit market. We hold a more favourable view of the bank's margin run rate going forward."

However, JP Morgan also retained a Neutral recommendation, saying the good quality result was already factored into the bank's share price.

CBA Equities echoed that sentiment, saying it was "encouraged" by BOQ's positive turnaround, but much of the near-term earnings upside was already priced into the stock. It also cautioned that the bank's earnings could be subject to volatility.

Going against the trend, CLSA has an Outperform rating on the stock. It said that changes to sales and services procedures in its retail network, as well a decision to sell loans through brokers, would help the bank achieve lending growth above system. Improvement in the Queensland property market was another bull point for the bank.