How times have changed in banking, or rather, in the way banks are now valued by investors.
The Bank of Queensland said yesterday it earned a cash profit of $197 million in the year to August 31, the highest on record, and in response the shares eased 12c on the day to close at $10.40.
That was a fall of 1.1% on a day when resource stocks dragged the market up 1.7%, helped by a good rise in banks, but not Bank of Queensland.
The profit was up 5% on the 2009 result.
Despite the solid result, the share price is well under the all time high of $19.32 hit in November 2007, just as the global credit crisis was intensifying.
It seems, investors no longer place as much trust in the earnings strength of banks it seems. They would much rather invest via a term deposit, rather than dividend producing shares.
A look at the BoQ share price graph above tells us that the reason for the lack of trust can be seen in the rollercoaster ride in the past three years.
The shares fell to a low of $6.32 in March of last year, when markets were bottoming and turning.
Earnings fell in 2009, before recovering in the 2010 year as bad debts and losses abated.
It is an experience shared with the rest of the sector as a whole.
Investors put a lot of trust in banks, but saw them battered by the impact of the global crunch, and the banks’ own bad debts and dodgy lending to financial engineers, property developers (especially in Queensland) and a host of weaker companies.
The profit and loss accounts of banks like B0Q may have recovered, but the faith of investors remains in question.
Take a look at the respective yields: BoQ has a dividend yield around 5.1% or so, it’s currently paying just over 6% as an introductory rate for websavers. The base rate is 4.1%; other rates go up to 6.75% if you take a term deposit of three to four years.
Ignore the tax side of the argument (the total dividend for the year of an unchanged 52c is fully franked); the notion of a bank offering savers more than shareholders can get from investing in the stock tells us a couple of things.
The first is that banks are changing their ways (rates on small amounts are still derisory by the way) and chasing stable deposits (and have been forced to by the credit crunch and the approach of regulators) to fund as much of their business as they can, instead of borrowing cheaply offshore, or securitising home loans and raising fresh capital that way.
That also puts more pressure on interest margins, as we saw with BoQ in the second half.
And there’s another point that emerges from the B0Q result, the ‘conservatism’ of banking is now fashionable.
Dividend for the year was held at an unchanged 52c a share after a final of 26c was announced.
Yes the cash profit was only up 5%, so there was every reason not to be generous with shareholders, but the outlook remains clouded by the patchy nature of the economy, the tougher time businesses seem to be having in Queensland (car sales and house prices are under pressure in the rich southeast of the state) and by the continuing uncertainty offshore.
And that 52c a share compares with the 72c record paid in 2008.
The difference is that capital was expanded substantially (from 114 million in 2008 on issue to just fewer than 200 million shares this year) by share issues to raise more capital to reassure the market and regulators. Bank of Queensland wasn’t alone in that.
Of course the bank expects to earn more in the 2011 year. (But with home lending expected to be weak and business credit soft, Bank of Queensland’s ambitions are a bit heroic at first glance.)
After saying bad debts had peaked in 2009-10, the bank said it expected higher profits in 2010-11.
Normalised cash net profit in 2010-11 would be $220 million to $250 million and dividends would grow by 10% to 20%, the bank said in a statement.
But its dividends, not profits, which the bank preferred to concentrate on yesterday.
The profit report on its website yesterday concluded with the statement “We are guiding the market to expect higher dividends in FY11.”
That would still put the payout to shareholders shy of the level in 2008.
“We have continued to deliver on our commitments to the market, despite the difficult conditions,” CEO, David Liddy said in earlier in the statement. “We expect that bad debt losses have peaked.”
Net interest margin was 1.60%, up from 1.56%, even though it contracted a touch in the second half of the year.
Somehow the bank was left behind yesterday.
A case of sell on the result?
