Why analysts aren’t buying the BoQ turnaround yet

afr.com:

There was a telling moment of exasperation in Bank of Queensland’s annual result presentation to brokers last week.

After almost an hour of questions, Jefferies analyst Matthew Wilson could offer only a strained “thank-you” after chief executive, and former chairman, Patrick Allaway danced around his query.

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Mr Wilson, who has an “underperform” rating on the bank, wanted to know why BoQ believed it would eventually receive excess returns above the cost of equity on mortgages, especially as competition looks to heat up.

“Shareholders need a return above the cost of capital,” Mr Allaway replied.

“If banks write business that does not provide a more economic return, they won’t be here. There is a cost of capital that we all have, and it doesn’t seem rational or sustainable that we would write business below that.”

The trouble is, BoQ’s return on equity target is 9.25 per cent by 2026, which is quite the mismatch from its estimated cost of capital at about 11 per cent to 11.5 per cent. Mr Wilson pushed again: if the cost of capital was the required return necessary for the bank’s products, why is the target less than that?

“We are very focused on growing our RoE, and the investment we are making in the business is to grow the RoE going forward,” Mr Allaway said.

His response did not answer the question, and captures a key reason analysts are not yet buying into Bank of Queensland’s long, tumultuous turnaround story. Since the current strategy was announced on February 27, 2020, its shares have fallen more than 25 per cent. The stock price, once $7.41, now languishes at $5.54.

Only this year, the bank has ejected George Frazis as CEO, after a