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As a small-cap bank stock with a market capitalisation of AU$4.67B, Bank of Queensland Limited’s (ASX:BOQ) risk and profitability are largely determined by the underlying economic growth of the AU regions in which it operates. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Bank of Queensland’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. See our latest analysis for Bank of Queensland
Is BOQ’s Leverage Level Appropriate?
A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Bank of Queensland’s leverage level of 14x is very safe and substantially below the maximum limit of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
What Is BOQ’s Level of Liquidity?
Since loans are relatively illiquid, we should know how much of Bank of Queensland’s total assets are comprised of these loans. Normally, they should not exceed 70% of total assets, but its current level of 84.38% means the bank has obviously lent out 14% above the sensible upper limit. This means its revenue is reliant on these specific assets which means the bank is also more exposed to default compared to banks with less loans.