Bank of Queensland (BOQ) is fighting on two fronts, according to a new note from analyst firm Jarden, which has cut its price target on the regional lender to AU$5.40. The core problem: BOQ doesn't attract as many low-cost deposits as its larger rivals, and its loan book is showing signs of stress. Together, these pressures are keeping the bank's return on equity stuck at around 6%, well below the roughly 12% that Jarden estimates it costs the bank to fund its business.
Why deposits matter so much
Banks make money by taking in deposits and lending them out at a higher rate. The difference between what they pay depositors and what they earn on loans is called the net interest margin, and it's the main engine of profitability. Banks that can gather large amounts of cheap, stable deposits—like the big four Australian banks—have a built-in advantage. They can fund their lending at a lower cost, leaving more room for profit.
BOQ, as a smaller regional player, doesn't have that luxury. To attract and hold deposits, it has been offering savings rates about 100 basis points (or one percentage point) above the Reserve Bank of Australia's cash rate. That's a full percentage point more than what the central bank pays on overnight funds, and it's a significant premium over what larger banks typically offer.
Paying up for deposits can help stabilize funding, but it also raises the bank's cost of "raw material"—the money it lends out. Unless BOQ can quickly raise the rates it charges on loans, its net interest margin will be squeezed. And raising loan rates is easier said than done when competition is fierce and borrowers are sensitive to higher repayments.
Credit risk is another headache
Jarden also flagged rising credit risk in BOQ's commercial loan book. Currently, loan losses are running at about 7 basis points (0.07%), and around 0.2% of loans are classified as impaired—meaning borrowers are already behind on payments or likely to fall behind.
Those numbers might sound small, but Jarden notes that in past downturns, BOQ's credit losses have been much worse. The bank may need to set aside more money to cover potential defaults, which would eat into profits. This is a familiar challenge for regional banks, which often have a higher concentration of riskier commercial and small-business lending than their larger peers.
What it means for investors
For shareholders, the key metric is return on equity (ROE)—how much profit a bank generates for every dollar of shareholder capital. Jarden sees BOQ's ROE stuck around 6%, far below the 12% cost of equity, which is the return investors expect for taking on the risk of owning the stock.
When a bank earns less on shareholders' money than investors think it costs to fund the business, the market typically assigns a lower price-to-book valuation. That's the channel through which price targets like AU$5.40 can fall. In simple terms, if a bank can't generate returns above its cost of capital, investors will value it at a discount to its net assets.
BOQ is not alone in facing these pressures. Regional banks across Australia have been grappling with intense competition for deposits and a slowing economy that raises the risk of loan defaults. The broader banking sector has also been under scrutiny as the RBA's rate cycle and regulatory changes reshape the competitive landscape.
What to watch next
Investors will be watching BOQ's next earnings report for signs of progress on two fronts: whether it can grow its deposit base without paying ever-higher rates, and whether credit losses stay contained. The bank's ability to reprice its loan book—raising rates on existing borrowers—will also be crucial. If BOQ can pass on higher funding costs to customers, its margin might hold up better than Jarden fears.
But the analyst's note suggests the path to a higher ROE is steep. As long as BOQ has to pay up for deposits and set aside more for bad loans, its profitability will likely remain under pressure. For everyday investors, the takeaway is that regional banks like BOQ face structural challenges that can limit their returns, even when the broader economy is stable.
For more on how banks are navigating funding pressures, see our coverage of India's record bank deposits and the growing cash pile in private credit. And for a look at how credit markets are flashing warning signs, check out rising AI debt insurance costs.
