Bank of Queensland (ASX:BOQ) is heading into its first-half results with a contracting loan book, modest earnings outlook and lingering questions over strategy, margins and capital following its housing pullback and Challenger partnership, Jefferies said in a Thursday note.

Jefferies expects broadly stable half-year earnings, with net interest margin edging down to about 1.7%, cash earnings up 1% to AU$185 million, pre-provision profit rising 9% to AU$298 million, and a AU$0.20 interim dividend.

The firm noted that loan growth remains weak, with expectations of a further 2% decline in the loan book in the first half, extending a 6% contraction since the first half of 2023, as the company continues shifting away from housing toward higher-return business lending.

The firm said that focus will also be on the capital partnership with Challenger, including sale and forward flow of its equipment finance book, expecting a AU$31 million hit to statutory earnings and seeking clarity on earnings benefits, transaction volumes, and potential cost savings.

The firm added that margins and funding remain in focus, with deposit costs still weighing despite softer lending, and flagged deposit growth, pricing, and replicating portfolio benefits as key, while expecting a modest rise in bad debt charges.

Jefferies kept an underperform rating on Bank of Queensland with a price target of AU$5.76.