Capital release potential is attractive enough
As a result of APRA's 'unquestionably strong' information paper released last week, the regulatory minimum CET1 ratio for banks using the Standardised approach will increase from 7.0% to 7.5%. Bank of Queensland (BOQ) is comfortably positioned on this front with a 9.3% CET1 ratio at end-1H17. Now that BOQ is better placed to quantify the size of the prize in moving to Advanced accreditation, we expect it will opt to go down the Advanced route.
While the 'unquestionably strong' benchmarks set last week reduce (in our view) the benefit of moving from Standardised to Advanced, we still expect BOQ to be able to release approximately $1.40 per share of CET1 capital supposing it were to obtain Advanced accreditation today under the unquestionably strong framework. If BOQ does decide to go down this path, we believe it will take at least 18 months for accreditation to be achieved from the point that the decision is made.
Margin receives support from further home loan repricings
BOQ recently announced that it will be increasing its BOQ-branded interest-only home loan rates by 40bps as of 8 August 2017. All else constant, we expect this to provide a 7bps boost to BOQ's Net Interest Margin. However, we note that BOQ has recently had a very sharp price point (after discounting) for principal & interest (P&I) loans through the broker channel, and we expect some of this front book aggression to eat into the margin benefit from back book repricing. The bulk of the margin benefit from the repricing of interest-only loans will come through the Net Interest Margin in 1H18.
Term deposits currently a relative advantage
BOQ's greater reliance on term deposits as a source of funding relative to the major banks is currently an advantage as the sector is in a phase of reducing term deposit competition. While the income growth outlook for BOQ is looking increasingly good with Net Interest Margin tailwinds from home loan repricings and reduced term deposit competition, we believe BOQ will use periods of rosy income growth to invest more into streamlining and automating its processes, resulting in higher expense growth.
We have increased our cash EPS forecasts by 0.3% in FY17F, 5.2% in FY18F and 5.3% in FY19F largely as a result of higher Net Interest Margin forecasts stemming from recent interest-only loan repricing.
We have increased our share price target but retain our Hold recommendation.
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