Credit rating downgrade and subsequent deposit outflow
S&P's downgrade of BOQ's long-term issuer credit rating from A- to BBB+ in May appears to have resulted in term deposit outflow attributable to depositors that have portfolio allocations based on credit ratings such as councils, churches and family offices. APRA's monthly banking statistics show that BOQ's market share of general government deposits has decreased since the credit rating was announced. The statistics published by APRA also show that BOQ's market share of household deposits has been declining over the last 18 months. While the decline in share of household deposits was understandable over 2H16 and 1H17 as BOQ's home loan book was contracting over this period, the continued decline in market share over 2H17 is somewhat concerning as we are forecasting BOQ's home loan book to grow over 2H17.
As a result of the apparent term deposit outflow stemming from the credit rating cut, we believe BOQ offered attractive term deposit rates relative to the market over the months of June, July and August to ensure a good overall term deposit retention level and to attract new term deposits. We have consequently reduced our Net Interest Margin (NIM) forecast for 2H17 slightly from 192bps to 191bps. The composition of our forecast NIM movement from 1H17 to 2H17 is detailed in the BOQ research note (clients only).
FY17 result to be announced on October 12
We are forecasting FY17 cash earnings of $359m and a final dividend of 38 cps fully franked. We are now expecting the NIM to expand by 6bps from 1H17 to 2H17 compared with the Company's guidance of 5bps at the time of the 1H17 result release. After two consecutive half-years of home loan book contraction, we expect to see growth in BOQ's home loan book over 2H17 albeit at a sub-system level. We are forecasting 2.1% home loan book growth over 2H17 compared with system home loan growth of 3.2% over the same period.
We expect to see continued benign asset quality and forecast the credit impairment charge to decline from FY16 to FY17.
Areas of particular interest
Areas we will be watching particularly closely when BOQ releases its full year result are:
- asset quality of central Queensland exposures;
- extent of improvement in mortgage fulfilment times; and
- BOQ's latest thoughts on Advanced accreditation.
Investment view and changes to forecasts
We have reduced our EPS forecasts by 0.5% for FY17F, 0.6% for FY18F and 0.6% for FY19F, largely due to lower NIM forecasts for each of these years. Key downside risks include increased funding costs and greater-than-expected deterioration in asset quality.
We retain our Hold recommendation.
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