Strong capital position is one of very few likeable features
Bank of Queensland's (BOQ) CET1 capital ratio was 9.42% at end-1H18, comfortably above its interim CET1 target of 9.25%. Given our view that the 'unquestionably strong' benchmark for Standardised banks under the existing risk weight framework is 8.5%, we continue to believe that BOQ's interim CET1 target is too conservative. From this perspective, we believe BOQ had surplus CET1 capital of $266m or 68 cents per share at end-1H18. However, BOQ may not revise its CET1 target until APRA has finalised risk weigh re-calibrations which may not be done until January 2020.
In the meantime, with the interim target of 9.25%, we continue to expect BOQ to declare special dividends whilst operating a 1.5% discounted dividend reinvestment plan (DRP) to maximise distribution of franking credits. BOQ's franking credit surplus was $101m as at 31/08/2017.
We have left enough room in our CET1 forecasts for potential acceleration of investment spend.
Loan growth remains challenging
We believe it will be difficult for BOQ to achieve home loan growth without compromising too much on margins until it has improved turnaround times in the broker channel. We believe the slow turnaround times mean that BOQ is having to rely on sharp pricing in the broker channel just to ensure that its overall loan book does not contract.
Other revenue elements also challenging
We are forecasting 3.5bps Net Interest Margin contraction for BOQ from 1H18 to 2H18F. On non-interest income, we do not see growth for the foreseeable future due to downward pressure on banking fees and the Company saying that it sees limited opportunities to generate trading income or other fee income.
Investment view and changes to forecasts
We have downgraded our cash Earnings Per Share forecasts by 6.7% in FY18F, 8.1% in FY19F and 9,2% in FY20F. The downgrades are largely the result of lower revenue forecasts and also the sale of the St Andrew's Insurance business.
Key downside risks include increased funding costs and greater-than-expected asset quality deterioration.
We have reduced our share price target (clients can login to view), but retain our Add recommendation.
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