- Bank of Queensland (BOQ) has announced FY18 cash earnings of $372m, 2.7% better than our forecast. A final ordinary dividend of 38 cents per share fully franked has been declared. No special dividend has been declared (contrary to our expectations).
- We don't foresee any cash EPS growth for BOQ over our forecast period. The dividend yield on offer is the key positive in our investment thesis.
- A plan to accelerate investment spend has been announced (in line with our expectations).
While NIM outcome is good there are low quality elements in the result
Total revenue for FY18 is 1% better than we expected, largely because the 2H18 Net Interest Margin (NIM) was better than we expected. The key surprises in the NIM movement from 1H18 to 2H18 were larger-than-expected tailwinds from funding costs and third party costs.
However, there was a low quality element to the result; this was the taking of accelerated software amortisation costs ($16m pre-tax) below the line as well as taking certain regulatory and compliance costs ($13m per-tax) below the line.
No special dividend declared but CET1 position is strong
No special dividend has been declared contrary to our expectations. We believe this is explained by a few factors: the CET1 ratio at Aug-2018 is weaker than we expected; and uncertainty around the completion of the sale of the St Andrew's life business to Freedom Insurance Group has increased in light of some of the revelations regarding the latter stemming from the Royal Commission. If the St Andrew's transaction proceeds then BOQ expects an approx. 17bps boost to its CET1 ratio. At this stage, our forecasts continue to assume that the transaction will proceed and we continue to expect special dividends in FY19F and FY20F partly for this reason.
One of the key highlights for us has been that BOQ's interim CET1 ratio target of 9.25% has disappeared. We believe this is supportive of our view that the 'unquestionably strong' benchmark for Standardised banks under the existing risk weight framework is 8.5%.
While BOQ did not announce a special dividend, we continue to see scope for special dividends to be paid going forward given:
- the strength of the capital position, and;
- our expectation that BOQ's home loan growth will remain sub-system for some time.
We see no EPS growth over our forecast period
We believe BOQ's relatively inferior mortgage fulfilment times in the broker channel will continue to work against its credit growth. For this reason, we believe it will be difficult for BOQ to achieve system home loan growth without compromising too much on margins. Until BOQ can match the major banks on mortgage fulfillment times, we expect BOQ to offer a sharp enough price point to prevent its home loan book from contracting. However, we expect the NIM headwind due to the front book versus back book pricing difference to remain significant for this reason.
We have increased FY19F cash earnings per share by 1.5% and reduced FY20F cash earnings per share by 0.6%. The dividend yield on offer is the key positive in our investment thesis.
We retain our Add recommendation.
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