Bank of Queensland: Hamstrung

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
22 October 2019, 2:02 PM
Sectors Covered:

  • BOQ has reported FY19 cash earnings of $320m, 3% lower than both our expectation and consensus. While we were expecting the next dividend cut to eventuate in 1H20, this dividend cut has eventuated now with a final dividend of 31cps fully-franked (compared with the interim dividend of 34cps).
  • The FY19 result is disappointing and it supports our view that the outlook for BOQ remains challenging for the next two years. The Company has today said that it expects lower year-on-year cash earnings in FY20.
  • BOQ’s return on tangible equity (ROTE) has now declined to 10.2% in 2H19. With such a low ROTE, the Company is not creating shareholder value from our perspective. If the decline in ROTE is not stemmed, then soon we may view the Company as diminishing shareholder value. We retain a Reduce recommendation (Morgans Clients can login to view detailed reports and price targets).

Disappointing result

A disappointing result, with the following key financial metrics moving in the wrong direction year-on-year: statutory NPAT down 11%; cash earnings down 14%; cash return on average equity down 160bps to 8.3%; cash return on average tangible equity down 210bps to 10.8%; CET1 capital ratio down 27bps to 9.04%; cash EPS down 16%; dividend per share down 14%; operating income down 2%; cost-to-income ratio up 300bps to 50.5%; loan impairment expense as a % of gross loans and advances up from 13bps in 1H19 to 19bps in 2H19.

Outlook hamstrung by operational challenges

We continue to believe BOQ has plenty of work to do in terms of streamlining its operations and improving customer-facing technology.

Until these issues are resolved, we believe BOQ’s revenue growth will remain challenged and underlying cash EPS growth will underperform the major banks.

The new CEO appears to agree with our view to some extent, stating that ’there are challenges ahead’ and saying that the following areas require attention: Retail Bank performance; lending processes; rising cost structure; digital and data platforms; and skills & capability build.

Our expectation has been that further significant restructuring/transformation plans will be announced later in 1H20, and it sounds like this will be the case with new CEO today stating: ‘There are numerous opportunities ahead for a revamped BOQ and I will be working closely with the executive leadership team to complete our strategic and productivity review, with a market update on our plans in February 2020’.

We see upward pressure on the cost base over the next 2 years given the extent of investment we believe is required to resolve the issues identified.

We also see scope for kitchen-sinking when the new CEO updates the market in late February 2020; this may chew further into BOQ’s CET1 capital ratio.

Investment view and changes to forecasts

We have reduced our cash EPS forecasts by 3.5%/3.3% for FY20F/FY21F respectively.

We retain a Reduce recommendation. Our target price, based on our DDM valuation, is unchanged (Morgans Clients can login to view detailed reports and price targets).

Key upside risks include:

  • The new CEO quickly winning the market over with a turnaround strategy
  • Increased dovishness on the part of the RBA resulting in compression in the cost of equity
  • A material reduction in the cost of funding.

More information

Morgans clients can login to view our detailed report and updated share price target for Bank of Queensland (BOQ). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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