Bank of Queensland: Hamstrung
About the author:
- 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).
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
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.
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.
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