Bank of Queensland: Significant makeover coming up?

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
15 October 2019, 12:29 PM
Sectors Covered:
Banks

  • BOQ is expected to report its FY19 result on the 17th of October. We continue to forecast FY19 cash earnings of $330m and a final dividend of 34cps fully-franked.
  • We believe BOQ's underlying cash EPS growth will remain challenged relative to the major banks over the next couple of years. Our target price remains unchanged (Morgans clients can login to view detailed reports and price targets).
  • Our recommendation is downgraded to Reduce (from Hold). 

Significant restructuring may be announced later in 1H20

From our perspective, the Company has been in limbo in many respects since it reported its 1H19 result.

The reason being that, for the bulk of that time, the Company was without a permanent CEO; also, the CFO and COO announced their resignations with replacements for these two positions only announced a few days ago. By way of recap, one of the key priorities laid out at the 1H19 result was to have a systemic approach to restoring earnings growth and returns.

The Company said at the time that such an approach will include:

  • a segment-by-segment review of return on tangible equity (ROTE)
  • retail banking strategy redevelopment
  • business simplification
  • a focus on capital/resource allocation, and 
  • an execution roadmap

Two points from us on this:

  1. firstly, this priority highlights the extent of challenges facing BOQ
  2. secondly, the points laid out sound like the remit the Board would have handed to the new CEO George Frazis upon his commencement on 5th of September 2019

Consequently, we see significant scope for restructuring and kitchen-sinking with the commencement of the new CEO. However, given that the new CEO only commenced last month (and after the end of FY19), it may be too early for significant restructuring to be announced alongside the FY19 result release.

We believe it is more likely that significant restructuring and kitchen-sinking may be announced later in 1H20.

Revenue growth concerns remain unchanged

We continue to forecast only 1% gross loan growth for BOQ over 2H19 with the NIM being constant at 1.94% from 1H19 to 2H19F.

Our view continues to be that BOQ will struggle to grow its home loan book without compromising too much on margins until it has competitive mortgage turnaround times (i.e. a competitive mortgage fulfilment process).

Investment view and changes to forecasts

We have made no material changes to our cash EPS forecasts. We believe BOQ has plenty of catch-up work to do in terms of streamlining its back office and middle office processes and improving customer-facing technology.

These issues are weighing on BOQ's ROTE, which we forecast to be only 11% in FY19F. While we expect the Company to embark on a significant transformation program, we do not see the key issues being resolved in the next couple of years; consequently, we believe underlying cash EPS growth will remain challenged relative to the major banks over the next couple of years.

Our target price, based on our DDM valuation, remains unchanged (Morgans clients can login to view detailed reports and price targets).

Our recommendation is downgraded to Reduce (previously Hold).

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; and asset quality being better than expected

More information

To view further analysis, Morgans clients can view the full research note. 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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