Bank of Queensland: Upside risk is playing out
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 15 June 2021, 4:30 PM
- Sectors Covered:
- Bank of Queensland (ASX:BOQ) has announced that its collective provision balance reduced by $75m over the quarter ended 31 May 2021.
- As we mentioned in our report titled Sustaining the home lending turnaround, we continue to expect positive revisions to consensus credit impairment charge forecasts and dividend forecasts for BOQ. We consequently expect BOQ’s share price to increase towards our target price (Login to view).
- Retain Add recommendation.
Bank of Queensland (ASX:BOQ) has announced that the quarterly APRA Basel III Pillar 3 Report for the period ending 31 May 2021 (scheduled to be released on or before 26 July 2021) is expected to include a decrease in the collective provision of $75m.
BOQ has said that the lower collective provision is due primarily to the improved economic outlook, with a further reduction from improvements in data quality relating to collateral.
We have previously pointed out in our report titled Sustaining the home lending turnaround that we see potential for credit loss provision release for BOQ in 2H21F and FY22F. However, we had not been factoring provision releases in our forecasts; rather we had been conservatively assuming that the collective provision (CP) coverage of credit risk weighted assets (CRWA) will remain unchanged over our forecast period. Even still, our forecasts appeared significantly more optimistic than consensus.
We calculate that the $75m reduction in CP results in the CP to CRWA coverage ratio decreasing from ~94bps to ~68bps. We calculate that this coverage ratio immediately prior to the COVID-19 pandemic was ~50bps. Whilst BOQ could potentially release another ~$50m in collective provisions if conditions warranted reverting to pre-pandemic coverage levels, we are conservatively assuming that BOQ will keep its CP/CRWA coverage at 68bps over our forecast period.
Investment view and changes to forecasts:
We are now forecasting a net provision release of $69m in 2H21F (previously forecasting a credit impairment charge of $13m). We have also slightly reduced our credit impairment charge forecasts for FY22F and FY23F.
Our cash EPS forecasts are increased by 13.7%/0.4%/0.3% for FY21F/FY22F/FY23F respectively due to positive revisions to our credit impairment charge forecasts.
Our target price, based on our DDM valuation, (Login to view).
Retain Add recommendation.
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