Bank of Queensland: Trumping peers on growth momentum

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
14 March 2022, 8:00 AM
Sectors Covered:

  • We see exceptional value in Bank of Queensland's (ASX:BOQ) stock. The Company has been executing well on its transformation program, it continues to grow its home loan book at above-system levels, we don’t expect its NIM to fare worse than the industry-wide trend, and cost synergies associated with the ME Bank acquisition are being realised at a faster rate than originally anticipated.
  • Over the next 12 months, we expect good operational momentum relative to peers to be supportive of the share price. Beyond the next 12 months, we expect cost efficiency improvements in particular to be supportive of the share price. Retain Add recommendation. Target price unchanged at (login to view).

Loan growth being sustained at above-system levels

BOQ’s home loan growth – excluding ME Bank – since end-FY21 has remained considerably above system growth, running at ~1.7x system.

From a margin perspective, it is pleasing to see that investor home lending growth has been particularly strong at ~2.8x system. We also suspect based on APRA data that BOQ has been growing above system in SME lending, which would also be supportive of the margin.

At the time of its FY21 result release, BOQ said that it expects to grow above its system home loan growth forecast of 7.5% in FY22F. We continue to forecast home loan growth for BOQ (including ME Bank) of 9% in FY22F.

We expect BOQ’s 1H22 result (scheduled to be released on 14 April) to show good operational momentum. We also see the upside risk of BOQ identifying further synergies in relation to the ME Bank acquisition. We therefore expect the result to be supportive of the share price.

Margin advantages relative to peers

BOQ guided for the margin to be down 5-7bps in FY22 at its FY21 result release. At its AGM in December, BOQ said that its FY22 NIM is expected to be “slightly lower” than earlier guidance.

We presume the Nov-21 quarter was particularly tough for BOQ’s margin – like the rest of the sector – due to the dramatic rise in swap rates observed in the month of October and the corresponding adverse impact on new fixed rate home loan margins. At the same time, variable rate home loan competition intensified.

However, relative to peers, we expect BOQ’s margin to fare well given that it entered 1H22 with better margin momentum than many peers. BOQ’s exit NIM for 2H21 was in line with the 2H21 NIM.

We also expect BOQ’s NIM performance to be relatively good as a result of the strong household deposit growth that it is experiencing together with reductions in its term deposit rates.

Relative to peers, we expect BOQ’s NIM outlook beyond FY22F to be supported by the opportunity to increase the low-cost transaction deposit base associated with the VMA and ME brands.

Executing well on transformation program

We continue to see an improving ROTE pathway for BOQ, largely due to improved home lending turnaround times and improving cost efficiency.

It has been pleasing to see that despite elevated investment spend, BOQ delivered positive jaws of 2% in FY21, and we are forecasting positive jaws of 2% for FY22F. BOQ reconfirmed guidance of positive jaws of at least 2% for FY22F at its AGM.

We expect the improvement in BOQ’s cost efficiency to become more obvious once all three brands are consolidated on the new cloud-based retail banking platform and once the elevated investment spend begins to normalise in FY23F.

In FY24F, we expect the amortisation expense associated with capitalised software to plateau and we expect the full impact of productivity savings to begin to come through.

Additionally, we expect the synergy benefits associated with the ME Bank acquisition to be at the top end of the guidance range of $70-80m pre-tax; this annual run-rate of synergies is expected to be fully realised by end-FY23F.

Investment view and changes to forecasts

We have changed our cash EPS forecasts by -2%/+2% for FY22F/FY24F respectively. These changes are explained inside.

Our target price, based on our DDM valuation, is unchanged at (login to view).

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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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