Company overview - Bank of Queensland Limited (BOQ) is an Australia-based financial company. The Company's segments include Banking and Insurance. The Banking segment includes retail banking, commercial, personal, small business loans, equipment, debtor finance, treasury, savings and transaction accounts. The Insurance segment includes customer credit insurance, life insurance, accidental death insurance, funeral insurance and motor vehicle gap insurance. The Company's online banking services include Internet banking, mobile banking, BOQ property application, online applications and BOQ money. The Company's personal banking offering includes everyday banking, savings and investment, credit cards, personal loans, home loans, insurance, international services, investing, private bank and account switching among others. Its business banking includes transaction accounts, investment accounts, statutory trust accounts, investment trust accounts, business loans, cash flow finance and equipment finance.

BOQ Details
 
Improved outlook for second half post witnessing a slash in earnings in the first half: Bank of Queensland Limited (ASX: BOQ) has reported a fall of 2% in interim cash earnings after tax to $175 million during the first half of 2017 as compared to the prior corresponding period (pcp). The statutory net profit after tax fell down 6% to $161 million during the period. There was strong competition for loans and deposits in a low interest rate environment, which had contributed to flat loan balances and a five-basis point reduction in Net Interest Margin over the half. Moreover, BOQ has prioritized margin and credit quality over growth in the first half, in what has been an intensely competitive period not just in lending but also in retail deposits. BOQ’s higher quality, higher margin portfolio is expected to deliver more sustainable profits longer term after facing quiet a volatility last year. The bank reported only two impaired assets of over 5 million dollars. Additionally, BOQ’s outlook for second half revenue is stated to be more positive. It is important to note that the bank are operating in a rapidly changing operating environment where regulation, competitive dynamics and customer demands are shifting. There were a number of headwinds that emerged in 2016 abated late in the half, which saw the mortgage application momentum return and deposit spreads improve. Meanwhile, the group recently appointed Ms Vicki Clarkson as an additional Company Secretary effective from this month.
 

Financial Performance in 1H 2017 (Source: Company Reports)
 
Decent performance in niche business segments: In the first half 2017, BOQ’s strategy of focusing on niche segments that value a more intimate customer relationship has continued to deliver. The target niche commercial segments such as retirement living, hospitality, franchising and agribusiness have experienced the growth of $200 million. The bank’s niche business banking segments generated an annualized growth of 15% across their target sectors. Management intends to aim further growth by adding more niche sectors and accordingly bringing new clients across a diverse geography. The strong growth in niche business segments are at 15% annualized and the niche business banking segments are continuing to add further resources, attract new clients and diversify by geography. Moreover, the high quality BOQ Specialist business has delivered another strong performance with 8% annualized commercial loan growth. The segment added 1,300 new clients during the first half of 2017.  However, the benign loss experience continues. The Housing loan book grew at 27% annualized to $394m due to the high quality residential loan portfolio. Additionally, BOQ Finance had made a valuable contribution with improved business mix and portfolio growth of 1% in 1H 2017. The impairment expense was below the expected range of the BOQ finance and the segments had successfully integrated the premium funding acquisition. The group has been focusing on using data analytics to enhance their segment profitability in BOQ Finance and accordingly delivered growth via a mix of higher margin business. In addition, the new Virgin Money Reward Me home loan product that was launched was just under 12 months and had continued to gain traction with customers and mortgage brokers that delivered the loan growth of $200 million for the first half. There are 2,677 mortgage brokers accredited by end of 1H17. The application volumes are well ahead of plan in 1H17 and 87% of the portfolio written in NSW & VIC.
 
Asset quality and growth opportunity from capital position: There was a strong focus on meeting responsible lending obligations and prudential practice guide standards in the first half as the loan impairment expense fell 25% to $27 million, or 13 basis points of gross loans. There was 100% validation of mortgages and the BOQ Specialist and Virgin Money mortgages providing further diversification. Moreover, there was continued run-off of development exposures. Overall, although there are pockets of weakness across the economy, there are no signs of deterioration in BOQ’s loan portfolio. BOQ’s strong capital position has improved, as the Common Equity Tier One ratio increased 29 basis points over the half to 9.29%. Moreover, BOQ’s retail deposit to lending ratio also saw a strong growth, up 3% over the half to 71%. This would offer the bank with more room for growth in the second half and would position BOQ strongly to respond to any potential regulatory changes.
 
Progressing well with regards to expense management targets: BOQ has reaffirmed its commitment to delivering its previously stated 1% underlying expense growth target for FY17. Moreover, the company has delivered $15m in run-rate savings through the operating model changes, which are centers of excellence, e-statements, cheque digitization and the procurement efficiencies. Additionally, there is an active investigation of additional efficiency opportunities underway to digitize operations, remove duplication and improve processes. In addition, in a competitive, low credit growth environment, the cost management continued to be a strong focus for BOQ which has elevated its productivity programs over the past 12 to 18 months. The operating expenses were down 2% on the prior corresponding period. This was achieved notwithstanding the investments made back into the business, including the roll-out of the Virgin Money mortgage product. 

Core Expenses (Source: Company Reports)
 
Outlook: BOQ has seen a 30% uplift in mortgage application volumes in recent weeks that gives the company confidence of a return to growth in the second half. Moreover, the industry is facing the challenges of low credit growth, low interest rates, regulatory uncertainty, rapidly changing consumer expectations and increased scrutiny of conduct and culture. BOQ has responded well to these challenges and have been able to continue delivering the strategic priorities and stable profits for shareholders. For the rest of the year, BOQ’s focus will remain on the growth prospects in niche customer segments and asset quality. The bank is committed to delivering on the 1% underlying expense target and have embarked on a transformation program to find further productivity efficiencies across the organization. Additionally, the increased mortgage momentum, outlook for revenue growth and capital optionality will all provide a strong framework to deliver on the full year targets.
 

Growth Strategy (Source: Company Reports)
 
Stock Performance: BOQ stock generated returns of over 1.3% during this year to date while moving up 6.1% in last six months, as of March 31, 2017. On the other hand, although the earnings fell in the first half, the outlook for the second half looks more favorable as the lending application volumes have been picking up in this calendar year. Management reported that they are now seeing a better scenario for mortgage applications after a challenging 2016 year and accordingly the deposit spreads would be better. Moreover, the bank is boasting that they are six months ahead of their peers in adhering to the regulatory guidelines. The bank’s loan book has delivered a better than expected performance in the central Queensland and northern WA, despite the ongoing volatility in these regions. In fact, the shares of BOQ stock rose over 4.8% in the last four weeks (as of March 31, 2017) and the bullish momentum could continue in the coming months. We give a “Buy” recommendation on the stock at the current price of – $ 12.22

 
BOQ Daily Chart (Source: Thomson Reuters)

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