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

Sailing decently under tough environment: Bank of Queensland Ltd (ASX: BOQ) reported a stable and healthy performance in FY18 but not without a few loose ends. Lending growth was healthy and well diversified at 119.8% YoY (Including ~$653 Mn, $569 Mn, of housing loans, commercial loan, respectively, sold-down during the year). Cash earnings after tax surged 3% over FY17. Asset quality was stable but core fee income growth was benign because of ongoing pressure in banking industry but still led to a decent balance sheet growth. A bit positive surprise came on NIMs wherein we had expected flattish NIMs as the banking industry was facing significant headwinds during the period. The net interest income came in at $965 million in FY18 which reflects the YoY growth of 4%. In our view, the bank is structurally among the best placed private sector banks with its diversified presence and well-oiled retail liability franchise. Nevertheless, at the current valuations we give a “Buy” recommendation on the stock with the target price that may see an upside of mid-single digit to low double digit with higher side over $11 ascribing a valuation of 1.09X FY20E P/B.

Key Financial Metrics (Source: Company Reports, Thomson Reuters), GLA- Gross Loans & Advances Assets

Strong Distribution Footprint in Domestic Market: Bank of Queensland is one of the leading regional banks in Australia and has a strong domestic presence with more than 180 branches across Australia. As of August 2018, the bank has 77 corporate branches, 99 owner managed branches, and 3372 brokers which are accredited with Virgin Money Australia (VMA) as well as 2774 brokers which are accredited with BOQ. The bank also has 2228 rediATMs, 597 BOQ branded ATMs as well as 7 transaction centres.

Decent Loan Growth amid Slow Market: Bank of Queensland ended FY 2018 with total gross loans and advances amounting to $45.3 billion while in FY 2017, the bank posted a figure of $43.8 billion. The bank also witnessed the favourable momentum in the housing growth thanks to VMA as well as BOQ Specialist coupled with improvement with regards to branch network. Additionally, the bank was able to maintain disciplined standards on credit.

NIIs higher than expected; we sense some competitive pressure: The bank garnered net interest income amounting to $965 million in FY 2018 reflecting the YoY growth of 4%. Despite a number of margin headwinds emerging during the year, the drivers for this YoY increase was higher net interest margin or NIMs and elevated average interest earning assets. This performance was ahead of our expectation because of improvement in funding costs during the year. In FY 2018, the bank’s average interest earning assets amounted to $48.8 billion implying a rise of 2% on the YoY basis. However, the bank’s funding costs also got improved helping its NIMs in FY 2018. During the same period, the bank garnered total non-interest income amounting $145 million which implies the substantial fall of 17% on the YoY basis.



Improving Asset Quality: The Bank has improved the asset quality in FY2018 across the portfolio with impaired assets reducing 15 per cent to $164 Mn and loan impairment expense reducing 15 per cent to $41 Mn. Loan arrears also remained at low and steady levels throughout the year. This is a direct result of a prudent approach to risk management, assisted by benign economic conditions.

Rise in Cost-to-Income (CTI) Ratio: Total operating income of the bank increased 1.6% to $1,121 Mn in FY2018, while the operating expenses surged 7.1% to $587 Mn, leading to increase in cost to income ratio to 52.4% in FY2018 from 49.7% in FY2017. This is a one of the key indicators to know about the profitability of the bank as it tells about the company’s costs in relation to its income. During FY18, CTI was primarily impacted by the challenging environment for revenue growth, higher employee costs, increases in amortization costs and additional investment in IT systems and infrastructure. However, the management believes that the investment in IT systems will yield improved customer experience and reduced IT support costs over the medium term.



Capital Position in Decent Zone: The Bank had set the Common Equity Tier 1 Capital target range to be between 8.0% and 9.5% and the total Capital range to be between 11.5% and 14.5%. Of which, the group was able to record a Common Equity Tier 1 Capital Ratio and Total Capital Ratio of 9.3% and 12.8%, respectively as at 31 May 2018. However, the management believes that its’s capital management strategy will continue to maintain its capital level to protect the deposit holders as per APRA guidance. Hence, we believe that the bank’s capital position at about 9.0% on 5-year average basis seems to be at decent spot under current challenging environment.



Maintaining Decent Dividend Payout Ratio: Over the past few years, the dividend trend of Bank of Queensland has been slightly fluctuating. In FY 2014, the bank’s dividend payout ratio stood at 86.9% and finally, in FY 2018 the payout ratio was 89.3%. However, in FY 2015, FY 2016 and FY 2017, the payout ratios were 85.7%, 85.1% and 84.1%, respectively.



Drivers for future: The scope of digitization is evolving at a rapid pace which is revamping the entire banking industry. Over the long-term, the economic landscape of the banking space would continue to remain challenging which would prompt the banks to come up with different tools and platforms which could help in customer retention. As per the management of Bank of Queensland, there is a pressing need to meet the digital requirements of the customers. Further, unfavourable wage growth, fall in the housing prices and in the housing credit growth would have an adverse impact on the revenues in the broad industry. The company would be making higher deployments towards the digital initiatives because of increased demand of the digital tools by the customers. The entire banking industry is expected to witness higher changes in the regulations in addition to the already lifted public scrutiny. However, the management is confident about the risk-based approach. The company is in the process of diversification. In FY 2019, the market players can expect significant advancements regarding the technology initiatives. The bank would be working towards the simplification of the platform. The improved digitization capabilities would help in witnessing an increase in the engagement from the customers’ side. Moving forward, this would also help in growing the profits as well as increasing the customer base.



Outlook and Stock Recommendation: While risks related to unfavorable wage growth, fall in the housing prices, and regulatory changes prevail; backdrop of resilient performance of BOQ on asset quality and prudent risk-based approach, continued investments for future customer needs, and readiness to respond to regulatory reforms are the strengths of the bank. The group expects a benefit of three basis points in first half of FY 2019 from BOQ’s mortgage repricing while a headwind of 5 basis points per half is expected from front to back book pricing. The group has hedged exposure to new calendar year but NIM may get reduced by one basis point given capital and low cost deposits. These changes are not expected to derail the resilient fundamentals of the group by large. The stock has been in an oversold region and has fallen by about 6.5% in last one month. Further, BOQ seems to find support around $ 10.3 while resistance may be seen around $10.7. Accordingly, we give a “Buy” recommendation on the stock at the market price of $ 10.380, with the target price that may witness an upside of mid-single digit to low double digit with higher side over $11 ascribing a valuation of 1.09X FY20E P/B.
 

BOQ Daily Chart (Source: Thomson Reuters)

 
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