Company Overview: Bank of Queensland Limited (ASX: BOQ) is Australia's regional Bank that operates in retail banking and BOQ business. BOQ has successfully implemented a brand acquisition strategy where its retail banking operations have an Owners Managed Branch (OMB) that focuses on retail and SME loans. The BOQ business segment includes commercial lending, deposits, asset finance & leasing, and a BOQ specialist that provides distinctive banking solutions.
BOQ Details
This report is an updated version of the report published on the 09 June 2022 at 3:43 PM GMT.
Factors Supporting BOQ's Future Growth:
- H1FY22 Result Overview: BOQ reports a 14% increase in cash earnings from H1FY21 to $268m in 1HFY22, driven by cost management and balance sheet growth. Statutory net profit went up by 38% from H1FY21 to $212m, driven by growth in business lending and growing housing market share. The Members Equity Bank (ME Bank) integration provides a benefit of $13m as synergy in H1FY22 through the consolidation of business operations, thus aiding BOQ reduce its expenses. BOQ reports the Common Equity Tier 1 Capital Ratio above 9.5% target ratio and Total Capital Ratio above 13% target ratio, indicating a comfortable capital zone. BOQ paid an interim dividend of 22cps representing 53% pay-out, while the dividend pay-out target as per policy remains at 60% to 75% for FY22.
- Digitalisation on Track: BOQ has made significant progress toward the single cloud-backed system that supports digital retail banking platforms and benefits the strategic partners and ongoing innovations. Management is focused on expanding deposits, cards, and loyalty on the digital platform in H2FY22 and transforming BOQ into cloud based fully digital bank.
Business Lending Performance (Source: Analysis by Kalkine Group)
Rising RBA Cash Rate: Reserve Bank of Australia (RBA) on 8th June 2022, hiked the cash rate by 50bps to 0.85% to control inflation, this rise in rates rapidly increased the borrowing cost across the economy. The increase in cash rate sparks the fear of a rise in bad debt among market participants. However, the beginning of the surging rate cycle is good for banks until they remain in the management's forecast. The rising cash rate provides option for BOQ to expand its margins. Further, during the time of rising inflation, the banking sector provides an inflation-resistant business model where they can easily increase their interest rates to ensure inflation doesn't impact their margins. However, the rising margins could impact the loan growth of banking sector.
RBA Cash Rate (Source: Analysis by Kalkine Group)
Key Metrics: For 1HFY22, BOQ reported an efficiency ratio of 64.3%, higher than the industry median figure of 63.9%. Loan growth for H1FY22 stood at 4.3%, up from 2.3% in 1HFY21.
Profitability Profile (Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 13.75% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and State Street Global Advisors Australia Ltd. are holding a maximum stake in the company at 3.76% and 3.3%, respectively, as also highlighted in the chart below:
(Analysis by Kalkine Group)
Dividend Track Record: BOQ has a decent track record of rewarding shareholders through dividends. For 1HFY22, the company has issued an interim fully franked divided of 220 cents per share, with the payment date 26th May 2022. At the current market price $6.880, the annual dividend yield stood at 6.24%. The bank may likely to continue to have a decent dividend payout policy in long term, considering its decent fundamentals and track record of paying dividends to its shareholders.
Dividend History (Source: Analysis by kalkine Group)
Key Risks: BOQ has been exposed to multiple risks, firstly, the risk of failure to comply with any regulatory body and the risk of inadequate response to regulatory change. Another significant risk is counterparty default, where BOQ can lose value due to deterioration in credit quality. Further, all major banks are exposed to liquidity risk where there is always a concern regarding failure to meet payment obligations as they fall due. BOQ also faces reputation risk that arises from the public opinion resulting from loss of people's trust.
Outlook: BOQ is focused on delivering sustainable growth of 2% and expects to outperform the market forecast credit growth of c.7.5% in housing and c.8% in business. Due to the commencement of the global rise in interest rate cycle, BOQ's expects the Net Interest Margins (NIM) headwinds to reduce in near future. BOQ is also focused on delivering integration benefits to further decrease its cost by a minimum of 1%. BOQ remains focused on its vision to grow sustainably and expects a 2% profitability growth in FY22. BOQ expects the second phase of the digital cloud-based retail core banking system to be available to customers, including home loan products, over the coming 12 months.
Valuation Methodology: Price/Book Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last nine months, the stock has been corrected by ~25.82% and is trading near its 52-week low price level of $6.870, offering a decent opportunity for accumulation. The stock has been valued using the P/B multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount as compared to its peer, considering economic headwinds, geopolitical tension, challenges associated with the COVID-19 pandemic, etc. For the valuation purposes, peers like Bendigo and Adelaide Bank Ltd (ASX: BEN), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and others have been considered. Considering the company's decent growth in H1FY22, positive long-term outlook, reduction in cost, indicative upside in the valuation, and key risks associated with the business, we give a "Buy" recommendation on the stock at the current market price of $6.880 as on 9th June 2022, 11:30 AM (GMT+10), Sydney, Eastern Australia.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
BOQ Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
Technical Indicators Defined:
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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