Last week, Bank of Queensland (BOQ) hit a 52-week share price high of $7. This came after the release of its full year financial results (BOQ has a 31 August balance date).
The moderately ‘better-than-expected’ results brought a ray of sunshine to BOQ shareholders, who have endured a horror run with the stock. Once a solid/reliable $10+ stock (both pre and post Covid), BOQ shares plunged to around $5 on the back of a litany of problems including the ill-judged acquisition of ME Bank, unsatisfactory leadership/CEO changes, decades of under-investment in technology and the inevitable compliance breaches and remediation program. Competition in home loans and pressure on funding caused a collapse in the net interest margin.
BOQ – 10 years from 10/14 to 10/24
Source: nabtrade
BOQ – 1 year from 10/23 to 10/24
But the market’s reaction to the result provides hope that the worst is over for BOQ. Let’s take a closer look at the result and what the major brokers have to say.
I should at the outset declare a long held bias against the regional banks. The bias is pretty simple. I like market leaders, and only invest in tier 2/tier 3 players if they are “super cheap” compared to the leaders or have a differentiated/unique business model.
Decades after Paul Keating tried to shake up the banking industry by inviting 15 well-capitalised foreign banks to open their doors in Australia, the four major banks still control more than 80% of the Australian banking market. The oligopoly is essentially untouched (apart from Macquarie), with as much market power today as it had back in 1985. Further, market leadership and arguably much of the product innovation comes from the “big 4”, not the other 140 regional, community and fintech banks. There is just not enough differentiation on product or service.
BOQ has boasted of a differentiated business model, with its owner/manager retail banking branches, concentration in Queensland and specialised offerings in business finance following the acquisition of the old Investec business. However, with BOQ now corporatising its retail branches, the differentiated business model is fading somewhat, notwithstanding that business banking (rather than retail banking) drives its profitability.
So, for me to want to invest in BOQ, it really does need to look “cheap” compared to the majors.
BOQ’s full year result
Cash profit for the year of $343m was down 24% on the $450m reported in FY23. Half on half, the second half was essentially flat to the first half ($171m vs $172m).
This came as the net interest margin stabilised at 1.57%, up 2bp on the first half’s 1.55%. A record low loan impairment expense of just $5m was recorded for the second half.
Volume growth was slightly negative, with the Business Bank returning to form and adding a net $432m in loans in the second half offset by a reduction of $646m in home loan balances in the retail bank (mainly Virgin Money). BOQ has taken a conscious decision not to compete in parts of the home loan market where it can’t get an adequate return on capital.
The financial pain was felt most in the Retail Bank (BOQ, ME Bank and Virgin Money) due to competition in the home loan market and pressure on deposit rates, with underlying profit down 57% to just $83m. The Business Bank, which includes BOQ Specialist and BOQ Finance recorded a profit of $253m, which was flat to FY23.
Strategically, BOQ is undergoing a simplification/digitisation programme to improve shareholder returns and deliver a sustainable return above the cost to capital. This includes targeting a cost-to-income ratio of 56% and a Return on Equity (ROE) of 8%, up from just 5.7% in FY24.
BOQ says that the foundational digital bank build is largely complete, with focus shifting to customer migration, scaling digital mortgages and decommissioning legacy systems to deliver material productivity benefits. It has a clear pathway to deliver its FY26 ROE target of 8%, with a strategy to deliver further uplift in the medium term.
Looking ahead to FY25, it anticipates stable net interest margins and revenue benefits from business bank growth, partially offset by a further reduction in mortgage balances. Broadly flat expenses growth is anticipated, as simplification initiatives offset inflation, higher amortisation, and branch conversion costs (from corporatising its owner/manager retail branches).
Shareholders will receive a final dividend of 17 cents per share, taking the total payout for FY24 to 34 cents per share, down from 41 cents per share in FY23. The payout ratio of 65.1% of BOQ’s cash profit is “mid-range” of their target range of 60% to 75%.
What do the brokers say?
The brokers remain “negative” on BOQ. While this is the case for all banks, they are more negative on BOQ than they are for Westpac, ANZ or NAB. According to FN Arena, there are 5 “sell” recommendations and 1 “neutral” recommendation.
The table below shows individual broker recommendations and target prices.
Major Broker Recommendations – BOQ
The consensus target price of $5.53 is 21% lower than Friday’s ASX closing price of $7.
FN Arena’s precis of Macquarie’s commentary on the result is a good summary of market sentiment: “Macquarie keeps its Underperform rating for Bank of Queensland after an “ok” 2H result, noting “ambitious” FY25 cost guidance requiring a material step-up in productivity.
For the 2H, weak balance sheet growth was offset by better margins and much lower impairments, notes the analyst.
The broker highlights the difficulty for management in investing for the future while also trying to reduce expenses and improve profitability. “
Ord Minnett is not convinced that the attempt to transform to a digital bank will remedy the current problems including heightened competition, noting the execution risks with the strategy. On multiples, the brokers have BOQ trading on a multiple of 15.1 times forecast FY25 earnings and 14.1 times forecast FY26 earnings. A total dividend of 35 cents is expected to be paid for FY25, implying a prospective dividend yield of 5%.
What’s the bottom line?
I can’t see any compelling reason to buy BOQ, particularly after the recent rally. On earnings multiples (one measure that can be used to compare value), BOQ is not that much cheaper. ANZ is trading on a multiple of around 13.9 times forecast earnings, Westpac 16.8 times, NAB 7.4 times and CBA 24.2 times. BOQ in the 14’s is a lot cheaper than CBA, but so are the other three majors. And while BOQ does have an interesting position in business banking, it is coming very late to the party with its digitisation strategy. As Ord Minnett noted, considerable execution risks remain. Achieving an ROE of 8% would be a positive outcome, but it is a long way from best in class.
What’s my view?
Not a buy. Underperform.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
