Australia | Oct 18 2019
Bank of Queensland has myriad issues to deal with and brokers expect revenue growth will be difficult over the next couple of years with the stock likely to underperform.
-Few positives in the FY19 results and the final dividend is reduced
-Asset quality deteriorates, impairment charges increase
-Loan growth not considered strong enough to offset margin headwinds
By Eva Brocklehurst
Bank of Queensland ((BOQ)) and its new CEO have a large task ahead to elucidate a strategy for the future that will reinvigorate confidence, amid mounting regulatory costs and pressure on interest margins. Revenue growth is expected to be difficult and the stock considered likely to underperform.
Brokers expect CEO George Frazis, who will present a market update in February, will need to focus on areas where the bank can derive an advantage, such as in Virgin Money Australia. Yet, Morgans points out, upward pressure on the cost base is very likely over the next two years given the extent of the investment required to resolve the problems.
Bank of Queensland has already flagged a potential expansion of BOQ Finance and a simplification of processes, as well as an accelerated investment in the digital roll-out of Virgin Money Australia. However, UBS warns, despite revenue growth, few in the digital banking segment have delivered strong earnings to date.
Bell Potter welcomes the "sensible" lowering of FY20 cash net profit expectations given the inevitable cost blow-out and management distractions this year. In its FY19 results Bank of Queensland announced cash earnings of $320m and reduced the final dividend to $0.31 versus $0.34 at the interim. Revenue was boosted by trading income while net interest margins eased further, to 1.92%. Credit growth was 1.6%.
There were few positives for brokers to laud. Some steps have been taken towards dealing with risk settings and capital strength, but brokers agree there is a long way to go. Morgans assesses the bank, at present, is not creating shareholder value. If the decline in the return on tangible equity is not averted then the broker may consider the stock is diminishing shareholder value.
Citi suspects earnings, the capital position and, possibly, the dividend are all set to deteriorate again in FY20 and downgrades to Sell from Neutral. The broker suggests there is little confidence in the sustainable profile of the business at this point, given the uncertainty about a resumption of growth to levels in line with peers as well as the level of returns that can be generated.
Macquarie notes the CET1 position deteriorated further in the second half, to 9.04% from 9.26%. Despite a discounted dividend reinvestment plan, the broker continues to envisage the current pay-out ratio is unsustainable.