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Bank Of Queensland Veers Conservatively

Australia | Sep 30 2020

This story features BANK OF QUEENSLAND LIMITED. For more info SHARE ANALYSIS: BOQ

Bank of Queensland has veered conservatively, taking further provisions to account for the impact of the pandemic. Brokers assess this makes the bank's dividend outlook highly uncertain.

-Loan deferrals higher than for the other banks
-Share price likely to stay under pressure
-Dividend outlook uncertain

 

By Eva Brocklehurst

Bank of Queensland ((BOQ)) has increased its credit provisions to take into account a more severe economic scenario, which incorporates higher unemployment, softer property prices and an elongated downturn.

As a result, and with FY20 results due on October 14, brokers hasten to reconfigure their numbers. The bank has announced an impairment charge of -$175m for FY20 amid increased provisions. This includes a covid-19 overlay of -$133m.

The numbers are materially ahead of Citi's estimates, with the difference almost solely related to the pandemic, reflecting a higher weighting to more severe scenarios. Hence, in view of some better macro indicators, the broker considers Bank of Queensland has been conservative.

An -$11m expense has also been incurred associated with the review of historical pay entitlements to employees, with Bank of Queensland ascertaining irregularities in its superannuation payments and wages.

The impairment charges are expected to have a capital impact of -39 basis points and reduce the bank's CET1 ratio to 9.8%, still above the target range of 9-9.5%. The changes to impairments puts Bank of Queensland at the top end of the range in terms of top-ups for the pandemic, although Ord Minnett considers this justified as a larger percentage of the bank's mortgage and small-medium enterprise (SME) loan books are in deferral.

Loan deferrals are declining but remain higher than the other banks. Several brokers point out Bank of Queensland has 12% of home loan balances and 16% of SME loan balances on relief packages as of the end of August. Around 25% of customers are making full or partial repayments.

In view of these numbers the increase in the collective provisioning of $136m for FY20 looks low to Shaw and Partners. The broker's forecast for FY21 bad debts is $230m, to reflect expectations provisions will be increased substantially.

Morgans observes Bank of Queensland is faring worse than most of its peers in terms of payment deferral statistics and, therefore, remains cautious about the outlook for asset quality. The broker anticipates the bank will deliver a cash return on tangible equity of 7% in FY20 and 8% in each of the following two years. Hence, the share price is expected to remain under pressure.

Macquarie had suspected the earlier assessment of impairments was on the light side and considers the quantum now conservative. Moreover, the strong starting capital position of Bank of Queensland means it can buffer increased provisions in FY21 and this should support dividends as well.

Dividends

Credit Suisse had also suspected the original impairment forecasts fell short and, while still forecasting a statutory profit, suspects the upcoming APRA stress test is likely to align with the severe scenario. That would imply an inability to pay a dividend given APRA's preference for banks to retain and preserve capital.

As a result Credit Suisse expects zero dividends and, at this point in time, assesses the regional banks appear at more at risk than major banks. UBS agrees the bank has made relatively conservative assumptions. Hence, in the event the economy recovers faster than anticipated and house prices stabilise, there is potential upside to forecasts.

The broker considers the changes to credit charges are largely a matter of timing and Bank of Queensland will pay out around 50% of FY20 statutory profit with its second half result. Hence, UBS increases its second half dividend forecast to $0.13 from $0.10.

Morgan Stanley, on the other hand, believes the risks are skewed to the downside and a combination of flat revenue and higher expenses as well as impairments will reduce estimates for earnings per share to just $0.07 in FY20 and contribute to the deferral of a final dividend.

Bell Potter is keeping fingers crossed, re-basing forecasts and expecting statutory net profit of $141m and an interim dividend of $0.04 as well as a final dividend of $0.07. The broker believes FY21 guidance will be retained but there could be changes to the timing and quantity of investment expenditure.

Bank of Queensland provides good exposure to the falling deposit costs currently being seen in the market, Goldman Sachs asserts, while the capital position remains solid.

In isolation the items just announced would have reduced FY20 forecast by -10% but the broker, not one of the seven monitored daily on the FNArena database, takes the opportunity to mark to market volume assumptions and sticks with its Buy rating and $6.85 target.

Citi also retains a Buy rating for Bank of Queensland as, while the provisions are material they represent a partial pull forward into FY20, and a number of macro indicators have improved since the third quarter update.

Shawand Bell Potter, also not among the seven, have Hold ratings and $6.00 targets and the database has six Hold ratings for Bank of Queensland and one Buy. The consensus target is $5.89, signalling 2% upside to the last share price.

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