Australia | Oct 14 2021
The market's disappointment with Bank of Queensland's cost performance in FY21 was palpable, given the slump in the share price, yet there are reasons to be optimistic
-Market may be overly focused on costs, as 2% growth in jaws is anticipated
-Bank of Qld branch loan portfolio returns to growth for the first time in seven years
-Home buyer transformation program expected to return ME Bank to growth
By Eva Brocklehurst
High expectations leading into Bank of Queensland's ((BOQ)) FY21 result were always likely to be dashed to some extent. Guidance for flat costs in FY22 was less optimistic than Morgan Stanley anticipated even though the bank appears to be accelerating the synergies with ME Bank.
Still, management appears to be developing a track record on costs and the broker believes there is upside to forecasts if the bank's target of 2% growth in "jaws" (revenue less expenses) is achieved.
Cash net profit was $412m, and Macquarie found the performance respectable, with low impairments and continued lending growth. The CET1 capital ratio was reduced by -23 basis points to 9.8% in the second half, with loan origination costs and higher RWA (risk-weighted assets) growth weighing on capital.
Management expects to remain above its 9.0-9.5% CET1 target in FY22 but Morgan Stanley believes a buffer is needed to fund integration costs and support volume growth ambitions. Even with a pay-out ratio at the lower end of the 60-75% target range the broker expects a CET1 ratio will trend down to 9.5% over the next two years.
Despite disappointment at the delivery of synergy benefits and the conservative margin expectations for FY22, Credit Suisse believes the bank can still deliver positive jaws. Nevertheless, the broker believes management will need to articulate a cost strategy when briefing later in FY22.
Citi ascertains the market was overly focusing on costs in the results, amid a perception this metric was accelerating away from the company's target, yet, adjusting for volume growth and accounting reclassifications, concludes the bank has delivered broadly flat costs. The broker is forecasting FY22 cash earnings of $508m.
Furthermore, Citi expects strong volume growth will deliver positive jaws and Bank of Queensland should be well-positioned compared with peers in a slowing revenue environment. As a result the broker upgrades to Buy from Neutral and believes the sell-off has provided an attractive entry point.
Morgans points out there will always be sceptics regarding Bank of Queensland's turnaround proposition but asserts some outcomes have already been delivered and over the past two years the bank has emerged from a period where it struggled to grow its home loan book.
Moreover, the branch loan portfolio returned to growth in FY21, the first full year of growth in seven years. The broker was impressed with the home lending growth of 1.8x system over the second half, highlighting this came with a flat net interest margin of 1.95% in a fiercely competitive environment.
The bank is guiding for -5-7 basis points of net interest margin contraction over FY22, citing competition and low rates, and this also appears to have been taken badly by the market. Yet Morgans is not dissuaded, given Bank of Queensland is expected to grow above the system home loan growth of 7.5% in FY22.
The broker calculates -7 basis points contraction would equate to a -3.8% reduction in net interest income, and with home loan growth of more than 7.5% net interest income growth of 3% is probable.
Ord Minnett finds the share price reaction hard to reconcile, down -4% on the day compared with a -0.7% decline for the major banks, and suspects the reaction is probably more about the share price performance heading into the result.
Aside from this, the broker's 5% three-year compound annual growth rate forecast for pre-provision profit is is on par with most of the major banks and valuation remains attractive.
Macquarie expected the second half would be messy because of the inclusion of ME Bank, yet on a stand-alone basis margins were stable and sector-leading profit growth was 9%. The funding outlook is also consistent with expectations.
The first phase of the digital bank launch for Virgin Money has been completed and Bank of Queensland now expects to extend cloud-based systems across its brands. Morgans also expects significant improvements in operating performance as the bank focuses on automation and digitisation.
Investment expenditure is expected to start normalising in FY23 and by FY24 the broker expects the amortisation expense associated with capitalised software will plateau. The full impact of productivity savings should then come through.