Synergies to Support Bank of Queensland

Australia | Apr 21 2022

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

Bank of Queensland looks likely to rely on synergies from the acquisition of ME Bank to support earnings in coming years, as limited leverage to rising cash rates makes peers a more attractive choice.

-Bank of Queensland’s share price drops -6% in the wake of a 14% cash profit increase
-Limited leverage to cash rate rises limits the bank’s comparative growth
-Acquisition synergies set to drive earnings in the near-term

By Danielle Austin

Despite Bank of Queensland’s ((BOQ)) share price taking a -6% fall following its first half results release, brokers remain largely positive on the bank’s outlook. While Bank of Queensland is unlikely to benefit from a rising cash rate environment like some peers, synergies from the ME Bank acquisition should support earnings in the near-term.

The bank delivered a net cash profit of $268m in the half, up 14% year-on-year and a 13% beat on consensus forecast, with the top line beat bolstered by one-off revenue gains. While the beat appeared positive, brokers highlighted compositionally it was of lower quality, with one-off gains and credit loss provision releases offsetting margin weakness.

Compared to listed peers, Bank of Queensland is less leveraged to the cash rate rises almost certainly ahead later this year, which will likely impact on the company’s growth trajectory compared to those peers in a higher cash rate environment, which some market experts expect may be driving market uncertainty and the resulting share price drop. A lower skew to cheaper transaction deposits leaves the bank less exposed to a rising cash rate, with Jarden analysts assuming a 25 basis point increase to the cash rate will translate to only a 2-3 basis point increase to Bank of Queensland’s group margins.

Although margin declines were anticipated to peak in the half, the decline was steeper than expected with the bank’s net interest margin (NIM) falling to 1.74% from 1.90% in the previous half. Market consensus had expected a drop to 1.79% in the half, following a -5 basis point NIM decline in the second half of FY21.

More than half of the decline in the first half was attributed to drag from fixed-rate mortgages, but analysts note the headwinds driving margin declines don’t appear to be unique to Bank of Queensland, but rather largely consistent with industry headwinds.

On the back of proactive measures taken by the company, including increasing the investment term for its replicating portfolio from three to five years, and moderating headwinds driving NIM declines, both the bank and market analysts expect the margin outlook to stabilise, with Bank of Queensland guiding to margins falling up to a further -2 basis points in the coming half.  

Acquisition synergies key to medium-term earnings

Not only does the integration of the ME Bank acquisition continues to progress, but Bank of Queensland has upgraded its medium-term synergy targets and now anticipates synergies of more than $95m in FY24, a $15m upgrade, while the company looks to be on track to achieve FY22 synergies at the top end of the $30-34m target range having delivered $13m in cost synergies in the first half.

The integration appears ahead of plan, with the cloud-based retail banking platform, including home loan features, to be rolled out to customers in the coming twelve months as part of the second phase of digital integration. Industry experts note further cost-out upside could be available following the migration of customers to a single, common platform.

With little upside to come for Bank of Queensland from cash rate rises, synergies from the ME Bank acquisition will be key to the company’s earnings outlook in the next few periods according to market analysts.

Of the five brokers within FNArena’s core coverage who commented on Bank of Queensland’s results, four are Buy rated or equivalent, while Ord Minnett is Hold rated and also maintains the lowest target price of these brokers at $8.30.

Ord Minnett considers Bank of Queensland a work in progress, noting the limited leverage to cash rate rises and high exposure to deterioration in term deposit spreads. Noting acquisition synergies should support earnings in coming years, and possible upside from digital transformation, Ord Minnett analysts see limited possibility for Bank of Queensland to outperform its valuation.

Credit Suisse, while retaining an Outperform rating, did describe the bank’s first half performance as disappointing. The Credit Suisse analysts noted while margin decline wasn’t a surprise, the bank’s limited leverage to the rising cash rate offers little potential upside, but considers the stock a value play in regional banking with potential to manage expenses better than peers.

At the top end of the target price range is Morgans, with a target price of $11.00 per share and an Add rating. The broker sees potential for upside risk from the strategy outlined at the mid-year update, noting it could clear a path to returns on tangible equity of 13%. Further, Morgans analysts see possibility for ME Bank synergies to drive operating expenses below $850m by the end of FY24 as all three Bank of Queensland brands are migrated to one common digital retail banking platform and investment spend normalises.

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