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SELL

Coverage Initiated
Updated
Price Initiated
Target
Sector
Industry
05/06/2020
26/10/2023
$6.21
$5
Financials
Banks

Profile

Bank of Queensland is engaged in retail banking, leasing finance and insurance products. The bank operates in two segments being Retail and Business banking. Major brands include BOQ Blue, Virgin Money Australia, BOQ Business, BOQ Finance and BOQ Specialist. The company operates over 180 branches across Australia. 

 

The retail solutions to customers are managed through its Owner Managed and Corporate branch network, third party intermediaries’ and Virgin Money distribution channels. While the Business segment includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The business division provides tailored solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking and deposit solutions for commercial customers.

Summary

The Bank of Queensland has a 158 year history starting as a Queensland dedicated retail bank. Since then, BOQ has diversified its business from a nationwide retail branch-based bank to a financial services firm. BOQ focuses on niche commercial lending segments and offers highly specialised banking that is deeply anchored in the Australian communities. The company has demonstrated success in building long-term client relationships with attention to detail to customer services.

Key Fundamentals

BOQ remains well capitalised with a Common Equity Tier 1 ratio of 9.68%. Funding increased during the last financial year with customer deposits increasing by $3.3B, totalling $$56.5 billion including ME Bank, representing a deposit to loan ratio of 75%. Good liquidity has been maintained with a Liquidity Coverage Ratio of 149%, with was bolstered by the RBA Term Funding Facility (all figures are as of Dec 2021). 

BOQ has a reasonable balance sheet and sufficient liquidity, which should provide the ability to respond to changing conditions. Moving forward, continued growth in niche segments and margin improvement will be critical, along with the smooth integration of ME Bank which seems to of been achieved. Both housing and business loan growth has been above system and ME's home loan book has recently returned to growth, although net interest margins have fallen sharply since February 2021. These should be offset moving forward, as BOQ, like its peers, will be raising their rates when the RBA jacks the official rate up later this year. As it stands, we are introducing a BUY recommendation on BOQ with a $10 target price, as of April 14, 2022. Growth across all segments is strong, and NIM should stabilise later on this year. BOQ continues to report consistent growth and strong earnings, which is anticipated to further increase throughout the year.

 

Industry Outlook

The COVID-19 pandemic has had a significant impact on the Australian Banking industry, not only financially but operationally. Bank of Queensland, fortunately, entered the period in a strong position with high levels of capital, good liquidity, and robust underlying portfolio quality. They have been well placed to join the big four in focusing on the well-being of customers and business continuity by prioritising the access of credit to small and medium enterprises. Following directives from government and banking regulators, both the major and regional banks have worked together to provide unified responses to protecting millions of personal and commercial customers suffering from financial strain.

Most of the banks appear robust enough to weather the current environment. BOQ’s good liquidity and capital levels before the market disruption have been further bolstered by RBA and APRA announcements improving their funding options:

  • RBA announced Term Funding Facilities for deposit takers – 3-year funding at 25bps

  • APRA announced temporary changes regarding bank capital ratios, to ensure banks are well-positioned to provide credit to the economy in the current environment

  • Loan deferral payments of up to 6 months retain current risk weighting

For the banking industry, the economic consequences of the pandemic while not on the same scale as those during the global financial crisis, are still significant, with uncertainty remaining as the health crisis continues alongside vaccine rollouts.

Company Outlook

Over time, BOQ has successfully acquired a portfolio of brands that provide a competitive advantage due to the specialised knowledge in these particular niche segments. BOQ retail services include those such as deposits, credit cards, insurance, and SME lending. Virgin Money also provides an innovative approach to a wide range of financial products that are easy to understand and is a compelling alternative for the younger generation to the big banks. Virgin Money operates as a standalone brand within the group since its acquisition in 2013. Most recently BOQ completed the acquisition of Members Equity Bank significantly expand the group’s size to become the 6th largest bank in Australia.

BOQ's business arm offers asset financing and leasing through its BOQ Finance branch. BOQ Finance is a mid-market financier providing deep industry and product skills to its partner base. BOQ Finance has been operating in the Australian and New Zealand markets for more than four decades. The core value of BOQ is to be close to its community and it is reflected by its BOQ Specialist branch which delivers distinctive banking solutions to niche market segments including medical, dental, and veterinary professionals.

BOQ distinguishes itself from its peers by its long history and unique brands that are deeply anchored in the local communities. Unlike many competitors, BOQ is highly specialised and provides detailed services in niche industry segments which form a foundation for customers loyalty. As of FY20, BOQ served almost 1 million retail customers and almost 110,000 businesses.

Growth Strategy

BOQ key focus areas from their growth strategy are: 

  • Continued support for its customers and people through COVID-19

  • Operational improvement driving business momentum, with strong housing loan growth of 1.6x system

  • Executing on its digital transformation

  • Strong balance sheet and capital, with sound asset quality 

  • Acquisition of ME Bank is strategically and financially compelling.

 

BOQ are committed to sustainable profitable growth, supporting returns to shareholders and a dividend payout ratio target range of 60 – 75% of cash earnings.

 

The outlook for growth is good and the operating environment is positive. Australia is relatively well placed with less likelihood of downside scenarios on unemployment and house prices given the success of the Government stimulus. 

 

Building the Digital Bank of the Future 

 

BOQ has made a foundational investment in a new cloud environment for BOQ’s digital transformation. With phase 2 underway of the bank’s digital transformation now in development, which will impact a broader range of financial products in its Virgin Money Australia digital bank.

 

The first phase was rolled out late last year in a 'friends and family' debut of the Virgin digital bank, which focused on transactional banking products. While phase 2 will bring home loans, loyalty programs and deposit options plus open banking capabilities to the Virgin Money Australia brand.

 

Part of the strategy includes a five year, $440 million technology overhaul, underpinned by a new core banking system from Temenos. The retail banking common platform will be used by all brands and planning is also underway to integrate newly acquired ME Bank onto the common platform.

Common use of Temenos for retail core banking aligns with BOQ’s pathway to a single, multi-brand cloud-based digital platform. It provides the potential to leverage capital investment across a broader base to deliver a best-in-class customer experience.

 

ME Bank Acquisition

 

BOQ completed the acquisition of Members Equity Bank for $1.325 billion at the start of July 2021.

The acquisition should significantly enhance the scale and portfolio mix for profitable growth, including: 

  • Number of customers increasing from ~900k to ~1.45 million 

  • Broadly doubles retail banking GLAs to over $57 billion 

  • Increases Retail net profit contribution from ~35% to greater than 50%.

By acquiring strong complementary challenger brands, BOQ has the potential to expand its customer segments and geographies with minimal overlap. It re-balances BOQ’s East Coast presence. The acquisition is expected to offer attractive financial outcomes with low double-digit to mid-teens cash EPS accretive including full run-rate synergies in the first year (FY22). Expected to be cash ROE accretive, over 100bps including full run-rate synergies in the first year. With expected full run-rate pre-tax synergy benefits of ~$70 - $80m.

1HFY2022 Update & Outlook

BOQ announced a performance update for the first half of the 2022 financial year, benefitting from a full six months of contribution from ME Bank. Statutory net profit after tax increased 38% to $212 million. Cash earnings of $268 million was a 14% increase on pcp and reflects strong ongoing business momentum though the half, a disciplined focus on costs and the benefits to BOQ of lower loan impairment expenses. Operating expenses fell 3% to $461 million whilst net interest margin (NIM) fell 12 basis points to 1.74% compared to pcp, but down a massive 21 basis points since February 2021. ME Bank's home loan book returned to to growth in the period and BOQ and Virgin Money (VMA) brands showed continued growth at 1.8x system, with housing loan growth of $2.6 billion during the half, up 9% on pcp. BOQ also recorded above market growth in SME of 2.5x system and corporate business lending of 1.2x system. Common Equity Tier 1 (CET1) Ratio was 9.68%, above BOQ's target range of 9-9.5%.

Despite the relatively uncertain economic environment, BOQ remains cautiously optimistic that Australia remains well places for strong economic recovery based on low unemployment figures, high terms of trade and a large pipeline of residential construction and infrastructure work to be done. Its main focus is to achieve quality and sustainable profit growth and deliver positive jaws, which is having income growth exceed expense growth, with jaws expected at over 2%. Jaws is expected to achieve above system growth in BOQ and Virgin Money’s housing departments, with ME to return to net growth and ahead of market by the year's end. BOQ expects NIM headwinds reducing with interest rates set to rise later this year, and continued benefits from the groups integration and productivity programs driving cost reductions of at least 1%. CET1 is to remain comfortably above 9.5% and a dividend payout ratio target range of 60-75% of cash earnings whilst maintaining a prudent approach to provisioning.

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Financials

Financial Performance

Full Year Results (FY2021)

Bank of Queensland released its full year results for FY2021, which reflected strong underlying performance and cash earnings. Cash earnings after tax increased 83% from FY20 to $412 million, whilst statutory net profit after tax was 221% higher at $369 million. Cash earnings were driven by above system housing growth across all channels, combined with disciplined NIM and expense management, with NPAT being attributed to increased net income and credit to loan impairment expenses, partly offset by higher operating expenses.

Total income climbed 13% higher to $1.26 billion, with net interest income up 14% to $1.13 billion thanks to lending growth and NIM improvements. Operating expenses for the year were 12% higher, totalling $684 million, however excluding ME Bank operating expenses increased by only 3%. The increase was predominantly due to higher business volumes and the build out of the company’s new Digital Bank and other technology projects.

BOQ Perf.PNG

Customer deposits grew by $3.3 billion, with BOQ seeing growth in transaction, savings and investment accounts, which were partially offset by reductions in term deposits caused by low interest rates. The deposit to loan ratio increased to 75% for the year, and including ME Bank, BOQ’s customer deposits totalled $56.5 billion. With regards to lending growth, BOQ (excluding ME) saw housing growth of 1.7x system with growth delivered across all channels. Including ME Bank, BOQ’s gross loans and advanced totalled $75.7 billion.

Financial Position

Cash earnings per share jumped 51% to 74.7 cents with good growth and lending and deposits. Gross loans and advances (GLA’s) moving higher across the board, with total lending GLA, including ME Bank, increasing 329%. Housing GLA’s were 480% higher and business lending GLA’s moved 40% higher. The banks net interest margin (NIM), including ME Bank, was 1 basis point higher at 1.92% with a common equity tier 1 (CET1) ratio of 9.80%, up 2 basis points on F20, above BOQ’s target range of 9.0-9.5%. BOQ’s funding finished the year at $55.2 billion, excluding ME Bank, comprised of $38 billion in consumer deposits, $5.4 billion inn short term wholesale and $11.8 billion in long term wholesale. The banks full year liquidity coverage ratio (LCR) was 149% with a net stable funding ratio (NSFR) of 122%. LCR remains above the Australian ADI average of 125% and NSFR is well above the minimum of 100% laid out in the Third Basel Accord.

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Dividends

Distribution Type
Dividend
Franking
Ex-Div Date
Payment date
Final
$0.22
100.00%
4/5/22
26/5/22
Interim
$0.22
100.00%
28/10/21
18/11/21
Final
$0.17
100.00%
5/5/21
26/5/21
Interim
$0.12
100.00%
4/11/20
25/11/20
Interim
$0.31
100.00%
6/11/19
27/11/19
Final
$0.34
100.00%
1/5/19
22/5/19
Interim
$0.38
100.00%
24/10/18
14/11/18
Final
$0.38
100.00%
26/4/18
17/5/18
Interim
$0.46
100.00%
2/11/17
23/11/17
Final
$0.38
100.00%
20/4/17
17/5/17
Interim
$0.38
100.00%
27/10/16
22/11/16
Final
$0.38
100.00%
28/4/16
19/5/16

Stock Specialist Pty Ltd (ACN: 640 931 997) is a Corporate Authorised Representative (AFSR No. 001282827) of Australia National Investment Group Pty Ltd (ABN: 40 636 343 630) which holds an Australian Financial Services Licence (AFSL no. 522028). The information on this website is general information only and does not constitute personal financial advice. We have not taken the individual circumstances, financial objectives or needs of any investor into account when preparing this information. Investors should consider their circumstances and the relevant PDS for any investment and obtain professional financial and tax advice before making any investment decision. The information on this website is not a recommendation to make any investment or to adopt any particular investment strategy. You should make your own professional assessment of the suitability of this information, relying on your own inquiries, investments in securities, are subject to investment risk. Investment value may go down as well as up, and investors may not get back the full amount originally invested. Risks include: the investment objective may not be achieved, share market and other market risk, liquidity risk, and currency risk with international investments. Any past performance shown is not an indication of future performance. Commission and other costs charged by executing broker are not considered when calculating past performance. To the extent permitted by law Stock Specialist Pty Ltd accepts no liability for any errors or omissions in, or loss from reliance on the information in this website.

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