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COMPANY NEWS & UPDATES

Bank of Queensland Limited ( BOQ )

Hold Valuation $ 8.50

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

2021 Interim Result

Bank of Queensland ' s result was a little stronger than we expected . Cash earnings increased 9 % on first-half fiscal 2020 , largely a result of net interest margins , or NIM , increasing 6 basis points to 1.95 %. NIM expansion reflected cheap funding from increased customer deposits , specifically savings ( up 16 %) and transaction account balances ( up 24 %). The earnings turnaround from the second half of fiscal 2020 is even more pronounced , up 66 %, after the bank booked significant loan loss provisions last year .

Loan loss provisions were largely unchanged at $ 374 million . Loan impairment expenses in the half of $ 24 million , just 0.1 % of gross loans , is tracking much better than our fullyear forecast of 0.18 %. This is down from 0.62 % on second-half FY20 . We believe Bank of Queensland is more than adequately provisioned , with a backdrop of falling unemployment and rising house prices adding comfort .

Our valuation for Bank of Queensland rises 4 % to $ 8.50 on a slightly more positive view on the long-term NIM outlook . While the proportion of funding from cheap customer deposits is likely to decline in the future , pricing of wholesale funding should improve for the enlarged group .

We continue to assume a full 12- month contribution of ME Bank from FY22 , with the consolidation of banking platforms and added scale to contribute to improvements in the banks cost / income ratio . We estimate the cost / income ratio falls from 54 % in FY20 to 47 % in FY25 . Regarding the short term , our FY21 profit forecast is increased 6 %. We increase our NIM forecast 3 basis points to 1.95 % in FY21 on lower funding costs . Second , we trim our loan loss forecast for FY21 to 0.15 %.

The interim dividend of 17 cents per share is in line with management guidance and represents a 66 % payout ratio . We assume a full-year dividend of 34 cents , which assumes a 70 % payout of second-half earnings .

The bank ' s Common equity tier 1 ratio of 10 % is above the bank ' s target range of 9 % to 9.5 % and supported an increase in the dividend payout ratio . Recall APRA has removed the 50 % cap on distributions imposed on the banks in 2020 . Given the bank ' s current success in growing the loan book , investment in the banking platform , and upcoming integration of ME Bank , we believe management will aim to maintain an excess capital position . We assume a 60 % -65% dividend payout ratio to FY23 , before an increase to 70 % in FY24 .

Housing loan growth was the standout of the result in our view , up 6 %. We believe an efficient loan approval process has helped the bank grow at 1.6 times system . The ability to provide conditional approval to a borrower within 2 days , in comparison to some competitors slipping beyond 10-days after being inundated by applications , has been key to success . We believe competitors such as Westpac will add resources and invest in processes which speed up approval times in the short term , taking away the free kick of sorts afforded to the likes of Bendigo and Bank of Queensland . With the added distraction of integrating ME Bank in FY22 , we believe Bank of Queensland ' s housing loan growth is likely to slow to 2.5 % per year over the medium term .

Housing loan arrears declined to 0.74 % of loans as at Feb . 28 , 2021 , down from 0.85 % in August . Despite temporary loan deferrals ending in March , management reported that arrears have trended lower since . With unemployment rate improving to 5.6 % in March , despite the end of Jobkeeper , and house prices rising , the outlook for loan losses continues to improve . Larger equity buffers and ease in selling a property should aid borrowers forced to sell without the bank incurring a loss .

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