Bank Of Queensland’s Ambitions Questioned

Australia | 10:30 AM

Bank of Queensland posted a better first half than forecast, but analysts doubt the ambitious targets set for FY26-27.

-Bank of Queensland posts a first half beat
-Lower costs and bad debts attributed
-Transformation program is progressing
-ROE and CTI targets seen as ambitious

By Greg Peel

Bank of Queensland ((BOQ)) achieved 7% earnings growth in the first half FY25 on the second half FY24 (August year-end), beating consensus by 11%. The 18c dividend (fully franked) is also ahead of expectation.

The earnings beat was achieved on lower than expected costs and bad debt expense. Costs declined -5% half on half, while loan impairment expense remained benign. Expectations were for loan impairment expense to begin normalising upwards from the abnormally low rate in the second half FY24. Instead, it declined further due to provision release from the commercial portfolio.

Asset quality remains resilient, Morgans notes, with the bank's loan portfolio benefitting from a larger skew than the major banks to home lending.

Another "beat" came in the form of net interest margin, which was flat on the prior half at 1.57% when a decline was forecast. The result was nonetheless offset by lower volume growth reflecting management's business transformation goals.

Taking Care of Business

Bank of Queensland's strong management of the balance sheet, which sees a run-down in mortgages, liquid assets, term deposits and wholesale funding, and pivot towards higher margin business lending, insulated it from asset and liability side pressures.

Citi expects this benefit to persist into the second half. However, as the balance sheet returns to growth in FY26 and beyond, the regional lender will be exposed to industry headwinds from lower interest rates and competition.

The mortgage portfolio will continue to shrink in the second half and Morgan Stanley doesn't expect a return to system growth during FY26. However, an improvement in the annualised growth rate of commercial lending from 7% in the prior half to 10% in the first half FY25 was encouraging, the broker suggests, and the outlook is supported by an increase in business bankers.

At the same time, the start of a deposit mix-shift away from term deposits suggests to Morgan Stanley some emerging benefits from management's digital bank strategy.

Such funding recycling has been a response to current industry headwinds but is not sustainable as a strategy, Citi believes. The bank is looking to digital products and further business credit growth to allow balance sheet growth. Global trade and economic growth uncertainty present new revenue challenges, as do rate cuts. Citi is factoring in four RBA rate cuts ahead.

Another element of management's strategy is to convert prior franchises, or owner-managed business (OMB), to corporate branches. That conversion is now complete, and adds 12 basis points to the net interest margin from the second half, Morgans notes.

Management also says it is on track to exceed its previous target of a $20m profit benefit in FY26 from optimising the branch network, with 20 branches already having been closed since end-FY24.

Costs

Costs fell -5% half on half and management has maintained its guidance for the cost base to be "broadly flat" year on year in FY25, despite the inclusion of some -$50m of OMB conversion costs in the second half.

With investment spending moderating and another -$100m or so of cost savings likely to emerge next year, Morgan Stanley forecasts expense growth of 2% (or -4% ex-OMB) in FY26.

In Morgan Stanley's view, productivity benefits should help Bank of Queensland to achieve three years of positive 'jaws' and lower the cost to income (CTI) ratio by -5 percentage points from 67% in FY24 to 62% in FY27.

While the -5% cost reduction was a step in the right direction, says Macquarie, it was partly underpinned by a -$50m reduction in investment spend. This broker questions the sustainability of the current spend, balancing the need for ongoing franchise investment with the warranted wind-down after a period of significant technological uplift.

Bank of Queensland is focusing on per-unit profitability, which UBS likes, and there are some green shoots emerging from the refreshed strategy and focus on business banking and digitisation. The retail division's costs, in the context of a contracting lending book, nevertheless pose the question to the broker of whether costs can be cut faster than revenue is falling.

Profitably funding business banking growth will also be a priority, in UBS' view.

The conversion of OMBs to corporate branches comes with a cost, and management says it is continuing to work with former owners regarding payout disputes. The estimated cost of internalisation is less than originally budgeted, Morgans notes, at -21 basis points impact to the CET1 capital ratio versus -30bps initially assumed.