Broker Confidence Improves In Bank Of Queensland

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

-Managing asset quality, costs
-Margins stabilise
-Potential in mortgage re-pricing
-Confidence in dividend growth
 

By Eva Brocklehurst

Bank of Queensland's ((BOQ)) FY15 results were a further confirmation for brokers that the bank has made good on its turnaround commitments, demonstrating several positive trends. Opinions on the bank have improved over the last year or so, with Buy ratings appearing on the FNArena database where previously there were none.

The database has three Buy ratings, four Hold and one Sell (JP Morgan). The consensus price target is $13.53, suggesting 4.4% upside to the last share price. Targets range from $12.40 (JPM) to $14.50 (Citi). The dividend yield on FY16 and FY17 forecasts is 6.0% and 6.3% respectively.

Citi upgrades its rating to Buy from Neutral on the back of the results, believing there is valuation appeal in a stock that has beaten expectations. The broker notes the Investec acquisition delivered earnings that were around 13% above management's guidance at the time of acquisition (July 2014).

Citi retains some questions regarding growth in future earnings, given there will be no tailwinds from acquisitions and a likely step up in expenses growth. Bank of Queensland's performance in FY16 is likely to be symptomatic of the sector, with limited earnings growth, the broker suspects.

Still, Citi envisages fewer headwinds from regulatory hurdles and highlights the bank's capital strength. Higher capital requirements for the major banks are levelling the playing field for the regionals and the implementation of the Basel 4 requirements is also likely to underpin regional bank returns and share price outperformance.

Deutsche Bank has a Buy rating on the stock, flagging the return of lending momentum, growth in non-interest income and well-contained costs. The broker increases earnings forecasts by 2-3% over FY16-18 on the basis of better banking fees and investor mortgage re-pricing. While returns on equity have expanded rapidly over recent years, Deutsche Bank envisages further upside potential from mortgage re-pricing.

The Queensland base is also expected to a potential tailwind in the medium term. The bank's specialist business is exposed to fast-growing areas of the economy, which are likely to be lower risk than most commercial lending segments.

In all there were more positives than negatives in the result from Credit Suisse's perspective. There was no actual earnings guidance but the company did flag the move to a more conventional dividend profile, implying a skew to a final dividend. The broker notes asset quality stress in the mining-exposed states appears to be manageable and, at this stage, confined to business exposures rather than consumer/mortgage exposures.

The stability of the net interest margin was better than Credit Suisse expected in the second half and this is encouraging for prospective re-pricing benefits in FY16. UBS flagged the hard work that has been done to turn the business around over the past three years.

While there have been issues regarding asset quality, particularly in Queensland and Western Australia, the broker is pleased the bank's impairments are improving. Bank of Queensland has made a considerable effort to clean up its book and as a result the risk profile has reduced substantially. Hence while the overall environment remains challenging, UBS believes the book is well positioned.

FY15 results were in line with JP Morgan's estimates, with weaker net interest income offset by improvements in fee income. Around 18 bank branches were closed and there is a similar expectation for the current year. The broker observes, as an offset to this saving,  the bank does expect amortisation for capitalised software to double over the next two years.

Bank of Queensland may not be short on capital but JP Morgan highlights the challenges of funding growth at a low return on tangible equity. This is a theme echoed by Macquarie. The strong specialist segment, a well managed margin and re-pricing benefits were strong enough to offset a core franchise that is still struggling for growth.

That aside, Macquarie has become more optimistic, enough to upgrade to Neutral from Underperform. The broker considers the result was reasonable but not outstanding. This still bodes well for the rest of the sector in upcoming results.

Simply put, if a bank can manage its margin and deliver some asset growth, the market is likely to reward it, given current sector multiples. Macquarie retains some concerns about the core business outlook, amid expectations of revenue headwinds from a normalisation of non-interest income.

Morgan Stanley is more confident in the bank's ability to lift its margins, re-invigorate growth and manage credit risk. Bank of Queensland is its preferred Australian bank exposure because of the dividend growth profile and relatively strong capital position, as well as leverage to home loan re-pricing.

The strong capital position stems from a pro-forma CET1 (common equity tier 1) ratio that is in line with the major banks, but Bank of Queensland is not a D-SIB (domestic systemically important bank) and its current mortgage risk weightings make it less vulnerable to potential changes under Basel 4 requirements.

The broker is confident the bank can hold the pay-out ratio at around 74%, maintain its CET1 ratio near the top of its target range of 8-9% and grow the dividend by 5.0% over the next two years.
 

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