Bank of Queensland’s Margin In Broker Sights

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

-Re-pricing probably offset by costs, competition
-Focus on mining/Queensland exposures
-Growth still likely to be above peers
 

By Eva Brocklehurst

Tomorrow's interim financial results release from Bank of Queensland ((BOQ)) will be scrutinised for margin pressure the bank pointed to earlier in the year.

Ord Minnett expects first half FY16 cash earnings to be $187m with an interim dividend of 36c, representing a 72% pay-out ratio. The broker expects the outlook for margins will be a key area of focus, considering the potential for re-pricing initiatives to be offset by larger front-book mortgage discounts, competitive business credit pricing and widening wholesale funding costs.

The broker's first half margin forecast of 1.97% is flat versus the prior half, as investor and owner occupier re-pricing initiatives are offset by rising funding costs and elevated competition for housing and business credit. Ord Minnett will also be looking for guidance on the exposure to mining related equipment finance, which has recently experienced a rise in impairments.

Credit Suisse bases its earnings forecasts of $191m on modest revenue growth, lower non-interest income and a flat net interest margin. The broker is also keen to look at asset quality trends, particularly within the mining exposed states, and obtain an update on cost re-structuring, including branch consolidation.

The bank has flagged a move to a more conventional dividend profile and a more conservative first half dividend. This implies a skew towards the final dividend, in Credit Suisse's opinion. The broker factors in a 38c interim dividend.

The bank expects non-interest income growth will be flat to low, targeting a cost to income ratio over the longer term in the low 40% range. The broker notes upward cost pressures and a rising balance of intangible assets which leads, in turn, to higher amortisation expenses.

Deutsche Bank observes loan growth has picked up as a result of the bank's channel diversification strategy but the first half result is likely to be subdued, because of the one-off cost investment flagged in February. This broker also expects underlying margin pressure to largely offset the mortgage re-pricing benefits.

A first half profit of $181m, down 5.0%, is forecast, driven by elevated cost growth more than offsetting revenue growth. Deutsche Bank expects more than half of this cost growth will be driven by the bank's investment program.

On the revenue front, the broker expects 2.0% growth in net interest income on flat margins. Deutsche Bank remains attracted to the bank's medium-term growth prospects but is well aware that the margin outlook is uncertain, with management having twice issued cautions in this area.

The broker also ponders whether the bank is growing too quickly given the current funding environment, and will be on the hunt for evidence of any deterioration in asset quality in Queensland and mining exposures. The downside risks in Deutsche Bank's view are higher bad debts, competition for retail deposits and potential for higher cost growth.

Morgan Stanley also envisages modest downside risk to forecasts. Still, the stock remains the broker's preferred bank because of its relatively strong capital position. While it trades at a discount to the major banks, Bank of Queensland offers stronger earnings and dividend growth.

Morgan Stanley envisages scope for more home loan re-pricing in 2016 and more favourable outcomes for credit quality, with less impact from higher capital requirements. The broker expects the bank to generate above-peer earnings growth of 4.5% versus an average decline of 0.5% for the major banks.

An interim dividend of 38c is forecast, with the broker noting this would end the 2c per share progressive dividend trend. A flat CET-1 capital ratio of 8.9% is also forecast, around 190 basis points above the regulatory minimum.

FNArena's database shows two Buy ratings and five Hold for Bank of Queensland. The consensus target is $13.17, suggesting 14.4% upside to the last share price. Targets range from $11.95 (UBS) to $15.40 (Citi). The dividend yield on FY16 and FY17 forecasts is 6.8% and 7.1% respectively.

See also, Is Bank of Queensland Vulnerable To Margin Pressure? on February 10 2016.
 

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