Bank Of Queensland’s Ambitions Questioned

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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.

Optimistic Targets

Management sees a “clear pathway” to its FY26 return on equity target of 8% and its CTI target of 56%. These targets would require a step change in profitability within an 18-month period and Morgan Stanley thinks they are optimistic.

This broker’s bull case assumes the ROE improves to 7.5% in FY26 and 8% in FY27, with a CTI ratio of 58.5% and 55% respectively. To achieve these outcomes, Morgan Stanley believes Bank of Queensland would need to grow its non-housing loan portfolio, reach $100bn of average interest-earning assets, maintain a net interest margin above 1.7%, lower its cost base and have a loss rate of -35bps of non-housing loans.

That’s all. But the bank has made further progress on its transformation by improving business loan growth, holding the margin, and reducing costs in in the first half. Morgan Stanley believes more confidence in the earnings and dividend outlook will support the share price around current levels.

Morgan Stanley upgrades to Equal-weight from Underweight, lifting its share price target to $6.60 from $6.20.

Morgans points out Bank of Queensland’s asset base is more concentrated than the major banks in the highly competitive home lending market, but with scale, funding cost and technology disadvantages compared to the major banks.

Management’s digitisation, simplification, and optimisation programs, including OMB internalisation, and greater focus on business banking, are targeted at improving the banks’ competitive position and returns.

While Morgans is sceptical of the bank’s ability to achieve its ROE and CTI targets, this broker sees value in the share price if meaningful performance improvement can be delivered.

Morgans retains Hold, increasing its target to $7.04 from $6.95.

Post the first half result, growing comfort on costs is making revenue a more meaningful driver of the share price and the company’s ROE ambitions, Citi suggests. However, balance sheet management to the extent seen in this result is not sustainable, in Citi’s view, and the bank will not be immune to headwinds from lower interest rates which present new challenges.

Citi sticks with Sell and a $6.00 target.

While Bank of Queensland’s simplification strategy and pivot towards business is bearing fruit, Macquarie thinks the bank will continue to struggle to make returns above the cost of capital over the medium term. With downside risks to FY26 earnings, Macquarie retains Underperform, with an unchanged $5.75 target.

UBS expects ROE to reach a maximum of around 7.0% in both FY26 and FY27. Potential challenges to increasing ROE further include expected credit losses returning to normal levels and a quicker than expected reduction in interest rates.

Upside risks could eventuate from continued progress on the simplification agenda and a better than expected margin outcome, UBS assert, although negative surprises on costs and the OMB conversion program remain potential downside risks in the broker’s view.

UBS retains Sell and a $6.50 target.

Brokers monitored daily by FNArena have three Sell or equivalent and two Hold. The consensus target is $6.38.

Overall, Jarden is encouraged that Bank of Queensland is on a firmer path towards improving returns and its FY26 ROE target. That said, even if this ambitious target is achieved, it remains below the cost of equity. Hence, Jarden keeps its Neutral rating, mainly given valuation support from a dividend yield of 5.5%.

Jarden’s target rises to $6.70ps from $6.50, due mainly to lower bad debts and higher business lending growth.

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