Bank of Queensland Earnings: Getting Worse Before It Gets Better

Bank of Queensland’s BOQ fiscal 2023 cash profit fell 8% to AUD 450 million, around 6% below our forecasts. As expected, the bank’s funding cost disadvantage, with very little sourced from cheap transaction accounts compared with peers, has weighed on margins and resulted in the bank being less aggressive in chasing loan growth. However, we underestimated the financial impact. Net interest margins fell to 1.69%, well short of our 1.75% forecast, as second-half NIM tanked to 1.58%. We reasoned the declining loan book, as market share in housing fell to 2.81% from 2.92% just six months prior, would have offered more margin protection.

The bank is also grappling with higher expenses as it invests to fix legacy technology and risk and compliance issues. The 8% increase in full-year expenses was in line with our forecasts, with inflationary pressures, higher investment in technology, and regulatory and compliance costs, overwhelming productivity and synergy savings.

Our fair value estimate is reduced by 6% to AUD 8 on materially lower earnings in the short term and a modest reduction to long-term NIM forecasts. We have cut our fiscal 2024 NIM forecast by 20 basis points to 1.55% to reflect the competitive environment, with a 2% increase in operating expense forecasts reflecting continued inflationary pressures.

We think the current share price, down 7% on the day, and at a 33% discount to our fair value, reflects market views that current margin pressures and rapidly rising costs will persist. We assume the bank returns to loan growth close to market at 3% per year from fiscal 2025 and NIM rises to 1.75% in fiscal 2026, as competition in lending and deposits eases. We forecast low-single-digit per-year expense growth as AUD 200 million in savings over the next three years is more than offset by inflation and investment spending, but still results in an improved cost/income ratio of 54% by fiscal 2026.