Punching Above Its Weight | Bank of Queensland (ASX:BOQ) Recommendation

Ord Minnett Research Recommendation:   Bank of Queensland (ASX: BOQ)  

Bank of Queensland reported an FY21 cash net profit of $412m, ahead of our $407.1m forecast. A fully franked final dividend of 22cps was declared, taking the full-year payout to 39cps, just ahead of our 38cps estimate. Second-half cash earnings of $247m came in 2% above our forecast, with the pre-provision profit less than 1% above our projection due to higher-than-expected credit write-backs.

Guidance for flat expenses in FY22 and “at least” 2% positive jaws* still implies pre-provision profit slightly ahead of our previous forecasts and even more so against consensus. Given that context, the 4% drop in the share price on 13 October (or as much as 6% intra-day) versus a 0.7% decline for the major banks looks hard to reconcile.

Underlying FY21 cost growth was 1.5%, with projects lifting overall cost growth to 3.4%. This was despite a $30m (or 5%) tailwind from productivity savings. Guidance for 3% underlying cost growth in FY22 was disappointing given similar productivity benefits are expected in FY22. That said, higher revenue expectations have shielded the impact on the income statement and we expect ongoing improvement in the cost-to-income ratio.

ME Bank’s net interest margin (NIM) improved more than we expected, increasing from 1.56% in FY20 to 1.7% in the August year-end aligned pro-forma disclosure. This suggests a reduction in the funding cost saving opportunity, with an NIM benefit of around 5bp for ME Bank expected in FY22 and already incorporated into group guidance. ME Bank’s mortgage application growth improved in August and September, bringing volumes closer to flat, and further improvements are expected with ME Bank to deliver system growth by the end of FY22.

Our 5% three-year compound annual growth rate forecast for Bank of Queensland’s pre-provision profit is at least on par with most of the major banks and valuation is attractive.

We have lifted our revenue forecasts, although this is offset largely by expense increases, and our pre-provision profit estimate has risen 1% in FY22 (as we assume +2.4% jaws) but fallen 1% in FY23. This is similar at the cash net profit line, with our impairment expense forecasts remaining broadly unchanged. We maintain our Accumulate recommendation with a $10.00 target price.

* Jaws refers to the extent to which the income growth rate exceeds the expenses growth rate, measured as a percentage.