Bank of Queensland
About the author:
- Author name:
- By Azib Khan
- Job title:
- Former Senior Analyst
- Date posted:
- 11 October 2016, 12:24 PM
- Sectors Covered:
Margin likely to continue contracting
The key area of disappointment in the FY16 result was net interest margin (NIM) contraction of 7 bps from 1H16 to 2H16. NIM contraction was the result of several margin headwinds, with the main ones being:
- wider term deposit spreads;
- higher wholesale funding costs;
- increased hedging costs; and
- a lower yield curve impacting the margin on capital and interest-rate-insensitive deposits.
Of these headwinds, the only one showing signs of abating in 1H17 is increased cost of hedging. We expect the other headwinds to continue to feature in 1H17. Although home loan repricing undertaken by BOQ in August will provide some assistance to NIM in 1H17, we do not expect this to be enough to offset the headwinds.
Term deposits bite harder with each rate cut
With the official cash rate (OCR) now at 1.50% signs are emerging that term deposit rates across the sector may generally be close to a floor. The last OCR cut in August saw many term deposit rates either increased or unchanged. BOQ has a greater reliance on term deposit funding than the major banks, so when the majors step up competition in this space, it hurts them less than it hurts BOQ. Another OCR cut may lead to wider term deposit spreads which would place further pressure on BOQ's NIM.
Revenue growth pressure calls for disciplined cost management
We expect revenue to decrease from FY16 to FY17 as a result on NIM contraction and we expect BOQ to deal with this through disciplined cost management. Our expectation is consistent with BOQ guiding to 1% growth in underlying operating costs from FY16 to FY17. However, in the event that BOQ decides to apply for advanced accreditation for regulatory capital purposes early next year, operating costs may exceed our FY17 forecast.
Special dividend a possibility in 1H18
If revisions to the Standardised Approach for credit risk fall in BOQ's favour, then we calculate that there is potential for a special dividend of up to 80 cps to be paid in 1H18.
Bank of Queensland (BOQ) is currently offering an attractive fully franked FY17 dividend yield of 6.8%, but the current share price is higher than our 12 month target price based on our dividend discount model valuation.
We re-initiate coverage with a Hold recommendation.
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