Bank of Queensland
About the author:
- Author name:
- By Azib Khan
- Job title:
- Former Senior Analyst
- Date posted:
- 31 March 2017, 9:39 AM
- Sectors Covered:
- Bank of Queensland (BOQ) has reported 1H17 cash earnings of $175m, 6% lower than our forecast, with the miss largely due to lower revenue. An interim fully franked dividend of 38cps has been declared, in line with our forecast.
- The current share price appears to be building in upside from repricings which may not eventuate. BOQ's slow mortgage fulfilment times mean that it cannot simply match competitors on price and expect to grow at system levels.
- Whilst abating term deposit (TD) competition should contribute to Net Interest Margin (NIM) expansion in 2H17, TD competition may intensify leading into August where a large 12-month TD maturity tower looms for the sector.
NIM set to expand in 2H17 but we are cautious on 1H18 dynamics
After 12bps of NIM contraction over the last two half-years, the NIM now looks set to expand in 2H17 partly courtesy of abating term deposit competition. BOQ expects 5bps NIM expansion from 1H17 to 2H17, and we agree that this should turn out to be the case if marginal TD spreads remain unchanged from current levels. However, it should be noted that with a large 12-month term deposit maturity tower looming for the sector in August, TD competition will likely intensify around that time relative to current levels.
While the timing of potential TD competition intensification around July/August should not impact BOQ's NIM much in 2H17, it will have adverse implications for BOQ's NIM in 1H18.
Turnaround times are impacting margin/volume decisions
Many of BOQ's peers have repriced their home loan books over the last couple of weeks, and this has led to speculation that BOQ may also follow very soon, which would further support its NIM. Such speculation appears to have been built into BOQ's share price over the course of the last week. However, we do not believe it is likely that BOQ will reprice to the same extent as peers in coming weeks if it reprices at all. The reason is that BOQ's home loan price points looked to be sitting 20-30bps higher than its main competitors prior to the recent round of competitor repricing. The gap has now narrowed, allowing BOQ to be more competitive. If BOQ reprices to the same extent as peers then it will again risk home loan book contraction in 2H17.
Lower fee income and upward pressure on expenses
The positive impact of an improved NIM outlook on cash earnings is being offset by lower fee income and upward pressure on expenses. As the lower fee Clear Path variable rate home loan products grows as a percentage of BOQ's home loan book, downward pressure on fee income will remain. Non-interest income decreased from $88m in 2H16 to $80m in 1H17.
On the expense front, we believe BOQ will utilise any periods of rosy revenue growth to allocate more resources to improving mortgage fulfilment times and resolving back office process issues.
We have made the following changes to our cash EPS forecasts:
- 2.8% decrease in FY17F
- 0.6% increase in FY18F
- 0.6% decrease in FY19F
Our share price target increases slightly, but we maintain our Hold recommendation.
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