Bank of Queensland: Sustaining the home lending turnaround

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
15 April 2021, 11:00 AM
Sectors Covered:

  • Bank of Queensland (ASX:BOQ) has announced 1H21 cash NPAT of $165m, compared with our expectation of $166m and guidance of $163-166m. An interim dividend of 17cps, fully franked, has been declared in line with guidance and our expectation. The result had largely been pre-announced in February alongside the ME Bank acquisition announcement. The result is broadly in line with expectations at all levels.
  • While the Company is targeting positive jaws of 1% for FY21, we are forecasting positive jaws of 2% for this year.
  • Over coming months, we expect to see favourable revisions to consensus credit impairment charge forecasts and dividend forecasts for BOQ, and we consequently expect BOQ’s share price to increase towards our revised target price (login to view). Retain Add recommendation.

Home lending turnaround remains impressive

BOQ grew its mortgage book at 1.6x system mortgage growth in 1H21, and the Group has said that it is looking to accelerate housing growth further.

BOQ’s mortgage Net Promoter Score (NPS) improved to 3rd in 1H21, compared with 5th in 2H20 and 11th in FY19. The Group has said that application volumes have increased significantly through increased branch and broker productivity.

We note that the increased volume that BOQ is processing has resulted in slippage in ‘time to conditional yes’ from 1 day to 2 days for branch-originated PAYG loans; however, despite the slippage, BOQ’s response times remain sharp by industry standards.

If BOQ continues to execute on its transformation program, then increased middle office capacity, digitisation, automation and product simplification should result in BOQ processing increased mortgage volumes without compromising on response times.

Slow home loan turnaround times was an issue that plagued BOQ for years, and the improvement seen under CEO George Frazis is therefore very commendable.

Potential for credit loss provision release

BOQ’s credit impairment charge of $24m for 1H21 equates to 10bps of gross loans, and was not assisted by any sizable release of collective provisions (CP). BOQ is by and large holding onto the $133m of COVID-related CP overlays it raised over 1H20 and 2H20.

With the macroeconomic and asset quality outlook improving, we believe BOQ’s provisioning is looking increasingly conservative. We see potential for provision release for BOQ in 2H21F and FY22F.

However, we are not yet factoring in provision releases in our forecasts; rather we are assuming that the CP coverage of credit risk weighted assets (CRWA) will remain unchanged over our forecast period. While we believe our forecasts are conservative, our forecasts appear significantly more optimistic than consensus.

Investment view and changes to forecasts

Our cash EPS forecast for FY21 is broadly unchanged. We have increased our cash EPS forecasts by 8.9%/8.1% for FY22/FY23 respectively, largely due to higher home loan balance forecasts and lower credit impairment charge forecasts.

We retain an Add recommendation. Our target price, based on our DDM valuation, has changed (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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