Cleaning up after the storm

PRE-RELEASED 1H23 RESULT 

Need To Know

• Underlying cash earnings of $256m, in-line with market. Dividend 10% below
• $60m provision to strengthen risk management
• $200m Goodwill write-down from the 2007 acquisition of Home Building Society 

Good news first. The unaudited cash earnings result is in line with the market. Whilst we have no details around the drivers of the result, given the fears in the market on falling margins, and inline 1H23 cash number we think is a reasonable outcome

Now the bad news. A $60m provision to fund improvements in non-financial resilience is a clear surprise to the market. The bank already has a three-step program across 1) Risk; 2) Simplification; 3) Digitisation. BOQ assures us that the new $60m, to be spent over 3 years, is for additional enhancements across operations, AML/CTF, risk culture and compliance. Importantly, BOQ is not under any regulatory or customer remediation programs due to this spending.

Which is bad news for the dividend. 20cps vs 22cps expected equates to a 60% payout ratio. That’s in line with BOQ payout guidance, with BOQ electing to include the $60m provision in its earnings base for the calculation of the dividend

Goodwill write-down. $200m goodwill write-down relates to the $600m acquisition of Home Building Society (WA) in 2007. The reality is that with the share price having traded below book value over the entire 1H23 period, auditors have simply reflected the equity markets view of net assets. A lower asset base should add ~0.25% to ROE. 

BOQ will release the 1H23 Result on 20 April 2023.

Investment View

We rate BOQ a Hold. The clean-up of the BOQ post the sudden departure of CEO George Frazis in November 2022 continues. It is hard to draw any other conclusion that BOQ under his watch focused on revenue growth at the expense of operational excellence – be that risk management, digital or operations. The after storm clean up continues. 

With form Chairman and now CEO Patrick Allaway continuing to run the bank (whilst external search continues), it's far from clear exactly what the longer-term strategic agenda of the bank is, or for that matter what the earnings capability is. Allaway has committed to staying on as CEO until the end of 2024.

Against this backdrop, despite BOQ trading at just 0.66x book value, it is difficult to see how BOQ can outperform against peers. Amongst the regional banks, we prefer Bendigo and Adelaide Bank (BEN).