ROE ambition remains

1H23 RESULT

Need To Know

• Preannounced Result. Focus on margins and outlook.
• Net Interest Margins are up +4bps in half, guidance implies margins will fall 2H23
• ROE < cost of capital again highlights the strategic conundrum of BOQ.
• Long-term ROE guidance remains at 9.25%, vs market at ~7%. Retain Hold rating.

Preannounced result. Underlying cash earnings of $256m are in line with the market. Dividend 20cps 10% below market. $60m provisions to improve non-financial resilience, and $200m goodwill write-down. Market EPS estimates for FY23/24 have been downgraded by ~5% over the last week.   

The Result detail contains few surprises. We expect earnings revisions to be a neutral post today’s Result.

Outlook gives the market several areas that are likely to continue to act as a handbrake on the share price;

1. NIM guidance implies falling margins in 2H23
2. Compliance costs are likely to remain high, with BOQ actively engaged with APRA/AUSTRAC on building more robust internal controls. This part is for the $60m additional spend.
3. ROE target guidance of >9.25% by 2026, and cost-to-income guidance of <50% by 2026 look ambitious in our view.

With credit growth slowing across both housing and business lending, BOQ faces several challenges to growing returns. Underlying cost growth is likely to remain elevated given additional compliance spending; whilst revenue growth is coming under pressure, and likely higher bad debt expenses in both FY24 and FY25.

Combined, this points to a tougher path for ROE and cost-to-income improvement relative to BOQ’s ambition. Both targets are materially ahead of current market expectations.

The current CEO, Patrick Allaway (former Chairman of BOQ) is effectively only an “acting” CEO” in our view. A new CEO has been flagged for no later than the end 2024. This of course raises the question of accountability to the ROE and cost targets.  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, it is difficult to see how BOQ can outperform its peers.  

Priced at just 0.63x book value, with a dividend yield of >7.0% there is value emerging in BOQ. With pre-provision earnings likely to go backwards in FY24E, we retain our Hold rating.  Amongst the regional banks, we prefer Bendigo and Adelaide Bank (BEN).