Tag: Bank of Queensland

The Bank of Queensland released their 1H17 results today. Interim cash earnings after tax were $175 million for the six months to 28 February 2017, down 2 per cent on the prior corresponding period. Statutory net profit after tax was down 6 per cent to $161 million.

It is not pretty, though there may be some upside in the the second half, depending on potential out of cycle uplifts to support net interest margin. Competition has been tough, and intense pressure on mortgage pricing plus higher deposit costs were not fully offset by out of cycle uplifts. In addition, as a regional player, they have to hold more capital than the majors, which costs. Whether moving towards advance capital metrics will help is a moot point. Nevertheless, the BOQ Board  maintained a fully franked interim dividend of 38 cents per share in line with the prior half.

Net Interest Margin was down 5 basis points on the prior half to 1.85%, they are looking to get back to 1.89% in second half.

BOQ Managing Director and Chief Executive Officer Jon Sutton said “We have prioritised margin and credit quality over growth in this half, in what has been an intensely competitive period not just in lending but also in retail deposits.”

The cost to income ratio was up 100 basis points to 47.4%. Underlying expenses fell, and there will be an ongoing focus on efficiency.

BOQ’s asset quality was again a highlight with Loan Impairment Expense down 25 per cent to $27 million, or 13 basis points of gross loans.

BOQ’s strong capital position improved, with the Common Equity Tier One ratio up 29 basis points over the half to 9.29 per cent. They are pushing towards advanced accreditation.

A quick look at their home lending shows settlements were down, but they said recent application volume were up, not investment lending, and they have the latest APRA guidance on expense and and income criteria in place. As competitors gear up to follow the revised guidelines, the bank expects stronger volume flows.

The geographic mix changed somewhat, with a focus on NSW, and growth in the “wobbly” WA market.

30 Day Past Due are 0.98%.

The LVR splits reflect industry trends, but the share of loans via brokers is still lower than it might be.

They appear to have low exposures to apartment construction, and regional housing.

BOQ announced a 1% uplift in Cash Earnings to $360 million for the 2016 financial year and increased Statutory Net Profit after Tax 6% to $338 million. Cost management saved the day, as net interest margins were squeezed, and lending growth slowed in the second half.

Lending grew 5% or $2.2 billion at 0.8x System, with gross loans and advances totalling $43.2 billion, though this growth was moderated in the second half with the strategic shift to preserve margin and target deposit acquisition through retail channels. Lending growth was entirely funded by the 8% growth in customer deposits, which resulted in a 2% uplift to the deposit to loan ratio to 68%.

Loan growth moderated significantly in the second half in light of heightened competition in key markets, the prudential cap on investment housing and the strategic shift to preserve margin over asset growth with an emphasis on deposit gathering. The strategy of targeting niche customer segments is delivering results with BOQ Specialist, BOQ Finance and niche segments in BOQ Commercial demonstrating solid growth momentum. The Group’s maturing broker presence combined with the new Virgin Money mortgage offering, and a more productive branch network, supported by the digitisation investment being progressively rolled out, should continue to deliver success from the multi-channel strategy.

The housing portfolio grew 5% over the year. Above system growth in the first half was offset by a slight contraction in the second half as the business focused on margin preservation and deposit gathering.

The broker channel continued to expand throughout the year, growing the accredited broker base and aiding BOQ’s geographic footprint with 84% of growth in this channel outside of Queensland.

Growth through the broker channel moderated in the second half, with greater price sensitivity to new business acquisition pricing compared to other channels. Despite the slower volumes through the second half, the broker network still contributed 23% of total retail housing settlements during the year, albeit with settlement volumes reducing to 19% of total retail housing settlements in the second half.

The launch of the Virgin Money mortgage product in May provided another channel for BOQ to engage with a new customer demographic. The Virgin brand attracts a different customer, more affluent and likely to be metro-based with a strong propensity to engage through digital channels. Virgin Money has engaged with complementary broker groups PLAN and FAST with over 800 brokers now accredited. Virgin Money is about to launch with two additional large broker groups in the coming months. This could provide an uplift in performance in 2017.

Net Interest Margin contracted 3bps over the year to 1.94%, with the second half margin declining to 1.90%.

The highly competitive rates in lending and deposits across the industry have translated into reduced new business margins and increased levels of retention repricing of existing customers. Further, the confluence of market dynamics in wholesale funding and hedging costs, and the low yield environment, accelerated the margin decline in the second half.

Repricing actions during the year positively impacted NIM by 9 basis points. Front to back book repricing impacts and retention repricing activity had a 3 basis point contractionary impact on NIM in the half, similar to the impact in the prior half. The competition for funding intensified over the second half at the same time as the yield curve contracted, with a 4 basis point impact to NIM. Half of this impact was evident in retail liabilities as increased competition meant absolute term deposit rates did not fall in line with movements in the yield curve. The majority of this impact emerged in the last quarter. A further 2 basis points of impact occurred in wholesale funding costs. The low yield curve continues to impact returns on BOQ’s replicating portfolio, covering the investment profile of BOQ’s capital and low cost deposits totalling $4.8 billion at year end and causing a 4 basis point reduction in the half.

Operating expenses increased 4% on the prior year to $520 million.

This included a $10 million uplift in amortisation expense as a number of strategic initiatives have been delivered, together with costs associated with the newly launched Virgin Money mortgage offering ($3 million). The benefit of the $15 million investment in organisational operating model changes announced to the ASX in February will be fully realised in line with stated targets, with further opportunities identified. This includes the cost of the operating model restructuring program of $15 million, with a similar level of one-off expenses in the prior year. The result also includes the uplift in intangible IT asset amortisation ($10 million), as the digitisation program and key strategic initiatives have been delivered.

Employee numbers have decreased 2% over the year as a result of the organisational operating model reshaping. Investment has been made to support the launch of the Virgin Money mortgage product and to support the channel diversification strategy. BOQ continued to optimise the branch network with a reduction in the branch footprint of 23 locations across the year to 211 branches, mainly reflecting consolidations and retirements.

Further improvement in asset quality was evident across the portfolio.

Loan impairment expense reduced by 9% to $67 million in 2016, or a reduction of 2bps to 16bps of gross loans and advances. The second half result was 14bps of gross loans and advances.

BOQ achieved positive improvements in credit quality metrics across the portfolio compared to the prior year and continues to maintain higher provisioning coverage.

However, 30 day delinquencies rose in the critical home lending portfolio.

During the year BOQ continued to strengthen its balance sheet with strong capital generation enabling an increase in the Common Equity Tier 1 ratio (‘CET1’) to 9.0%, which positions it well for evolving regulatory capital requirements.

APRA requires ADIs to maintain a minimum 100% LCR. The LCR requires sufficient High Quality Liquid Assets to meet net cash outflows over a 30 day period, under a regulator defined liquidity stress scenario. BOQ manages its LCR on a daily basis with a buffer above the regulatory minimum in line with the BOQ prescribed risk appetite and management ranges. BOQ’s average LCR remained consistent over the August quarter at 129% (31 May 2016 quarter: 129%).

The Board has determined a final dividend of 38 cents per share fully franked, with the total dividends of 76 cents for the year, an increase of 3% on the 2015 financial year.

BOQ today announced interim cash earnings after tax of $179 million for the six months to 29 February 2016. This was below consensus of $186m thanks to lower revenue grow, despite good cost control, and lower provisioning. However, the announcement today of lifts in home loan pricing will assist going forwards. We will see if other lenders follow, as we think they might.

Statutory profit after tax rose 11 per cent to $171 million on the prior comparative half.

On a cash basis, BOQ’s basic earnings per share were up 5 per cent on the prior half to 47.8 cents. Return on average tangible equity increased 20 basis points to 14 per cent, and return on average equity was up 20 basis points to 10.5 per cent.
Managing Director and CEO Jon Sutton said the result was driven by above system housing lending growth and strong asset quality levels. The Bank also maintained its Net Interest Margin and kept costs under control.

The BOQ Board has determined to pay an interim dividend of 38 cents per share fully franked, an increase of 2 cents on 1H15.

Loan Growth – BOQ achieved above System loan growth of $2 billion (1.2x System) for the half predominantly as a result of its decision to diversify distribution channels. Housing mortgage growth for the half was $1.7 billion (1.6x System), driven by strong growth through BOQ Specialist and the broker network.The third party strategy has allowed for home loan growth beyond QLD.

Growth in these channels also improved the Bank’s mortgage portfolio diversification outside of Queensland and increased its lower LVR lending relative to the portfolio. They did not disclose the mix between investment and owner occupied loans. According to recent APRA data BOQ has one of the highest proportions of investment loans among the banks.

Commercial lending growth was 6 per cent (0.5x System) for the half as it maintained a focus on credit quality and appropriate pricing for risk within its targeted niche segments. BOQ Specialist’s commercial loan book grew 14 per cent to $2.4 billion year on year while the BOQ Finance portfolio grew 1 per cent (0.6x System).

Net interest margin – BOQ maintained its 1H16 net interest margin at 1.97%. Benefits from repricing initiatives during the half were partially offset by front book and retention pricing. The targeted loan growth in new channels has resulted in a better quality loan portfolio that will support longer term balance sheet durability. BOQ has increased its variable home loan interest rates by 12 basis points for owner occupied loans and 25 basis points for investor loans, effective from 15 April 2016.

The underlying credit quality of BOQ’s portfolio remained strong in 1H16. This reflects the Bank’s continued focus on prudent lending and risk management practices, as well as the low interest rate environment. Total loan impairment expense was flat on the prior comparative period at $36 million (1H15:$36 million). Total impaired assets across retail, commercial and BOQ Finance fell 7 per cent to $240 million (1H15: $259 million). Home lending arrears rose a little. Whether this is just a seasonal uptick, or something more systemic, we will see.

Costs – BOQ’s cost to income ratio for the half was 46.4 per cent including one-off restructuring costs of $7 million pre-tax. Excluding one-off costs, the cost to income ratio was 45.1 per cent with underlying cost growth of 3.8 per cent from the prior comparative half, in line with market guidance provided at the end of the 2015 financial year. The Bank continues to focus on its goal to reduce its cost to income ratio to the low 40s in the years ahead.

Capital and Funding – Customer deposit growth of $1.3 billion helped BOQ maintain a stable deposit to loan ratio of 66%, with a slight fall in the proportion of long-term funding via securitisation. The ratio of long-term to short-term funding improved a little.

BOQ’s Common Equity Tier 1 ratio decreased 11 basis points to 8.80 per cent during the half, driven by strong loan growth in the second quarter without a full period earnings benefit.

BOQ said this ratio remains solid compared to peers and positions BOQ well for any regulatory changes to capital or risk weighting requirements. BOQ does not use IRB capital methods, so is not necessarily under the same pressure to lift capital ratios.

BOQ positioned well for the future –  Mr Sutton said BOQ’s progress against its strategic objectives positioned it well to deliver its goal of EPS outperformance over the longer term. Australia’s transition away from a resources led economy is ongoing. This presents good opportunities for expansion in the niche segments BOQ is targeting. Mr Sutton said he was also optimistic that the future regulatory environment would provide additional opportunities for standardised banks like BOQ.