Bank of Queensland eyes strategic initiatives as profits slide continues

Bank of Queensland has flagged ‘bold’ initiatives under consideration to improve shareholder returns, as interim cash profit and dividends decline.

Bank of Queensland CEO Patrick Allaway at the AGM. Picture: NCA NewsWire / John Gass

Bank of Queensland flagged “bold” strategic initiatives under consideration to improve shareholder returns, as it reported a 33 per cent decline in cash profit and lower dividends in the first half of the year, with competition, inflation and higher funding costs hurting margins.

Unveiling the result, chief executive Patrick Allaway flagged further “bold” strategic moves the bank is considering to address the structural challenges the lender is facing.

Those include a change in its business model, pursuing a bolder simplification program, and capital optimisation initiatives, he said. Mr Allaway declined to clarify whether the possible strategic initiatives included selling off parts of its business portfolio.

In October 2022 BOQ said it was working to improve its cost to income ratio (CTI) – which at the time was around 55.7 per cent – to less than 50 per cent by the 2026 financial year. It was also targeting an improvement on return on equity (ROE) from 8.4 per cent to above 9.25 per cent in the same time frame.

On Wednesday, the lender unveiled a ROE of 5.1 per cent for the first half of the 2024 financial year, a deterioration from the 6.2 per cent posted in the pervious half and far from its target.

It also said its CTI ratio had been 65.9 per cent in the half, up from 61.3 per cent in the second half of 2023.

“We are addressing new pathways and additional initiatives to ensure that we meet those targets,” Mr Allaway said.

“We certainly recognise that we need to lift our way and it’s not sustainable at current levels. We will continue to look at our portfolio of assets to ensure we get appropriate returns”.

The bank has stepped out of the mortgage market, with home lending volumes shrinking by $411m during the half, as Mr Allaway says the bank is still not “getting an acceptable economic return.”

“To address that, we are lowering our cost to serve and our cost to serve will be at the low end of our peers, if not lower, once we deliver on our digital bank.”

BOQ also wants to grow its business banking book in key industries such as among medical practices, where it says it has competitive advantages. It also plans to grow non-interest revenues through its third party credit card and insurance business.

Regional banks like BOQ are facing higher funding costs than major banks, increasingly tougher capital requirements and, just like the majors, are under pressure to upgrade their technology to be able to compete for customers and protect their security.

BOQ said it was on track to deliver $200m in productivity benefits by 2026.

It has cut over 220 full time employees from its ranks, reduced about 6000 square meters of corporate property space and consolidated its five contact and support centres into a single shared service model for all its brands.

It expects its digital bank will significantly reduce costs and is planning to launch digital mortgage capabilities in the second half of the year.

Cash profit for the six months ending February 29 fell to $172m, compared to the $256m reported for the first half of 2023. That was also lower than the $194m reported in the previous half.

That result was nonetheless better than the Visible Alpha consensus forecast for an interim cash profit of $163m, as bad debt charges came below analysts forecasts.

“Earnings continue to reflect structural disadvantages, a highly competitive market across both lending and deposits, cost inflation and investment in our transformation,” the company said in a presentation accompanying the result.

Operating expenses grew 6 per cent to $524m, reflecting inflationary pressure and investment in risk, compliance and technology, the company said.

Last year, BOQ was chided by banking and financial crime regulators for having subpar compliance and risk systems. The lender has submitted the first phase of its remedial action plan, which has been approved by both APRA and Austrac.

Analysts pointed out the relatively high proportion of investment spend that BOQ accounted for as an “asset” rather than as an expense helped keep total expenses lower than expected.

Net interest margin (NIM), a key measure of bank profitability measuring how much interest on loans exceeds what it pays to depositors, fell by 24 basis points to 1.55 per cent when compared to the first half last year.

The bank blamed competition and higher funding costs for the decline and said it was “seeking to address potential structural margin decline.”

Strategic decisions under consideration include a “shift in our revenue mix, a further simplification of our operating structure and capital optimisation initiatives,” Mr Alloway said.

When asked if the potential strategic initiatives being considered involved selling off or divesting certain parts of the company’s business portfolio or assets, Mr. Allaway declined to provide any details or confirm whether divestments were on the table.

“I’m not going to speculate on that,” he told analysts at the briefing. “We are looking at multiple opportunities to pursue additional pathways to get to where we need to get to. If we have anything to tell you, we’ll certainly tell you at the appropriate time.”

The highly watched NIM metric was actually expected slightly lower at 1.53 per cent. But the lender drew benefits from customers rolling over from low, fixed-rate home loans into variable-rate loans with higher interest rates. This beneficial effect outweighed the negative impact on margins from deposits and mortgage competition, said E&P Capital banking analyst Azib Khan.

Mr Khan said the overall profit beat was “low-quality” as it was driven by lower bad debt charges and capitalised expenses, while revenues and pre-provision profit had missed expectations.

“With the above points in mind, and BOQ’s balance sheet shrinking, it is difficult to be upbeat about BOQ’s outlook,” he said.

UBS analyst John Storey also noted “obvious” structural headwinds that were impacting BOQ margins “costs and their ability to effectively price and compete (grow) in a higher interest rate environment.”

Mr Storey further noted the bank had about 14 per cent of its $27bn wholesale funding stack in need to be refinanced over the next six months.

Dividends declared fell to 17c per share, down from 20c last year, in line with expectations.

Bank of Queensland shares jumped as much as 8.3 per cent to $6.28 each on Wednesday, up from a three-month low of $5.80. They lost some ground in midafternoon to close up 5.2 per cent at $6.10.

“In the context of a muted view around improvements in future profitability, even at a 40 per cent discount to reported book value, BOQ (shares) could remain in a holding pattern with risks to the downside,” Mr Storey said.

Originally published as Bank of Queensland eyes strategic initiatives as profits slide continues