‘Clear pathway’ to improve Bank of Queensland shareholder returns

CEO Patrick Allaway says there is ‘clear pathway’ to improved returns as he shrugged off concerns about buying back the bank’s franchised branches and delivered a better-than-expected annual profit.

Investors applaud BOQ’s full-year results handed down by CEO Patrick Allaway. Picture: Jane Dempster

Bank of Queensland boss Patrick Allaway is confident the lender has a “clear pathway” to improved shareholder returns, as he shrugged off concerns about buying back the bank’s franchised branches and delivered a better-than-expected annual profit.

The Brisbane-based bank reported a 24 per cent slump in cash profit to $343m for the year ended August 31, as it overhauled its under-pressure business model, in a result that beat analyst expectations. Net interest margins – what the bank earns on loans less funding and other costs – edged up in the latter half to 1.57 per cent and BOQ flagged stable net interest margins in this half.

Mr Allaway remains cautious, however, on the geopolitical climate given several conflicts are raging offshore and expects the Reserve Bank to cut interest rates three times in 2025, buoying the economy’s performance.

“The big uncertainty is the geopolitical volatility that we’ve got... because that could be very disruptive and cause obviously confidence issues going forward and no one knows where that may go,” he said in an interview. “In terms of the economy, we’ve obviously had the tax cuts come through, I think they’ve been helpful in supporting consumers. “We do expect to see economic recovery next year, once rates cut start to come through.”

Bank of Queensland’s branch in Mount Pleasant.

Mr Allaway told analysts and investors on Wednesday he was optimistic on BOQ’s outlook given the bank’s simplification drive, which includes cutting hundreds of jobs and converting franchised branches to corporate ones, which has triggered angst among some branch owners.

“Transformations of this scale are difficult,” he said, noting growth in business banking and a shift to lower-cost digital channels would help to underpin BOQ’s growth. “We have high conviction in our strategy.” Mr Allaway signalled costs would be “broadly flat” across this financial year.

BOQ’s shares surged 6.5 per cent to $6.68 on Wednesday, marking their highest level in almost 18-months and bucking a 0.4 per cent decline in the S&P/ASX 200.

Citigroup analysts led by Brendan Sproules labelled BOQ’s result “slightly better” than expectations, helped by a benign loan losses even as interest rates remained higher for longer.

“The bottom line was boosted by a very low bad debt charge of 2 basis points/GLA (gross loans and advances), seeing underlying profit a more modest circa 1-2 per cent beat,” they said.

“We expect the market to focus on management’s confidence to achieve flat costs in FY25.”

CLSA analyst Ed Henning said BOQ’s net interest margin exceeded market expectations and benefited from a shift away from lower-margin home lending.

But Macquarie Group’s analyst Victor German called out BOQ’s stock as expensive.

“Even if BOQ can achieve better cost performance than expected, leading to upgrades, the stock remains expensive, trading at a circa 20 per cent premium to Bendigo and Adelaide Bank,” he said.

In a controversial step, BOQ is converting all of its franchised branches to corporate ones by the end of March. That move has led to a standoff between some branch owner-managers and BOQ, with more than half of the 114 owners sending a letter to the board to take issue with valuations proposed in the buyback program.

Mr Allaway said the bank had received a dispute notice regarding the program from owner managers that were “not comfortable” with the change and selling their branch back to BOQ.

“Our owner managers signed up to franchise agreements with us... We’re complying with the terms of those agreements and the franchise code,” he added. “In fact, we’ve been more generous in our (buy back) offer with respect to some terms, and we’re just going to continue to act in good faith with them.”

Mr Allaway noted the bank expected “some attrition” as it pushed ahead with the plan.

BOQ’s net interest income fell 9 per cent annually for 2024 as it pulled back two of its brands from mortgage broker channels. Non-interest income, which reflects fees and other revenue, fell 4 per cent for the year.

Operating expenses rose 6 per cent annually.

Mr Allaway said he was restructuring and digitising the retail bank to navigate a commoditised market, particularly in mortgages.

He noted that the conversion of owner-managed branches to corporate ones would aid margins, but noted the bank wouldn’t provide guidance on that measure for the second half.

Mr Allaway said BOQ wrote its first digital mortgage in August, but it was still in a testing phase and the bank wouldn’t see benefits from that product until late 2025.

BOQ is shifting more toward business banking and lending where it sees more favourable margins and returns and has embarked on a hiring drive to employ about 40 bankers in that area.

That comes, however, against the backdrop of the bank cutting 400–600 roles across its operations as part of efforts to contain costs and simplify its structure.

“We are being very disciplined about the way we use our capital,” Mr Allaway said.

BOQ in August cut its 2026 return-on-equity target to 8 per cent. For the year ended August 31, the bank’s return-on-equity was 5.7 per cent.

“The initiatives that we are progressing will give us a material uplift in return-on-equity,” Mr Allaway said. “We are not comfortable with 8 per cent... We have a number of programs and strategic initiatives that we’re pursuing to continue to grow that.”

Statutory net profit more than doubled to $285m, given fewer lumpy items were included in BOQ’s annual accounts.