Goldman Sachs tips 40pc tumble in BOQ earnings

Goldman Sachs warns of inflationary pressures, margin squeeze ahead of Bank of Queensland’s first-half result.

Band of Queensland CEO Patrick Allaway. Picture: Jane Dempster/The Australian

Goldman Sachs is tipping a 40 per cent tumble in Bank of Queensland’s first-half cash earnings, as inflationary pressures and competition in the lending market hit its bottom line.

The Brisbane-based lender is due to hand down its first-half results later this month, with the broker on Tuesday calling out the bank’s lending volumes, margins and its lengthy transformation program as potential risks to watch.

Goldman Sachs analysts led by Andrew Lyons expect the regional lender’s cash earnings to slump to $152m for the six months to February 29, well down on the $256m reported for the first half of 2023. The consensus forecast in the market is for cash earnings to hit $164m.

Warning it will be a “tough result”, the analysts pointed to rising expenses, telling clients: “We currently forecast first-half expense growth of 3 per cent half-on-half (or 7 per cent on prior corresponding period) and note that there remains a high level of execution risk around BOQ’s transformation initiative given banks’ have historically struggled to stay on budget when undergoing large scale transformation programs.”

As such, the analysts are “keen to get an update on how far BOQ has progressed with regard to automation, digitisation, and driving productivity, as well as where they currently sit in terms of investment spend budgeting and shrinking margins.”

BOQ’s net interest margin – a key profitability metric – was down 21 basis points to 1.58 per cent at the end of the last financial year, and Goldman Sachs expects it to have declined further over the past six months.

“We forecast first-half 2024 net interest margin to fall a further -6 basis points half-on-half to 1.52 per cent, and we will be looking for management commentary around i) their strategy for balancing growth and defending margin in this highly competitive environment, and ii) what actions can be taken to alleviate the pressures it faces from higher relative funding costs,” the analysts said.

“BOQ’s volume momentum remains weak, and while this is partly due to management’s efforts to protect profitability, BOQ’s 2023 NIM fell materially (notably below market expectations) and we do not expect margin pressures to ease given the current challenging environment (intense competition in both lending and deposits).”

The bank’s lending has also been well below system in recent months, growing about -0.3 times system on average over the period, they added.

“We currently forecast a loan book decline in the first half of 2024 of -1 per cent and will be interested to hear management commentary around lending outlook and strategy, particularly within business lending, a less competitive segment of the lending market, which peers are also focusing on.”

Goldman Sachs is also watching for an update on BOQ’s multi-year transformation program, with rising costs in focus.

“While the company’s transformation program is the right long-term strategy to deliver a strong and simpler bank, we believe it does leave the bank more exposed to inflation in third party distribution costs.

“We are concerned by the operational risks and costs pressures involved in undertaking such an initiative.”