BoQ shares hit 17-month high as ailing bank backs off from mortgage wars

Bank of Queensland will scale back its chase for market share in home loans to increase efforts on the more profitable business bank division as the struggling lender tries to climb out of its financial rut and turn its fortunes around.

The move comes after the Brisbane-based bank unveiled a 24 per cent slump in cash profits to $343 million in the 2024 financial year, weighed down by a highly competitive mortgage market as well as higher operating expenses and investments in technology and regulatory compliance.

The result was still better than feared, however, sending BoQ’s shares 6.5 per cent higher to hit a 17-month high on Wednesday. The shares closed the session at $6.68. The company declared a full-year dividend of 34¢, which amounts to a 65 per cent payout of its full-year cash earnings.

Bank of Queensland chief executive Patrick Allaway will home in on the the more profitable business bank division to help the mid-tier lender turn around its fortunes. Credit: Dan Peled

Chief executive Patrick Allaway said the mid-tier lender expected to return to stronger growth in home loans in the 2026 financial year with the roll-out of digital mortgages, but meanwhile, it would focus on the more profitable business banking arm.

“Margins [in business banking] are higher and returns are higher,” he said. “So you should expect as that portfolio continues to shift [towards business banking], that will be supportive of margins.”

The bank’s net interest margin – what it charges for loans compared with its funding costs, a key measure of profitability – decreased 13 basis points to 1.56 per cent, compared with the same period last year, but still came in better than expected.

While the banking sector’s mortgage wars had cooled for about a year, competition has quietly begun ramping up again as banks have started to offer cash-backs and cheaper home loan rates for new borrowers.

BoQ’s mortgage growth fell 2 per cent to $944 million in the last financial year, and its business lending grew 2 per cent to $323 million over that time.

Citi analyst Brendan Sproules estimated the bank needed to grow its revenue by 15 to 20 per cent over the next two years to hit its reduced return-on-equity target of 8 per cent. But Allaway would not be drawn on that analysis.

“We have high conviction that we can achieve our targets, and it’s not just business banking margins,” he said, pointing to the company’s program to boost productivity.

Bank of Queensland shares soared to a 17-month high on Wednesday.Credit: Dan Peled

Allaway is seeking to grow profits by slashing $250 million in costs through job cuts, increasing revenue from business banking, completing the digitisation of its retail banking platform and taking over its 114 franchised networks for $125 million.

He was confident that the acquisition of the owner-managed branch network would be completed on time (by March), but told investors the bank had received a dispute notice from some franchisees who are angry about the way the process has been managed.

“This is a difficult decision for them, and it’s the right decision for BoQ,” Allaway said. “We are addressing [...] structural market shifts, changing consumer habits. There’s an enormous complexity in this distribution structure and an unsustainable economic model for both us and them. So we are making decisions that are in the best interests of our stakeholders.”

Citi analyst Sproules said the bank was reaching its target of keeping costs broadly flat in financial year 2025, which was a year early, predicting a “significant deceleration” from last year’s 6 per cent cost growth. The market had been expecting costs to continue climbing 3 to 4 per cent, he said.

”We expect the market to focus on management’s confidence to achieve flat costs in [financial year 2025] despite a number of headwinds,” the analyst said. The pressure on business banking to drive revenue growth and the outlook for the quality of its loan book given the low charges for bad loans in the second half were other factors investors would be looking at, he said.

Loan impairment expenses, asset writedowns as well as commercial arrears all fell in the second half of 2024 even though inflation and high interest rates continued to hurt mortgage holders, with a rise in those who are 90 days behind in their repayments.

BoQ is expecting the Reserve Bank to begin cutting interest rates in the second half of 2025. Allaway said while the economy remained resilient and unemployment relatively low, parts of the community were doing it “really, really tough”.

“The whole industry is seeing increased arrears and hardship,” Allaway said. “That has stabilised a little bit in the second half for us. We do think that the tax cuts have provided some buffers to consumers.”

BoQ shares closed 6.5 per cent higher at $6.70.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.