Earnings clouds gather for Bank of Queensland
Flat earnings, a healthy but weaker capital position, and continued strength in asset quality were among the key takeaways from Bank of Queensland's full-year 2018 result.
Flat earnings, a healthy but weaker capital position, and continued strength in asset quality were among the key takeaways from Bank of Queensland's full-year 2018 result.
However, management's warning of challenging times ahead was hard to ignore, says Morningstar director, equity research John Likos.
Likos has maintained his $10.80 fair value estimate for Bank of Queensland (ASX: BOQ) following the result but is forecasting a falling dividend payout ratio toward 73 per cent in financial year 2023 from 80 per cent in financial year 2018.
Shares in Bank of Queensland were up more than 4 per cent up in early trade Thursday but have since dropped back pre-reporting levels. At 3pm on Monday, shares were trading at $10.65.
BOQ posted a full-year cash profit of $372 million on Thursday, down 2 per cent on FY2017. Net profit after tax for the regional lender fell 5 per cent to $336 million.
Likos says his greatest concern for the banking industry, BOQ included, remains the generation of future earnings growth, which he says in the face of a potentially normalising non-performing loan environment could "paint a particularly unpleasant outlook for the sector."
Other key risks, Likos says, include a weaker residential property market and regulatory risks stemming from the banking royal commission.
Likos forecasts that earnings pressure will continue in future years through increased investment in information technology as the lender moves towards being a tech-savvy, digital enabled institution.
"Although this should bring long-term cost efficiencies, the near to medium term will likely see heightened operating expenses in the form of information technology and amortisation as a result, albeit offset somewhat by lower employee costs," Likos says.
Positives from the result include the 5-basis point increase in net interest margin to 1.98 per cent, driven by funding costs and asset pricing.
"In other words," Likos says, "a greater proportion of funding was made up of deposits during the year relative to the more expensive wholesale funding alternative, while loan rate repricing also reaped benefits."
The board maintained a fully franked dividend of 38 cents per share.
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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