Bank of Queensland: Retaining Our Fair Value After New CEO Gets Some Bad News Out of the Way

Ahead of reporting first-half fiscal 2023 results next week. Bank of Queensland BOQ announced an AUD 200 million goodwill write-down plus an AUD 60 million pretax provision to cover costs of uplifting nonfinancial risk controls over the next three years. The latter includes systems and processes to manage operational risk (cybersecurity, fraud, human error, and so on), risk culture, and compliance with anti-money laundering laws. The goodwill write-down is of little consequence, in our view, but the spending on risk is noteworthy as the board highlighted it when booting the CEO late last year. The costs are expected to be one-off, and in our view “catch-up” investments. Pressure is likely coming from regulators, with management noting internal and external reviews had identified areas of weakness. Given how costly breaches of anti-money laundering law have been for Commonwealth Bank and Westpac in recent years, it is money well spent.

Operationally, it announced first-half net profit after tax of AUD 256 million, softer than we expected, up around 7% on the second half of fiscal 2022. We expect this is due to net interest margins, or NIMs, not recovering as much as we hoped,given intense competition for both customer deposits and home loans. The no-moat-rated bank is far more reliant on term deposits and wholesale funding than its peers, and the margin benefit from holding low-cost deposits is less material.

We lower our fiscal 2023 NIM forecast to 1.80% from 1.85%, implying a 5-basis-point improvement from the second half of fiscal 2022. We maintain our medium-term NIM forecast at 1.85%, including funding cost synergies from Me Bank. Our fiscal 2023 profit forecast is lowered around 9%. We leave operating cost and bad debt assumptions unchanged pending clarification with the result. While negative, the change to short-term earnings and one-off cost of the risk program is not sufficiently material to move our AUD 8.80 fair value estimate.