It used to be an article of faith among investors that a bank was a safe investment, with earnings tied to steady growth in the home loan market and the prospect of a steady dividend flow. Not any more.
Evans & Partners has slammed Bank of Queensland in a review of its 2018/19 financial report, which was released earlier this month, and questioned whether recently appointed chief executive George Frazis is the right person for the job.
In a commentary titled “Transform or Die”, Evans & Partners says it expects the bank’s share price to fall from its current level around $9 to $8.
It says: “BOQ requires radical change. Yet we suspect it will receive the vanilla major bank revamp with some simplification, investment in digital capability and refinement of fulfilment processes.
“We think a small regional bank largely manned by executives from the [bank] oligopolies will struggle. The mindset is simply not right – more accustomed to defending rather than attacking.
“Its competitors are no longer the old banks, but rather the new legacy-free fintech offerings, which are sharper, better platformed customer-oriented enterprises that deliver more than a means to acquire shelter.”
Evans & Partners says low rates will crunch the bank’s margin and return on equity. The bank will continue to lose share to competitors and will have to spend heavily on technology.
It says: “BOQ has been discussed in the media and investment community as a potential player in regional bank consolidation. While cost synergies could be attractive, we think banking has moved on.
“The merger of two old world (technologically challenged) banks simply creates on old world (still technologically challenged) bank. BOQ needs a much more radical transformation… to avoid its Kodak moment.”
BOQ delivered a 2018/19 financial report that Frazis described as “disappointing”.
The bank suffered from slowing credit demand, higher regulatory costs and pressure on its margin from lower interest rates.
BOQ made a net profit of $298 million in the year to August – down 11 per cent on the 2017/18 result. Cash earnings were down 14 per cent to $320 million.
Net interest income was unchanged at $961 million and non-interest income fell 12 per cent to $128 million.
Non-interest income was hit by regulatory impacts on St Andrew’s Insurance. It stopped selling consumer credit insurance during the year.
Operating expenses rose 4 per cent to $550 million. The bank has a cost-to-income ratio of 53.5 per cent.
The loan impairment charge increased 80 per cent to $74 million. Loan impairments were 16 basis points of gross loans and expenses.
The net interest margin fell five basis points to 1.93 per cent. Return on equity fell 120 bps to 7.7 per cent (8.3 per cent on a cash basis).
The common equity tier 1 capital ratio fell from 9.3 per cent to 9.04 per cent.
The bank reduced the dividend by 9 per cent in the second half.
Lending grew by $937 million, compared with growth of $1.5 billion in 2017/18.
Frazis says the bank needs to change the way it does business. “I’ll be working closely with the board and senior executive leadership to develop and overarching strategy,” he says.
He says areas needing attention include weak retail banking performance, slow and complex lending processes, high operating costs and the “digital gap between BOQ and peers”.
A new mobile app and improved internet banking functionality has been developed for BOQ Specialist customers. In the retail bank, a new mobile app and digital banking platform will enter a pilot phase next year.
The bank is also working to tranform Virgin Money Australia into a digital bank. It expects to migrate transaction and savings accounts to a digital platform over the next 12 months.
The bank has acknowledged that it is having difficulty growing its branch network, some of which operates as a franchise system, because potential owner-managers are uncertain about the future of the industry.