Cautious response to BOQ five-year plan
Bank of Queensland's new business strategy, outlined in an investor briefing last week, has had a lukewarm response. The view of one leading analyst is that bank faces significant execution risk and will struggle to meet its targets.
In a note to clients on BOQ's strategy briefing, Macquarie Securities said the bank appears to be heading in the right direction but, given the complexity of its legacy systems, it will be a long and uncertain journey.
"BOQ's medium term targets will be difficult to achieve in the current environment. Given the challenging revenue outlook and execution risk we remain cautious on BOQ," Macquarie said.
The long-term strategy outlined by BOQ chief executive George Frazis last week is largely based on digitisation.
Frazis said: "BOQ will deliver a digital bank of the future with a personal touch. It will be a comprehensive digital transformation, through implementation of digital and cloud-based technologies, starting with the investment in the Virgin Money Australia new digital bank that is well underway."
Frazis is also promising to focus on niche segments that offer the best opportunities for growth. These niches include Virgin Money Australia and BOQ Specialist
The bank will maintain a capital investment program worth around A$100 million a year, reducing to around $80 million in 2022/23 and $60 million the following year.
Frazis committed to grow home lending and business lending above system, producing positive jaws in 2020/21, target return on equity of 8 per cent in 2021/22 (increasing to 9 per cent by 2022/23) and growing the dividend from 2020/21 onwards.
Macquarie said: "We were pleased that management supplemented the strategic outlook with financial targets, albeit in our view that targets appear optimistic in the current environment.
"We continue to see margin pressure stemming from mortgage competition and front-to-back book normalisation, as well as the impact of lower rates on the deposit book.
"If our expectations are broadly correct, BOQ would need to grow volume by around 20 per cent to achieve its implied revenue targets, which we see as unrealistic without sacrificing margin."
Macquarie also argues that BOQ will have to review its dividend policy. Its most recent dividend represented a payout ratio of 83.8 per cent but Macquarie says a sustainable level is around 60 to 65 per cent.
Macquarie has set a 12-month price target of $7.75 a share on BOQ stock. The current price is around $7.20 - down from a recent high of $9.56 last September. It rates the stock 'neutral'.