Bank of Queensland (ASX:BOQ)
Current Share Price: $7.38 | Target Price: $7.89 | April 2025
Executive Summary
Bank of Queensland (BOQ) delivered solid performance in 1H25 with cash earnings after tax of $183 million, up 6% year-over-year, demonstrating resilience in a challenging banking environment. Net interest margin remained stable at 1.57% (+2bps YoY) while the cost-to-income ratio improved to 65.6% (-30bps YoY).
The Group is at a critical inflection point in its transformation journey to become a "simpler, specialist bank." Several strategic milestones have been successfully delivered, most notably the March 2025 conversion of all 114 Owner Managed branches to a corporate model, which management expects will generate a material 12bps uplift to NIM in 2H25.
BOQ's strategic shift toward higher-returning business segments is evident in its balance sheet composition, with housing loans contracting by 3% while commercial lending grew by 9%. This deliberate portfolio rebalancing is already yielding results, with the Business Bank delivering a 20% increase in cash earnings to $140 million, contrasting with a 10% decline in the Retail Bank to $45 million.
With a strong capital position (CET1 ratio of 10.87%) and disciplined strategic focus, BOQ is positioned to progress on its transformation journey while working toward its FY26 targets of 8% ROE (currently 6.2%) and 56% cost-to-income ratio (currently 65.6%).
Key Outlook Points
- Branch conversion expected to deliver material 12bps NIM improvement, providing significant near-term catalyst for 2H25 performance
- Housing lending contraction to peak in FY25 before stabilizing as digital mortgage platform (launching 2H25) gains traction
- Business lending to maintain growth momentum in specialized segments (healthcare, agriculture, owner-occupied commercial property)
- Progressive improvement in cost-to-income ratio toward 56% target by FY26 through $250m productivity initiative
- Economic outlook cautiously positive with improving household disposable income and strong labour market, though geopolitical uncertainties pose downside risks
Valuation Summary
Our base case valuation of $7.89 per share represents 17.8% upside to the current price. This valuation is derived using a weighted average of three complementary methodologies: dividend discount model, ROE-based approach, and P/E multiple method.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $7.89 |
| DCF - Bull Case | $9.61 |
| DCF - Bear Case | $5.37 |
| P/E Multiple - NTM | $7.80 |
| ROE-based | $7.70 |
| Implied Valuation Range | $7.40 - $8.25 |
| Current Share Price | $6.70 |
| Up/Downside to Base Case | +17.8% |
**Note that the current share price was captured and recorded as of $6.70, occurred prior to BOQ's report last week. BOQ's closing price as of the 22nd of April 2025 was $7.25.
Key explicit assumptions in our base case include:
- Initial dividend of 18 cents per half-year growing progressively to 25 cents by 2H28
- NIM expansion from 1.57% to 1.75% by FY28 (driven by branch conversion and portfolio optimization)
- Cost-to-income ratio improvement from 65.6% to 54.8% by 2H28
- Loan impairment expense normalization from 1bp to 10bps by 2H27
Key Tailwinds
Business Banking Momentum: Strong performance with cash earnings growth of 20% year-over-year, driven by 9% growth in commercial lending focused on specialised sectors. The segment's efficiency is notable with a cost-to-income ratio of 44.8% comparable to major bank metrics.
Branch Conversion Benefits: The March 2025 completion of branch conversion to the corporate model is expected to deliver a 12bps positive impact to NIM. This structural change provides greater control over customer experience and operational execution while creating growth corridor opportunities.
Digital Transformation Progress: 41% of retail deposit customers now on digital platform with the first phase of ME Bank migration completed (140,000+ customers). Digital mortgage platform ready for market launch in 2H25 following successful piloting.
Economic Recovery: Australian economy showing improvement with rising household disposable income and resilient labour market. Anticipated easing cycle should improve loan affordability while potentially stimulating credit demand.
Key Headwinds
Transformation Execution Risk: Complex multi-year transformation with significant milestones still ahead. Failure to execute effectively would jeopardize anticipated benefits including the pathway to 8% ROE and 56% CTI targets.
Competitive Pressure: Intense banking environment dominated by major banks with scale advantages. This competitive pressure is evident in BOQ's home lending performance (-13.53% YTD vs. system growth of +5.41%).
Retail Banking Inefficiency: Continues to underperform with cash earnings declining 10% year-over-year and an extremely high cost-to-income ratio of 82.7%, creating a substantial drag on group returns.
Credit Quality Normalization: Current metrics are exceptionally strong (loan impairment expense at 1bp of GLA) but represent a historically low point in the credit cycle that management acknowledges is unsustainable.
Financial Highlights
| Key Metric | 1H25 | 1H24 | YoY Change |
|---|---|---|---|
| Cash earnings after tax | $183m | $172m | +6% |
| Net interest margin | 1.57% | 1.55% | +2bps |
| Cost-to-income ratio | 65.6% | 65.9% | -30bps |
| Return on equity | 6.2% | 5.8% | +40bps |
| CET1 ratio | 10.87% | 10.76% | +11bps |
| Dividend per share | 18.0c | 17.0c | +6% |
| Gross loans and advances | $79.6bn | $80.7bn | -1% |
| Housing lending | $60.3bn | $62.3bn | -3% |
| Commercial lending | $12.2bn | $11.2bn | +9% |
Segment Performance
- Business Bank: Cash earnings of $140m (+20% YoY), CTI ratio 44.8%, loans $26.1bn (+3%)
- Retail Bank: Cash earnings of $45m (-10% YoY), CTI ratio 82.7%, loans $53.5bn (-4%)
Analysis Summary
Based on our valuation analysis and assessment of BOQ's strategic positioning, the data points to potential share price appreciation, with our model indicating a fair value of $7.89 per share.
Key factors supporting this view include:
- The quantifiable near-term catalyst in the form of 12bps NIM improvement from branch conversion
- Demonstrated success in the strategic shift toward higher-returning business segments
- Strong capital position (CET1 ratio of 10.87%) providing financial flexibility
- Attractive dividend yield of 5.4% at current prices
However, investors should consider key risks including:
- Execution challenges in the ongoing transformation program
- Persistent competitive pressures in both lending and deposits
- Inefficiency in the Retail Bank segment (CTI ratio 82.7%)
- Potential for credit quality normalization from current historically low levels
BOQ's transformation journey appears to be at an inflection point, with several critical milestones achieved and tangible benefits expected in upcoming reporting periods. Our analysis suggests the current valuation may not fully reflect the progress made to date and potential upside from successful execution.
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★☆ 65% | ★★★ 80% | ★☆☆ 40% | ★★☆ 55% | ★★☆ 60% |
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