Citi deliver its verdict on Bank of Queensland Limited shares

Shares in retail banking and insurance giant, Bank of Queensland Limited (ASX: BOQ), were up more than 2% Monday, despite Citi joining other brokers with a cautious view on the bank’s outlook. 

Citi reinstated coverage on the bank stock with a “Neutral” rating amid warnings about revenue headwinds and expenses growth following the bank’s 1HFY18 result last week. 

The broker noted that while Bank of Queensland’s shares had “underperformed the ASX200 by ~15% YTD and the ASX200 Banks by ~10%, the challenges for BOQ over the forecast period appear to be increasing.” 

In particular, the bank faced challenges in terms of competition from micro banks and non-bank financial institutions and the need to remain competitive in a rapidly evolving competitive landscape, the broker said. 

The cautious tone follows Bank of Queensland reporting a 4% lift in cash earnings to $182 million for 1HFY18 and an 8% increase in statutory net profit after tax to $174 million. Its net interest margin (NIM) increased 1 basis point to 1.97%. 

The result saw UBS and Morgan Stanley cut their price targets on the bank last week, with the latter also reducing earnings estimates. 

Citi warned on Bank of Queensland’s revenue growth, saying the outlook “appears significantly more difficult” in current market conditions following a period which saw the bank report strong net interest margin growth which offset below system volume growth and challenges in growing other operating income. 

The broker also warned that expense growth was set to resume “at an inopportune time for the bank”. 

“Prior tight cost control came to end in this result with cost growth set to resume. Regulatory and digital investments will be undertaken in the immediate term, while the fallout of the Royal Commission on the re-casting of the business practices of Retail Banking to be present into the medium term,” it said. 

Citi revised down its FY18 EPS estimates by ~6% mainly due to the weaker outlook for both NIM and other operating income and shaved its FY19 EPS estimates by ~15% due to a combination of the continued weak NIM outlook, lower revenues from the divestment of the St Andrews insurance business and higher costs.  

It also forecast the bank’s return on equity to fall to 8.5% from around 9.5% by FY20. 

Citi cut its target price to $11.00 from $13.00 due to changes in its long-term return on equity forecasts.    

In late afternoon trade Monday, Bank of Queensland shares were up 2.3% to $10.59, while shares in Bendigo and Adelaide Bank Ltd (ASX: BEN) gained 4.7% to $10.38 and Australia and New Zealand Banking Group (ASX: ANZ) were up 0.8% to $26.93. 

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