Bank of Queensland - · PDF fileMacquarie Wealth Management Bank of Queensland 30 March 2017 3...

Please refer to page 11 for important disclosures and analyst certification, or on our website

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AUSTRALIA

BOQ AU Neutral

Price (at 07:20, 30 Mar 2017 GMT) A$12.04

Valuation A$ 12.29-12.67

- Sum of Parts/GG

12-month target A$ 12.50

12-month TSR % +10.1

Volatility Index Low/Medium

GICS sector Banks

Market cap A$m 4,663

30-day avg turnover A$m 25.5

Number shares on issue m 387.3

Investment fundamentals Year end 31 Aug 2016A 2017E 2018E 2019E

Net interest Inc m 937.0 929.2 989.8 1,025.7 Non interest Inc m 173.0 161.5 162.9 167.8 Underlying profit m 590.0 578.3 625.7 651.8

Reported profit m 338.0 341.5 375.1 385.6 Adjusted profit m 360.0 361.1 386.3 396.8 EPS adj ¢ 91.2 89.5 93.8 95.2 EPS adj growth % -2.6 -1.9 4.8 1.5 PER adj x 13.2 13.5 12.8 12.6 PER rel x 0.68 0.85 0.81 0.81 Total DPS ¢ 76.0 76.0 76.0 76.0 Total div yield % 6.3 6.3 6.3 6.3 Franking % 100 100 100 100 ROA % 0.7 0.7 0.7 0.7 ROE % 10.4 9.9 10.2 10.1 Equity to assets % 7.1 7.3 7.2 7.1 P/BV x 1.3 1.3 1.2 1.2

BOQ AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, March 2017

(all figures in AUD unless noted)

30 March 2017 Macquarie Securities (Australia) Limited

Bank of Queensland Is it possible to love a bank? Event

BOQ’s disappointing revenue performance in 1H17 was driven by both

declining margins and poor volume growth trends. While in our view margin

trends should rebound in 2H17 and 1H18, uncertainty remains in BOQ’s

ability to grow volumes without sacrificing margins. Moreover, we continue to

believe that BOQ’s front-to-back book pricing gap will be an ongoing drag to

profitability in the medium term. As a result, we see the current valuation

discount of 5-10% to peers as appropriate.

Impact

BOQ’s 1H17 underlying result was ~2% below our expectation. While

management appears more optimistic about the outlook as mortgage

originations started to show signs of improvement, we note that ongoing

portfolio run-off from branch closures as well as regaining the confidence of

the broker channel are likely to take time and we continue to expect BOQ’s

lending growth trends to underperform peers in the near term. Ultimately we

believe that BOQ should be able to grow ahead of system if the flow from the

broker channel increases towards the level of peers. However, we believe

BOQ will need to address its systems issues and offer more competitive and

consistent pricing in order for broker flow to improve. Moreover, we see

BOQ's deposit gathering capabilities as a constraining factor of growth.

BOQ hasn’t yet repriced its variable investor mortgages following recent

repricing activity by peers. While this arguably presents upside risk to

earnings, we continue to believe that the regionals have less scope to

continue to reprice due to their current elevated pricing. However, we see

opportunity for BOQ to reprice Investor and Interest Only Investor Loans after

it addresses its system issues. We have incorporated 10bps of investor

repricing in May and an additional 15bps of interest-only investor repricing at

the end of June.

While BOQ offers an attractive dividend yield of ~6.3%, this is supported by

~84% 1H17 payout ratio, which we believe is unsustainably high in a more

normal balance sheet growth environment. As a result, we forecast no

dividend growth for BOQ until 2020, when its payout ratio returns to a more

normal level.

Earnings and target price revision

We downgrade EPS by ~2% in FY17 from lower-than-expected margins. Our

target price is unchanged at $12.50.

Price catalyst

12-month price target: A$12.50 based on a Sum of Parts/GG methodology.

Catalyst: Mortgage repricing, 2H17 result, October ’17.

Action and recommendation

BOQ is trading at a PE multiple of 13.1x and offers a dividend yield of 6.3%.

We see the current valuation discount of 5-10% to peers as appropriate and

maintain a Neutral recommendation.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Bank of Queensland

30 March 2017 2

BOQ 1H17 Result

What we liked What we didn’t like What else was interesting

Impairment expense down 1bp to

13bps HoH. The impairment charge

came in at A$27m for 1H17 (A$31m

for 2H16), which was 1bps better

than our expectation and 1bps down

HoH. 30dpd arrears deteriorated

slightly, up 2% HoH although 90dpd

improved, down 7% HoH.

Cost growth in line with our

expectation, with guidance

maintained. Costs came in at

$252m (-4% HoH) compared with

our expectation of $253m.

Underlying cost growth (ex 2H16

one-offs of $8m) came in at -1%

HoH aided by a reduction in general

expenses. BOQ's cost-to-income

was 47.4% in 1H17.

Capital improved to 9.29% in

1H17. BOQ's CET1 capital came in

at 9.29% (vs 9.00% in 2H16),

slightly below MRE's 9.35% with

subdued RWA growth driving the

increase.

Improved margin outlook for

2H17. BOQ did highlight an

improving margin outlook for 2H17

with deposit spreads contracting and

capital and low cost deposit

headwind reducing and expect the

NIM to return to 1.90% in 2H17.

Given recent deposit pricing trends

we would expect margins to improve

in 2H17.

Other income 3% above

expectations, but down 9% HoH.

Non-NII came in at $80m in 1H17,

ahead of our expectation of $78m

driven by slightly better trading

income despite a decline in banking

fees. BOQ is targeting flat non-NII

growth for 2H17.

Cash profit was 1% below MRE and

2% below consensus due to revenue

weakness. 1H17 cash profit came in at

$175m (-3% HoH growth), compared

with MRE ($177m) and consensus

($178m).

NIM was down 4bps HoH to 1.85%,

below our expectation. NIM was down

4bps HoH to 1.85%, vs. MRE’s 1.89%

as funding costs impacted the NIM by -

3bps, capital by -3bps and front-book

pricing by -4bps. This was despite asset

pricing benefits of 6bps.

GLA growth weak in 1H17 at -1%

HoH, volume outlook improved.

Asset growth was in line with

expectation at -1.0% HoH (MRE: -1.0%)

as BOQ’s troubled trends in housing

persisted (-3% HoH). This was partially

offset by growth in commercial lending

(2% HoH) and BOQ finance (7% HoH).

BOQ noted higher application volumes

over the last six weeks with a 30%

improvement in volumes recently.

However, we remain cautious of a

turnaround given FY16 and 1H17

trends.

ROE down 40bps HoH. BOQ’s ROE

declined 40bps HoH to 9.8% (from

10.2% in 2H16) driven by the decline in

cash earnings and increase in capital.

Banking income declined 8% HoH.

Banking income declined $3m HoH

(and reduced expenses by a

commensurate amount) impacted by a

change in outsourced ATM

arrangements.

Flows through broker channel

significantly down in 1H17. Flows

through the broker channel were just

~$50m in 1H17 compared with ~$500m

in the four prior half years. Broker

originated lending made up 15% of

settlements in 1H17, compared with

19% in 1H16. BOQ noted the drop-off

had been driven by changes to

serviceability requirements as well as its

application process which requires

validation of 100% of loan applications.

Dividend of 38c for 1H17, in line

with expectation. DPS for 1H17

was 38cps, in line with MRE and

consensus, equating to a 1H17

payout ratio of 84%.

DRP Discount of 1.5% remains.

BOQ continued to participate in the

DRP and offered a 1.5% discount,

with the participation rates in the

mid-30s during the period.

NSFR estimated to be c107%.

BOQ estimates that the NSFR is

~107%, above the minimum

requirement of 100%. BOQ’s LCR

was 132% in 1H17, up from 122%

in 2H16 due to $1bn RMBS

issuance during the period.

BOQ closed 14 branches during

1H17. BOQ closed 14 branches

during 1H17 (total 23 branches

closed during FY16) reducing its

branch footprint to 197. BOQ noted

ongoing branch network

optimisation was one of its FY17

priorities.

Deposit to lending ratio

increased to 71% from 68%. The

increase was driven by strong

transaction account growth (10%

annualised) and now sits just

above its target operating range of

65-70%.

Centrepoint alliance acquisition

completed during 1H17. The

acquisition added $120m of loan

balances and is expected to boost

the NIM by 1bps and expenses by

$3m in 2H17 ($1m already

incurred in 1H17).

Replicating portfolio has shifted

to a 3 yr investment horizon. The

portfolio previously had a five-year

investment horizon.

Source: Company data, Macquarie Research, March 2017


30 March 2017 3

Key Issues

BOQ’s disappointing revenue performance in 1H17 was driven by both declining margins and poor

volume growth trends. While management appears more optimistic about the outlook as mortgage

originations started to show signs of improvement, we note that ongoing portfolio runoff from

branch closures as well as regaining the confidence of the broker channel are likely to take time

and we continue to expect BOQ’s lending growth trends to underperform peers in the near term.

As the figure below highlights, recent rebalancing in BOQ’s originations away from largely relying

on the proprietary channel and towards the broker channel had its early challenges. We believe

that ultimately BOQ should be able to grow ahead of system if the flow from the broker channel

increases towards peer levels over time (currently ~50% of flow). However, we believe BOQ will

need to address its systems issues and offer competitive and consistent pricing in order for broker

flow to improve. Moreover, in the medium term we see BOQ’s deposit gathering capabilities to

ultimately be the constraining factor of growth.

Fig 1 Growth in loans (HoH) Fig 2 Housing growth by division and OMB

Source: Company data, Macquarie Research, March 2017 Source: Company data, Macquarie Research, March 2017

BOQ hasn’t yet repriced its variable investor mortgages following recent repricing activity by

peers. While this arguably presents upside risk to earnings, we continue to believe that the

regionals have less scope to continue to reprice due to their elevated rates relative to peers.

However, we see some scope for BOQ to reprice Investor and Interest Only Investor Loans after

BOQ addresses its system issues (introduced differentiated pricing between interest only and

P&I). We have incorporated 10bps of investor repricing in May and an additional 15bps of interest-

only investor repricing at the end of June.

Fig 3 Owner occupier rates for P&I and I/O Fig 4 Investor rates for P&I and I/O


-1

1

-1

3

-6

-4

-2

-

2

4

6

8

Housing Business Personal Leasing

%

1H15 2H15 1H16 2H16 1H17

768467

242-49

248472

133

603

-650-978

341 923

1068

479 394

11 200

175

200

225

250

275

300

-1000

-500

0

500

1000

1500

2000

2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

#$m

BOQ BOQ Specialist VMA Home loans Branches (RHS)

0.8 1.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

CB

A

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B

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A

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Q

BO

Q C

P

P&I Owner occupier I/O Owner occupier

%

SVR Additional discount req. by majors

0.9 1.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

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P&I Investor I/O Investor

%

SVR Additional discount req. by majors


30 March 2017 4

1H17 Result Analysis

BOQ delivered a soft 1H17 underlying result driven by margin pressure (mortgage competition,

funding costs and lower rates) and weak volume growth trends. While BOQ appears more

optimistic about the revenue outlook as mortgage originations show early signs of improvement,

we note that ongoing portfolio runoff from branch closures as well as time required to rebuild

confidence in the broker channel suggests that BOQ’s lending growth trends are likely to continue

to underperform peers in the short to medium term. BOQ reaffirmed its cost guidance of 1%

(underlying growth), which should partly offset the revenue pressures.

DPS of 38cps was in line with MRE and consensus. This equates to 1H17 payout ratio of 84%,

which we believe is unsustainably high in a more normal growth environment. As a result we

forecast no divided growth for BOQ until 2020, when its payout ratio returns to a more normal

level.

Fig 5 Result summary compared to forecasts and HoH growth

MRE Actual 2H16 1H17 1H17 Growth % Diff. %

Net Interest Income 470 461 452 -4% -2% Non-Interest Income 88 78 80 -9% 3% Total Operating Income 558 539 532 -5% -1% Total Operating Costs 264 253 252 -5% 0% Pre-Provision Operating Profit 294 286 280 -5% -2% Impairment Charge 31 31 27 -13% -13% Pre-Tax Profit 263 255 253 -4% -1% Tax Expense 82 78 78 -5% 0% Other Post Tax Items 14 5 14 0% nmf NPAT Attributable to Shareholders 167 172 161 -4% -6% Adjustments to stat profit 14 5 14 0% nmf Macquarie Cash Profit 181 177 175 -3% -1%


Margins

The NIM performance was disappointing in 1H17, with repricing benefits more than offset by back-

book to front-book pricing differential, elevated funding costs and the impact of lower rates on

capital and low-cost deposits. What is somewhat pleasing however is the margin guidance from

management suggests 2H17 margins will return to the level seen in 2H16. Our analysis supports

this thesis and we currently forecast margins to be slightly ahead of company guidance as we

have incorporated an additional 10bps of investor repricing in May and 15bps of interest-only

investor repricing at the end of June. Furthermore, ongoing normalisation in deposit costs

underpins our favourable outlook for margins in 1H18.

Fig 6 Net interest margin bridge


1.90

1.85

1.91

0.06

0.04

0.03

0.030.01

0.05

0.03

0.01

0.04

0.010.02

1.75

1.80

1.85

1.90

1.95

2.00

%


30 March 2017 5

Asset Quality

Asset quality trends remained largely benign in 1H17 supported by prevailing low interest rate

environment, with 90 days past due to GLA down 4bps (despite a small pick-up in commercial

90dpd). Total impairment expense was also 1bps lower compared with 2H16.

Despite a small reduction in collective provisions during the period BOQ’s coverage ratio remains

materially better than BEN, but it is slightly below the majors. At this point, we do not see credit

quality deterioration as a material issue for BOQ, particularly as BOQ saw a marked improvement

in new impaireds in 1H17 with no new individual exposures above $10m and overall new

impaireds down to $57m from $80m in 2H16.

Fig 7 Collective provisions to non-housing loans Fig 8 New impaired assets ($m)


Capital

In our view, further levelling of the playing field in mortgages remains the key area of upside for

the regional banks. As the figure below highlights the regionals capital benefit from Advanced

Accreditation is ~90-130bps+. However, it appears BOQ is still weighing up the timing of the

application. Based on management’s current expectations it will take BOQ two years to be in a

position to submit its application to APRA.

Fig 9 CET1 benefits from reduced risk weights following Advanced Accreditation

Mortgage risk weights $

Mortgage exposures $

Mortgage risk weight %

Reduced mortgage risk weight sensitivity (bps)

25% 30% 35%

BEN 17.0 42.8 39.7 157 97 44 BOQ 12.1 28.6 42.5 201 135 77


Furthermore, potential reduction in risk weightings on mortgages for BOQ should improve its

ongoing capital generation and dividend sustainability. BOQ’s current risk weighting on mortgages

is ~43%. Should BOQ be able to reduce it to ~33%, we estimate that this will translate to ~4%

improvement in BOQ’s sustainable payout-ratio and provide ~5% uplift to the fundamental

valuation.

112 110

126

114

102

30

0

20

40

60

80

100

120

140

160

ANZ CBA NAB WBC BOQ BEN

bps

1H14 2H14 1H15 2H15 1H16 2H16 1H17

11 125 5

15

83

111

77 63

59

80

57

0

20

40

60

80

100

120

1H14 2H14 1H15 2H15 1H16 2H16 1H17

$m

Exposure >$10m Exposure >$5m & <$10m Exposure <$5m


30 March 2017 6

Fig 10 Capital generation, sustainability of dividends and valuation upside

Current m/gage risk weighting

M/gage risk weightings under Advanced Methodology

FY17 Normalised FY17f NPAT ($m) 362 343 343 343 343 Dividend payout ratio (%) 82% 67% 69% 71% 73% Additions to retained earnings ($m) 66 112 107 99 91 Balance sheet growth (ann) 1.4% 5.0% 5.0% 5.0% 5.0% Implied capital usage -36 -132 -127 -120 -114 Other capital movements -28 -15 -15 -15 -15 Organic capital generation 2 -35 -35 -36 -37 DRP (%) 35% 15% 15% 15% 15% Implied capital generation after DRP 106 0 0 0 0

Implied sustainable dividend (cps) 0.59 0.60 0.62 0.64 Valuation/Share 11.80 12.02 12.43 12.85 Valuation upside (%) -2% 0% 3% 7%

Source: Macquarie Research, March 2017

Costs

BOQ reaffirmed its cost guidance for 1% underlying growth in FY17. While in isolation poor

revenue trends leave BOQ with a challenging earnings backdrop for FY17, cost guidance provides

a partial offset. BOQ’s underlying cost growth guidance does not include $4m in costs associated

with the premium funding acquisition. We expect that BOQ to continue to manage expenses well

in the current challenging revenue environment and partly absorb additional expenses from this

acquisition.

Fig 11 FY17 underlying cost growth guidance of ~1% reaffirmed


240 244 249 256

228

279

167

8

4

150

170

190

210

230

250

270

290

1H15 2H15 1H16 2H16 1H17 2H17f

$m

Underlying expenses One-off investment

FY17f: $507m underly ing expense

FY16: $505m underly ing expense

0.5% YoY underlying growth


30 March 2017 7

Valuation and risks

Our price target is unchanged at $12.50/share based broadly on the midpoint of our SOTP

($12.29/share) and GG ($12.67/share)-based valuations.

SOTP (sum of the parts) valuation $12.29/share

Our SOTP valuation attributes a peer-based multiple to normalised bank earnings. We apply a

13.1x FY18F P/E multiple to our BOQ earnings, which is representative of the peer average

banking P/E multiple after adjusting each bank’s multiple to exclude the funds management

business. We assume that BOQ should trade at a 7% discount to the sector, which is in line with

the 5yr average.

Fig 12 Segment valuation

Division Cash Earnings (EPS) PE Multiple (x) Adj. PE Multiple (x)

ANZ 2.39 13.5 13.5 CBA 5.89 14.7 14.8 NAB 2.42 13.9 13.9 WBC 2.52 14.0 14.1 Average 14.0 14.1 LT premium to sector -7.0% Implied multiple 13.1

BOQ Valuation 0.94 13.1 12.29


Note: Wealth Management multiple is based on AMP FY18 multiple. Bank multiple is based on the average of peers adjusted for their respective WM contributions.

Gordon Growth (GG) valuation $12.67/share

We have derived a GG valuation of $12.67, based on BOQ’s estimated return on tangible equity of

~13.0% in FY18. Based on this methodology BOQ is currently trading at a ~5% discount to its

fundamental valuation.

Fig 13 Gordon Growth valuation


Risks

Key upside for BOQ is from continued levelling of the playing field and achieving Advanced

Accreditation. Key downside risks stem from ongoing aggressive competition in mortgages and

deposits and a continuation of subdued growth trends.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

8 10 12 14 16 18 20 22

P/NTA (x)

RoTE (%)

ANZ

CBA

WBCNAB

BOQBEN


30 March 2017 8

Fig 14 BOQ Financial Summary


Bank of Queensland Year Ending 31 August 1H16 2H16 2016 1H17 2H17 2017 2018 2019

Neutral PER SHARE DATA

Cash EPS (AUD) - Macquarie Diluted Basis 46 45 91 44 46 89 94 95

Current Price Target Price Cash EPS Growth (%) -6% -1% -3% -3% 4% -2% 5% 2%

A$12.04 $12.50 DPS (AUD) 38 38 76 38 38 76 76 76

Total Shareholder Return 10.1% BVPS (AUD) $9.37 $9.41 $9.41 $9.53 $9.64 $9.64 $9.87 $10.12

NTA PS (AUD) $7.07 $7.13 $7.13 $7.28 $7.42 $7.42 $7.67 $7.94

Bloomberg: BOQ AU Shares on issue (m) 376 381 381 387 392 392 396 401

Reuters: BOQ.AX

VALUATION METRICS

Macquarie Equities | Australian Banks P/E (Cash) 13.1x 13.3x 13.2x 13.8x 13.2x 13.5x 12.8x 12.6x

Analyst(s) Contact(s) P/B (Stated) 1.3x 1.3x 1.3x 1.3x 1.2x 1.2x 1.2x 1.2x

Victor German +61 2 8232 6089 P/NTA 1.7x 1.7x 1.7x 1.7x 1.6x 1.6x 1.6x 1.5x

Anita Stanley +61 2 8232 9869 RoE (%) 10.3% 10.2% 10.2% 9.6% 10.0% 9.8% 10.1% 10.0%

Brendan Carrig +61 2 8237 6043 RoA (%) 0.73% 0.71% 0.72% 0.69% 0.72% 0.71% 0.73% 0.72%

Dividend Yield (%) 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Dividend Payout (%) 80% 80% 80% 84% 80% 82% 78% 77%

PROFIT & LOSS (AUDm)

Net Interest Income 467 470 937 452 477 929 990 1,026

Non-Interest Income 85 88 173 80 82 162 163 168

Fees & Commissions 49 50 99 46 47 93 94 97

Insurance Income 15 11 26 11 11 22 22 23

Other 21 27 48 23 23 46 47 48

Total Operating Income 552 558 1,110 532 559 1,091 1,153 1,193

Total Operating Costs 256 264 520 252 260 512 527 542

Employee Costs 126 127 253 126 129 255 258 264

Other Costs 130 137 267 126 131 257 269 278

Pre-Provision Operating Profit 296 294 590 280 298 578 626 652

Impairment Charge 36 31 67 27 31 58 70 81

Pre-Tax Profit 260 263 523 253 268 521 556 571

Tax Expense 81 82 163 78 82 160 170 174

Minority Shareholders 0 0 0 0 0 0 0 0

Other Post Tax Items 8 14 22 14 6 20 11 11

Stated Net Profit 171 167 338 161 180 341 375 386

Extraordinary & Other Items -8 -14 -22 -14 -6 -20 -11 -11

Preference shares 0 0 0 0 0 0 0 0

Macquarie Cash Profit 179 181 360 175 186 361 386 397

BALANCE SHEET & CAP AD (AUDm)

Risk Weighted Assets 27,467 28,054 28,054 28,014 28,433 28,433 29,724 31,327

Average Interest Earning Assets 47,506 49,353 48,430 49,237 49,517 49,377 50,950 53,491

Gross Loans, Advances & Acceptances 42,924 43,152 43,152 42,995 43,640 43,640 45,626 48,029

Total Deposits 36,080 36,720 36,720 37,096 37,652 37,652 39,366 41,439

Total Assets 49,841 50,853 50,853 50,956 51,707 51,707 54,020 56,820

Shareholders Equity 3,525 3,587 3,587 3,691 3,776 3,776 3,912 4,056

Tier 1 Capital 2,866 2,974 2,974 3,052 3,134 3,134 3,266 3,405

Tier 1 Ratio (%) 10.4% 10.6% 10.6% 10.9% 11.0% 11.0% 11.0% 10.9%

Core Tier 1 Ratio (%) 8.80% 9.00% 9.00% 9.29% 9.44% 9.44% 9.48% 9.43%

ASSET QUALITY

Impairment Charge / GLAA (bp) 17 14 16 13 14 13 16 17

Impairment Charge / NHL (bp) 57 47 52 40 45 43 50 55

Provisions / NPLs (%) 54% 55% 55% 59% 59% 59% 59% 59%

KEY RATIOS & GROWTH

Net Interest Income growth (%) 1.7% 0.6% 3.3% -3.8% 5.6% -0.8% 6.5% 3.6%

Non-Interest Income growth (%) -11.5% 3.5% -3.9% -9.1% 1.9% -6.6% 0.9% 3.0%

Total Revenue growth (%) -0.5% 1.1% 2.1% -4.7% 5.0% -1.7% 5.7% 3.5%

Cost growth (%) 4.9% 3.1% 4.0% -4.5% 3.3% -1.5% 2.8% 2.8%

Pre-Provision Profit growth (%) -4.8% -0.7% 0.5% -4.8% 6.5% -2.0% 8.2% 4.2%

RWA growth (%) 4.4% 2.1% 6.6% -0.1% 1.5% 1.4% 4.5% 5.4%

GLAA growth (%) 3.7% 0.5% 4.3% -0.4% 1.5% 1.1% 4.6% 5.3%

Deposit growth (%) 3.9% 1.8% 5.7% 1.0% 1.5% 2.5% 4.6% 5.3%

Net Interest Margin (%) 1.98% 1.89% 1.93% 1.85% 1.91% 1.88% 1.94% 1.92%

Cost / Income Ratio (%) 46.4% 47.3% 46.8% 47.4% 46.6% 47.0% 45.7% 45.4%

-1%

0%

1%

2%

3%

4%

5%

6%

1.70%

1.75%

1.80%

1.85%

1.90%

1.95%

2.00%

1H17 2H17 2017 2018 2019

Volumes and margins

Net Interest Margin (%) GLAA growth (%)

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

44.0%

44.5%

45.0%

45.5%

46.0%

46.5%

47.0%

47.5%

48.0%

1H17 2H17 2017 2018 2019

Efficiency and Costs

Cost / Income Ratio (%) Cost growth (%)

10

12

14

16

18

20

22

24

9.10%

9.20%

9.30%

9.40%

9.50%

9.60%

1H17 2H17 2017 2018 2019

CET1 ratio and BDD/GLA

Core Tier 1 Ratio (%)

Impairment Charge / GLAA (bp)


30 March 2017 9

Fig 15 Australian Bank Investment Fundamentals

Source: Company data, Macquarie Research, March 2017. Closing prices as of 30 March 2017

ANZ CBA NAB WBC BEN BOQ CYB (£)

Recommendation Neutral Neutral Outperform Outperform Underperform Neutral Neutral

Price target (A$) 33.00 89.50 35.00 37.00 11.50 12.50 2.93

Upside/downside to TP (%) 2.2 3.5 4.8 4.8 -4.2 4.0 5.5

12 month TSR (%) 7.4 8.7 10.2 10.2 1.4 10.3 8.8

Last Price (A$) 32.28 86.48 33.40 35.30 12.01 12.02 2.78

Cash NPAT (A$mn)

2016a 5,889 9,450 6,483 7,822 439 360 178

2017f 7,050 9,854 6,627 8,280 457 361 182

2018f 7,361 10,605 6,841 8,796 464 386 204

2019f 7,677 11,046 7,046 9,136 488 397 237

Fully diluted EPS (cps)

2016a 193 544 235 229 86 91 20

2017f 229 555 237 239 88 89 21

2018f 239 592 241 252 88 94 23

2019f 250 612 245 260 91 95 27

EPS growth (%)

2016a -22.7 0.5 -0.8 -6.0 -4.1 -2.6

2017f 18.6 1.9 0.7 4.4 2.6 -1.9 2.1

2018f 4.5 6.7 1.9 5.4 0.3 4.8 11.4

2019f 4.5 3.4 1.7 3.1 3.7 1.5 15.6

Price/Earnings Ratio (x)

2016a 16.8 15.9 14.2 15.4 14.0 13.2 13.8

2017f 14.1 15.6 14.1 14.8 13.7 13.4 13.5

2018f 13.5 14.6 13.8 14.0 13.6 12.8 12.1

2019f 12.9 14.1 13.6 13.6 13.1 12.6 10.5

PE rel to All Industrials ex banks (x)

2016a 0.88 0.83 0.74 0.81 0.74 0.69 0.69

2017f 0.71 0.79 0.71 0.75 0.69 0.68 0.68

2018f 0.74 0.80 0.75 0.76 0.74 0.70 0.61

2019f 0.77 0.84 0.81 0.80 0.78 0.75 0.53

Price/Earnings rel to bank sector (x)

2016a 1.08 1.02 0.91 0.99 0.90 0.85 0.88

2017f 0.96 1.06 0.96 1.01 0.93 0.92 0.92

2018f 0.97 1.04 0.99 1.00 0.97 0.92 0.86

2019f 0.95 1.04 1.00 1.00 0.97 0.93 0.77

DPS (A$)

2016a 1.60 4.20 1.98 1.88 0.68 0.76 0.00

2017f 1.65 4.31 1.86 1.88 0.68 0.76 0.07

2018f 1.69 4.55 1.77 1.89 0.68 0.76 0.11

2019f 1.78 4.71 1.85 1.91 0.68 0.76 0.16

Current Yield (%)

2016a 5.0 4.9 5.9 5.3 5.7 6.3 0.0

2017f 5.1 5.0 5.6 5.3 5.7 6.3 2.6

2018f 5.2 5.3 5.3 5.4 5.7 6.3 4.1

2019f 5.5 5.4 5.5 5.4 5.7 6.3 5.7

Price/Book ratio (x)

2016a 1.6 2.5 1.7 2.0 1.1 1.3 0.9

2017f 1.6 2.4 1.7 2.0 1.1 1.3 0.8

2018f 1.5 2.2 1.6 1.9 1.1 1.2 0.8

2019f 1.5 2.1 1.6 1.8 1.0 1.2 0.9

ROE

2016a 10.2 16.8 12.1 14.1 8.9 10.4 6

2017f 12.0 16.0 12.6 13.9 8.8 9.9 5

2018f 12.2 16.2 12.4 14.1 8.5 10.2 6

2019f 12.3 16.0 12.1 13.9 8.6 10.1 7

Price/NTA ratio (x)

2016a 1.9 3.0 1.9 2.5 1.6 1.7 1.0

2017f 1.8 2.8 1.9 2.3 1.6 1.7 0.9

2018f 1.8 2.6 1.8 2.2 1.5 1.6 0.9

2019f 1.7 2.5 1.7 2.1 1.4 1.5 1.0

1 yr fwd PE ratio 13.8 14.9 14.0 14.4 13.6 13.1 12.8

1 yr fwd PE ratio (adj for div) 13.5 14.8 13.6 14.1 13.5 12.4

Relative premium/discount -3% 5% -3% 1% -3% -12%

1 yr fwd div yield 5.2 5.2 5.4 5.3 5.7 6.3 3.4

Victor German

[email protected]+612 8232 6089

Anita Stanley


Brendan Carrig



30 March 2017 10

Macquarie Quant View

The quant model currently holds a reasonably positive view on Bank of

Queensland. The strongest style exposure is Valuations, indicating this

stock is under-priced in the market relative to its peers. The weakest style

exposure is Earnings Momentum, indicating this stock has received

earnings downgrades and is not well liked by sell side analysts.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Banks)

283/747 Global rank in

Banks

% of BUY recommendations 21% (3/14)

Number of Price Target downgrades 3

Number of Price Target upgrades 1

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

0.6

0.7

1.2

1.7

1.7

1.7

2.3

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Bank of Queensland

MyState

Bendigo and Adelaide Bank…

Commonwealth Bank

Westpac Banking Corporati…

ANZ Bank

National Australia Bank

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Bank of Queensland

MyState


Commonwealth Bank


ANZ Bank


Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.8

-0.8

0.1

0.5

0.3

0.4

-0.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Bank of Queensland

MyState


Commonwealth Bank


ANZ Bank


-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

Bank of Queensland

MyState


Commonwealth Bank


ANZ Bank


Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-34%

-24%

-24%

-21%

31%

31%

32%

34%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Earnings Stability

Momentum 3 Month

Operating Margin FY0

Net Income Margin FY0

Price to Book FY0

Price to Earnings NTM

Price to Earnings FY1

EV/EBITDA (NTM)

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.80 0.18

-0.87 0.03

-0.09-0.23

-0.27-0.18-0.23

0.57 0.63

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/747)

0 50 100

Percentile relative

to market(/421)


30 March 2017 11

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA

Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2016

AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)

Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)

Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 19-Jan-2017 BOQ AU Neutral A$12.50 16-Dec-2016 BOQ AU Neutral A$12.00 29-Jul-2016 BOQ AU Neutral A$11.50 07-Apr-2016 BOQ AU Neutral A$12.00 09-Feb-2016 BOQ AU Neutral A$12.50 21-Jan-2016 BOQ AU Neutral A$13.00 09-Oct-2015 BOQ AU Neutral A$13.20 26-Mar-2015 BOQ AU Underperform A$13.66 19-Dec-2014 BOQ AU Underperform A$11.74 09-Dec-2014 BOQ AU Underperform A$12.88 09-Oct-2014 BOQ AU Neutral A$12.88 25-Sep-2014 BOQ AU Neutral A$12.34 11-Sep-2014 BOQ AU Underperform A$12.34 13-Aug-2014 BOQ AU Underperform A$12.11 05-Jun-2014 BOQ AU Neutral A$12.11 11-Apr-2014 BOQ AU Neutral A$11.81 07-Apr-2014 BOQ AU Underperform A$11.34

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or


30 March 2017 12

other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 30 March 2017 at 11:07 UTC.

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