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Morningstar | Growth Outlook Remains Gloomy for Regional Banks, Including Bank of Queensland

No-moat Bank of Queensland, like its regional bank peers, faces a challenging near-term outlook as macroeconomic and regulatory factors threaten to crimp growth across numerous drivers. We're revising some of our credit growth assumptions, but our AUD 10.80 fair value estimate remains unchanged. At current prices the stock screens as fairly valued.

The profitability outlook for Bank of Queensland remains challenged, largely due to slowing credit growth, and we make slight adjustments to our earnings estimates accordingly. Australian Prudential Regulatory Authority data shows Bank of Queensland’s total loan growth slowing to 2.3% in the last 12 months, but more concerning, 0.1% in the last six months and 0.3% in the last three months. We don’t see any triggers for this slowdown to reverse in the near term and therefore expect it to translate to weakness in top-line growth. We have reduced our total loan growth forecasts to 2% from 3% through our forecast period to fiscal 2023, which brings Bank of Queensland into line with Bendigo and Adelaide Bank’s total loan growth assumptions. Bendigo and Adelaide Bank’s 12-month total loan growth sits at 0.9%, with its three-month numbers even weaker at negative 0.4%. Our net interest margin forecasts are unchanged, remaining flat at 1.90% through our forecast period. We estimate a similar NIM for Bendigo Bank by 2023, although we have it trending down from around 1.95% currently over this period.

Amid the backdrop of slowing earnings growth, cost management will become increasingly important for the industry, especially for regional banks such as Bank of Queensland. We forecast the cost/income ratio to increase toward 48.5% in fiscal 2019 from 47.5% currently, but then to return toward 47.5% by fiscal 2023. This remains well below Bendigo, which is currently around 57%. Some of the key drivers of the increasing cost/income ratio include increasing regulatory risks, higher funding costs, slowing credit growth, and heightened competition.

Capital levels remain stable and well-placed to satisfy APRA’s January 2020 8.5% minimum capital benchmark for standardised banks. Common equity Tier 1 capital was 9.1% at November 2018, placing Bank of Queensland ahead of Bendigo Bank’s latest CET1 number by about 30 basis points. We expect pressure on capital buildup to increase as organic growth slows and expenses increase in line with regulatory requirements and already-forecast capital spending increases as management attempts to combat these growth and efficiency challenges. Management said it expects an approximate 7-basis-point decrease in CET1 on this basis, outlining digital banking platforms and improved customer experience as the focus.

Like regional peers, Bank of Queensland’s funding profile relies heavily on deposits. At the end of fiscal 2018, about 65% of Bank of Queensland’s total funding was made up of deposits. This compares to 82% of Bendigo’s total funding base as of Dec. 31, 2018, which clearly displays a heavier reliance on deposits, thereby lowering Bendigo’s wholesale funding risk. On the other hand, should a fight for deposits break out between the banking industry, Bendigo stands more to lose. Our view is the latter scenario, although not dramatic, could prevail. Namely, intensifying competition for deposits.