Bank of Queensland (ASX:BOQ)

Anthony Rose
Interim CEO
Market Cap (AUD): 3.6B
Sector: Financials
Last Trade (AUD): 8.88 +0 (+0%)
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1. About

BOQ is one of Australia's leading regional banks. The Company has also among the few still not owned by one of the big banks. At BOQ, most of its branches are run by local Owner-Managers.

The Company has more than 180 branches across Australia and in each and every one of them you'll find us really getting to know its customers and recognising the things they need. It's how the Company have been doing business since 1874. The Company has created simple, easy-to-understand banking products to help support its customers' financial needs. The Company offers a range of these products and services to individuals, as well as businesses. The Company is one of the top 100 Australian companies ranked by market capitalisation on the Australian Securities Exchange and are regulated by the Australian Prudential Regulation Authority as an Authorised Deposit-taking Institution.

The Company has four subsidiary, these are the following:

  • Virgin Money Australia
  • BOQ Finance
  • BOQ Specialist
  • St Andrew’s Insurance

2. Business model

       

The Company operates the following divisions:[1]

 

Division

Revenue ($M)

% of Revenue

% of Profit (before Income Tax)

Profit drivers[2]

Retail Banking

$525

47.3%

41.9%

  • BOQ has generated cash earnings of $372 M in FY18, representing a two percent decrease on FY17. Statutory net profit after tax decreased of five percent on FY17 to $336 M
  • Excluding the one-off $16 M profit on disposal of a vendor finance entity which occurred in FY17, cash earnings increased three percent on FY17
  • Statutory profit after tax was reduced by a number of one-off items including accelerated amortisation expense to create capacity for additional capital initiatives in FY19-20 aligned with the Group’s Investment Roadmap
  • Total income grew by one percent from FY17, or two percent on an underlying basis (excluding the $16 M profit on sale in FY17). This was driven by net interest income growth of four percent, while non-interest income contracted 17 percent (nine percent on an underlying basis)
  • The improvement in net interest income was driven by a combination of growth in total lending of $1.5 B or three percent and an increase in NIM of five basis points to 1.98 %

BOQ Business

$573

51.6%

59.2%

Other

$12

1.1%

(1.0)

N/A

3. Strategy

 

Major strategies include:[3]

 

BOQ’s corporate strategy is delivered through four strategic pillars: Customer in Charge; Grow the Right Way; There’s Always a Better Way, and Loved Like No Other.

  • Customer in Charge is about improving customers’ experience and expanding BOQ’s avenues for growth by putting customers in charge of when, where and how they choose to engage with BOQ. This is regardless of whether they come into a branch, use online services, call on the phone or buy products through a third party intermediary.
  • Grow the Right Way is about building a strong and profitable business by making the right decisions about where and how to grow. This includes focusing on niche customer segments that value an intimate banking relationship. The niche segments in the BOQ commercial portfolio contributed $623 million in new lending growth in FY18. Together with BOQ Specialist, BOQ Finance and VMA businesses, BOQ’s niche strategy is delivering.
  • There’s Always a Better Way is about BOQ’s commitment to making systems and processes simpler, faster and smarter. The aim is to improve efficiency, reduce costs, deliver better customer service and establish a nimble organisation positioned to take advantage of a rapidly changing landscape. BOQ is digitising its lending platforms by making improvements to retail, commercial and lease management lending systems. Ongoing focus on efficiency across the Group has enabled it to contain expense growth to three percent, whilst investing in new technology aligned to a simplified and business enabled target architecture which will enable it to respond more quickly to emerging opportunities than has been possible in the past
  • Loved Like No Other is about how BOQ maintains positive stakeholder relationships by living its values, creating a place where people love to work and contributing to the communities in which it operates. These are just some of the things BOQ does to prove “It’s Possible to Love a Bank

 

BOQ  Goals

  • Achieving digital parity and meeting its customers’ digital needs
  • Delivering a seamless customer experience
  • Tilting to higher margin segments
  • Lift MFI penetration through deposit gathering and pricing for risk
  • Treat data as a strategic asset
  • Ensuring a state of readiness to respond to regulatory reform
  • Overhauling key processes
  • Developing capabilities to drive efficiency through digitization
  • Define and bring to life its purpose for its people and customers
  • Deliver a differentiated service offering
  • Upgraded or new digital banking platforms and apps
  • Accelerate VMA digital bank opportunity
  • Focus distribution channels towards deposit gathering and MFI
  • Close key product gaps to support deeper customer relationships
  • Develop strategic response to potential regulatory reform
  • Establish lending centre of excellence
  • Continuous improvement initiatives
  • Digitisation of processes
  • Engage its people to define and start to embed its purpose-led culture
  • Revitalise BOQ core business market positioning

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

    Growth rate

National and Regional Commercial Bank

$146 billion (2018)

(1.7%) (Annual 13-18)

General Insurance

$66 billion (2018)

1.7% (Annual 14-19)

Money Market Dealers

$7 billion (2017)

2.5% (Annual 13-18)

Non-Depository Financing

$9 billion (2017)

(1.5%) (Annual 13-18)

5. Competition

    

Major competitors include:[5]

 

  • Bendigo and Adelaide Bank Ltd (ASX: BEN)
  • Suncorp Group Ltd (ASX:SUN)
  • Auswide Bank Ltd (ASX:ABA)

6. History

 

1874[6]   

Established as the Brisbane Permanent Benefit Building and Investment Society, the first permanent building society formed in Queensland

 

1887   

Converted from a building society to a bank

 

1942   

Following mergers with other Queensland-based financial institutions, became a trading bank

 

1970   

Adopted the name Bank of Queensland and computerised operations

 

1971   

Became a publicly traded company listed on the ASX

 

1982   

Incorporated Bank of Queensland Savings Bank Ltd as a wholly owned subsidiary

 

1985   

Opened its first regional branches in Cairns and Townsville

 

2001 – 04   

Accelerated branch opening program, opening 55 new branches throughout Queensland

 

2003   

Purchased equipment finance company UFJ Finance Australia giving BOQ its first significant interstate presence

 

2005   

Acquired $78 million debtor finance division of ORIX Australia

 

2007   

Made a successful bid for Mackay-based Pioneer Permanent Building Society

 

2007   

Members of Home Building Society in Western Australia endorsed $592 million merger proposal, increasing BOQ’s national footprint

 

2010   

Purchased St Andrew’s Insurance, an Australian manufacturer of consumer credit insurance products

 

2010   

Acquired Australian and New Zealand divisions of CIT Group Inc, a leading supplier of vendor finance to small business and middle market companies

 

2013   

Acquired Virgin Money Australia, the Australian retail financial services arm of the Virgin Group, for approximately $40 million (including approximately $30 million in BOQ shares)

 

2014   

Acquired Investec Bank (Australia) Limited (now BOQ Specialist Bank Limited), including the Professional Finance business (now BOQ Specialist) and the Asset Finance & Leasing business (now part of BOQ Finance)

 

2016   

BOQ announced embarking on a program to reshape its organisational structure

 

2017   

BOQ successfully completes Capital Notes Bookbuild

BOQ closes Capital Notes Offer raising $350 million

 

2018   

BOQ announces sale of st andrew’s insurance

7. Team

 

Board of Directors[7]

 

Roger Davis – Chairman

Bruce Carter – Non-Executive Independent Director

Richard Haire – Non-Executive Independent Director

John Lorimer – Non-Executive Independent Director

Warwick Negus – Non-Executive Independent Director

Karen Penrose – Non-Executive Independent Director

David Willis – Non-Executive Independent Director

Michelle Tredenick – Non-Executive Independent Director

Patrick Allaway – Non-Executive Independent Director

Kathleen Bailey-Lord – Non-Executive Independent Director

 

Management Team

 

Anthony Rose – Interim Chief Executive Officer and Chief Operating Officer

Matt Baxby – Chief Financial Officer

Peter Deans – Chief Risk Officer

Debra Eckersley – Group Executive People and Culture

Lyn McGrath – Group Executive Retail

Donna Vinci – Chief Operations Digital and Information Officer

Vicki Clarkson – Company Secretary

Fiona Daly – Company Secretary


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 31 August):[8]

 

Division

Revenue ($M)

% Change

Profit (before Income Tax) ($M)

% Change

Retail Banking

$525

1.9%

$244

1.2%

BOQ Business

  $573

2.3%

$345

1.5%

Other

$12

(53.8%)

($6)

(185.7%)

Total

$1,110

0.8%

$583

(0.9%)

9. Risk

 

Major risks include:[9]

 

Market Risk

Market risk is the risk that movements in market rates and prices will result in profits or losses to the Bank. The objective of market risk management is to manage and control market risk and to minimise its impact on the Consolidated Entity.

 

Interest Rate Risk

The operations of the Consolidated Entity are subject to the risk of interest rate fluctuations as a result of mismatches in the timing of the repricing of interest rates on the Consolidated Entity’s assets and liabilities.

 

Foreign exchange Risk

It is the Bank’s policy not to carry material foreign exchange rate exposures, net of associated hedging instruments. At balance date, there are no net material foreign exchange rate exposures. The Bank uses cross currency swaps and foreign exchange forwards to hedge its exchange rate exposures arising from borrowing offshore in foreign currencies. The Bank uses forward foreign exchange contracts to hedge potential exchange rate exposures created by customer-originated foreign currency transactions. The Bank’s investment in its New Zealand subsidiary is hedged by forward foreign exchange contracts which mitigate the currency risk arising from the subsidiary’s net assets.

 

Traded market risk

Market risks attributable to trading activities are primarily measured using a parametric Value-at-Risk (VaR) model based on historical data. VaR is a statistical technique used to quantify the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99% confidence level using 2 years of historical data. As an additional overlay to VaR, the individual market risks of interest rate, foreign exchange, credit, and equity are managed using a framework that includes stress testing, scenario analysis, sensitivity analysis and stop losses. Risks are monitored and measured against limits delegated by the Asset-Liability Committee (ALCO) and approved by the Board’s Risk Committee.

 

Credit risk

Credit risk arises in the business from lending activities, the provision of guarantees including letters of credit and commitments to lend, investment in bonds and notes, financial market transactions and other associated activities. Credit risk is the potential loss arising from the possibility that customers or counter parties fail to meet contractual payment obligations to the Bank as they fall due.

The Board has implemented a structured framework of systems and controls to monitor and manage credit risk comprising:

  • documented credit risk management principles which are disseminated to all staff involved with the lending process;
  • documented policies;
  • a process for approving risk, based on tiered delegated approval authorities, whereby the largest exposures are assessed by the Executive Credit Committee consisting of Group Executives and senior risk managers, chaired by the Chief Risk Officer;
  • risk grading the Bank’s commercial exposures for facilities greater than $100,000 based on items inclusive of financial performance and stability, organisational structure, industry segment and security support. Exposures within this segment of the portfolio are generally subject to annual review including reassessment of the assigned risk grade;  
  • an automated scorecard approval model for the Bank’s retail portfolio inclusive of home loans, personal loans, and lines of credit. This model is supported by experienced risk assessment managers; and
  • a series of management reports detailing industry concentrations, counter party concentrations, loan grades and security strength ratings.

The Consolidated Entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. In accordance with its treasury risk policies, the Consolidated Entity can hold derivative financial instruments for trading purposes. Credit risk on derivative contracts used for these purposes is minimised as counter parties are recognised financial intermediaries with acceptable credit ratings determined by a recognised rating agency.

 

Liquidity risk

Liquidity risk arises from the possibility that the Bank is unable to meet its financial obligations as they fall due. Liquidity risk is managed through a series of detailed policies. This includes the management of cash flow mismatches, the maintenance of a stable, core retail deposits base, the diversification of the funding base and the retention of adequate levels of high-quality liquid assets.

 

Insurance risk

Risk management objectives and policies for risk mitigation

Insurance risks are controlled through the use of underwriting procedures, adequate premium rates and policy charges and sufficient reinsurance arrangements, all of which are approved through a Board approved governance structure. Controls are also maintained over claims management practices to assure the correct and timely payment of insurance claims

 

Strategy for managing insurance risk

Portfolio of risks

During the financial year, the Bank’s insurance subsidiaries issued a range of consumer credit insurance, life and general insurance products. The performance of the Bank’s insurance subsidiaries and its continuing ability to write business depends on its ability to pre-empt and control risks. The Bank’s insurance subsidiaries have a risk management strategy which has been approved by their respective Boards. It summarises the approach to risk and risk management.

 

Risk strategy

In compliance with contractual and regulatory requirements, a strategy is in place to ensure that the risks underwritten satisfy objectives whilst not adversely affecting the Consolidated Entity’s ability to pay benefits and claims when due. The strategy involves the identification of risks by type, impact and likelihood, the implementation of processes and controls to mitigate the risks, and continuous monitoring and improvement of the procedures in place to minimise the chance of an adverse compliance or operational risk event occurring. Included in this strategy is the process for underwriting and product pricing to ensure products are appropriately priced. Capital management is also a key aspect of the Consolidated Entity’s risk management strategy. Capital requirements take account of all of the various regulatory requirements to which the Consolidated Entity is subject

 

Prudential capital requirements

Prudential capital requirements established by APRA are in place to safeguard policyholders’ interests, which are primarily the ability to meet future claim payments to policyholders. These require the Consolidated Entity’s capital base to exceed the Prudential Capital Requirement throughout the year, not just at year-end. The level of capital requirements also takes into account the specific risks faced by the Bank’s insurance subsidiaries.

 

Methods to limit or transfer insurance risk exposures

Reinsurance

The insurance subsidiaries use reinsurance arrangements to pass on or cede to reinsurers risks that are outside of the subsidiaries’ risk appetite.

 

Underwriting procedures

Strategic underwriting decisions are put into effect using the underwriting procedures detailed in the Bank’s insurance subsidiaries’ Underwriting Policy. Such procedures include limits to delegated authorities and signing powers. .

 

Claims management

Strict claims management procedures ensure timely and correct payment of claims in accordance with policy conditions.

 

Asset and liability management techniques

Assets are allocated to different classes of business using a risk based approach. The Bank’s insurance subsidiaries have a mix of short and long-term business and invest accordingly. Market risk is managed through investing in cash, deposits, and bank issued commercial bills. No more than 35% of shareholder funds and funds backing insurance policy liabilities can be invested with any one counterparty, subject to counterparty credit ratings.

References

  1. ^ Annual Report 2018,  P. 110
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html
  2. ^ Annual Report 2018, P. 15   
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html
  3. ^ Annual Report 2018, P. 16
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html
    Investor Presentation 2018, P.28
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=1818
    http://www.ibisworld.com.au/industry/default.aspx?indid=526
    http://www.ibisworld.com.au/industry/default.aspx?indid=1706
    http://www.ibisworld.com.au/industry/default.aspx?indid=1703
  5. ^ http://quotes.wsj.com/AU/XASX/BOQ
  6. ^ http://www.boq.com.au/aboutus_corporate_history.htm
    http://www.asx.com.au/asxpdf/20160209/pdf/434xm41x0pkbqr.pdf
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/boq-successfully-completes-capital-notes-bookbuild-1746614.html
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/boq-closes-capital-notes-offer-raising-350-million-1768814.html
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/announces-sale-of-st-andrew-s-insurance-1863760.html
  7. ^ https://www.boq.com.au/About-us/board-of-directors
    https://www.boq.com.au/About-us/executive-team
  8. ^ Annual Report 2018,  P. 110
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html
  9. ^ Annual Report 2018, P. 120-129
    https://www.listcorp.com/asx/boq/bank-of-queensland/news/fy2018-annual-report-1989314.html