UBS: BOQ cuts divvy again

Welcome to the future of Aussie banks, via UBS on UQ:

ONE LINER
NPAT miss on higher Bad Debts. Dividend cut for the second consecutive half.

KEY NUMBERS (FY19)
FY19: (1) Cash NPAT down 14% to $320m (Cons. $330m); (2) Cash basic EPS down 16% to 80cps (Cons. 81cps); (3) Final 2H dividend 31cps (Cons. 34cps).

RESULT HIGHLIGHTS (2H19, sequential)
(1) Revenue up 1% to $548m boosted by $5m trading income (Cons. $551m); (2) NIM down 2bp to 1.92% (Cons. 1.93%), Credit Growth 1.6% (UBSe 1.0%) driven by 15% growth in BOQ Finance (leasing); (3) Non Interest Income fell 3% to $63m (Cons. $66m), albeit boosted by higher trading. Underlying Banking Non Interest Income fell 9%; (4) Costs were up 5% to $282m (Cons. $283m), in-line with guidance; (5) Credit Impairment Charge $44m or 19bp of GLA (Cons. $31m or 14bps); (6) Asset quality deteriorated given a handful of large commercial exposures including agriculture. Combined with a “less certain economic outlook”, the forward looking IFRS 9 model was negatively impacted. NPLs 110bps (1H19 at 96bp); (7) CET1 capital down 22bps to 9.04% due to IT spend, higher RWA growth and a decline in the DRP participation.

VALUATION
Our valuation and price target of $8.25 (Gordon Growth model + Franking based) remain unchanged.

GUIDANCE
“We expect lower year on year cash earnings in FY20”. A strategic and productivity review is underway with a market update due in late February 2020. Revenue and impairments are expected to be “broadly in line with FY19, subject to market conditions”. Cost guidance: “Higher amortisation and ongoing regulatory costs in FY20E”; ~$30m capital expenditure to transition VMA into a digital bank in FY20E with “launch costs” likely in 4Q20E/1Q21E.

UBS COMMENT
Another tough result for BOQ, with a second consecutive dividend cut. Things are not getting any easier.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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