Digital Mortgage Shift Will Aim To Improve Efficiency Amid Analyst Disagreement

Key Takeaways

• The shift to a digital mortgage platform and operational simplification is set to enhance efficiency, customer experience, and margins by FY '26.
  
• Strategic focus on business banking growth corridors and branch conversions align with digital strategies, boosting competitive advantage and profitability.
  
• The Bank of Queensland's transformation strategy focuses on customer experience and shareholder returns, potentially driving revenue growth, financial resilience, and improved net margins.

Catalysts

Provides various financial services in Australia.

• The transformation to a digital mortgage platform is expected to reduce the Bank of Queensland's cost to serve and improve customer experience, potentially leading to higher revenue growth and operational efficiencies by FY '26.
  
• The conversion of owner-managed branches to corporate branches aims to simplify the distribution model and align with digital strategies, which is projected to enhance net margins and increase profitability by approximately $20 million annually from FY '26.
  
• BOQ's strategic focus on business banking and increasing the number of business bankers by 70% in growth corridors aims to drive revenue growth by capitalizing on higher-margin business lending in specialist sectors.
  
• Accelerating investments in bankers and new business centers in growth corridors, particularly in Queensland, is expected to support earnings growth and enhance the bank's competitive advantage in the business banking landscape.
  
• The simplification of BOQ’s operating model and technology platforms, including the migration of customers to a digital bank and the decommissioning of legacy systems, is projected to deliver significant operational efficiencies and contribute to a lower cost base, thereby boosting net margins.

Bank of Queensland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Queensland's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.1% today to 23.3% in 3 years time.
• Analysts expect earnings to reach A$414.6 million (and earnings per share of A$0.54) by about February 2028, up from A$284.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$468.9 million in earnings, and the most bearish expecting A$316 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 16.3x today. This future PE is lower than the current PE for the AU Banks industry at 14.6x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Bank of Queensland Future Earnings Per Share Growth

Risks

• The Bank of Queensland's transformation into a simpler specialist bank, with a focus on improved customer experience and enhanced shareholder returns, may lead to stronger financial outcomes, including potential growth in revenue and earnings.
  
• The business lending division has shown growth, with a 7% increase on an annualized basis, indicating potential revenue growth opportunities in targeted specialist segments.
  
• The completion of a digital retail platform and plans to return to sustainable home lending growth could improve operational efficiency, lower costs, and stabilize or increase net margins over time.
  
• Strong financial resilience, including a CET1 ratio at the top end of the target range and a disciplined approach to liquidity management, could support stable earnings and potentially improve shareholder returns.
  
• Proactive cost management and increased productivity targets, with $250 million in planned savings by FY '26, indicate a focus on improving net margins, which could offset revenue challenges and support earnings growth.

Valuation

• The analysts have a consensus price target of A$6.004 for Bank of Queensland based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$7.5, and the most bearish reporting a price target of just A$4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.8 billion, earnings will come to A$414.6 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$7.03, the analyst price target of A$6.0 is 17.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.