Bank of Queensland (BOQ) - Bell Potter

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Aug 5, 2014 - operational risk and in strengthening both its operating platform and competitive positioning. We also see
5 August 2014

Analyst TS Lim 612 8224 2810

Bank of Queensland (BOQ) On and up

Authorisation Chris Savage 612 8224 2835

Asset quality continues to improve

Recommendation

Buy (unchanged)

BOQ’s recent 3Q14 Pillar 3 report has pointed to further improvements in asset quality. Credit exposure growth was 5.5% on a rolling 12-month basis (up from 3% in the previous quarter) and equates to roughly 1.25 times system growth (in line with the blended target of 1.3 times system growth excluding Investec contributions). Impaired assets were lower at $359m ($364m in 2Q14) and 39% lower on a PCP basis ($588m in 3Q13). As a percentage of credit exposures, impaired assets are down to 99bp (104bp in 2Q14 and 171bp in 3Q13) and the pattern is similar for 90 days past due loans. The 2H14 BDD charge should now be lower than the $46m incurred in 1H14.

Price

$12.26 Target (12 months)

$13.50 (unchanged) Expected Return Capital growth

10.1%

Dividend yield

5.7%

Total expected return

15.8%

Company Data & Ratios Enterprise value

n/m

Market cap

$4,444m

Issued capital

363m

Free float

100%

Avg. daily val. (52wk)

$20.4m

12 month price range

$9.29 - $13.25

GICS sector Banks

Price Performance Price (A$) Absolute (%) Rel market (%)

(1m) 12.22 0.90 -2.16

(3m) 12.39 -0.48 -1.53

(12m) 9.32 32.30 22.69

Absolute Price

At least $1.00 valuation upside post Basel II accreditation Basel II accreditation in the form of a lower mortgage risk weighting (i.e. level playing field) is expected to increase the CET1 ratio by 2% and lead to surplus capital of $484m ($1.34 per share). Utilising the extra capital to boost lending by say $4bn (all else being equal while maintaining the equity ratio at close to 7.0%) would boost cash NPAT by around 10% and ROE and ROTE by 1%. Prospects of a higher overall riskadjusted return should then increase BOQ’s valuation by at least $1.00 per share.

Maintain $13.50 price target and Buy rating Our estimates are largely unchanged and we have maintained the $13.50 price target and Buy rating. We remain positive on BOQ given progress to date in lowering operational risk and in strengthening both its operating platform and competitive positioning. We also see value upside flowing from the recent Investec acquisition (including cost outs) and redeployment of surplus capital following Basel II accreditation that would boost returns and valuations as described earlier. The price target is the equivalent of 1.4 times 2015e book value and 13.7 times 2015e cash earnings, and 1.3 times 2016e book value and 12.9 times 2016e cash earnings, not unreasonable given healthier earnings prospects and acquired growth options. The target PB multiples are in line with the bank’s medium term ROE outlook.

Earnings Forecast Year end 31 August

$14 $13 $12 $11 $10 $9 $8 $7 $6

2013

2014e

2015e

2016e

NPAT (reported) (A$m)

186

285

356

384

NPAT (adjusted) (A$m)

251

294

363

391

EPS (adjusted) (A¢ps)

80

89

99

104

590%

11%

11%

6%

15.3

13.8

12.4

11.7

P/Book (x)

1.6

1.3

1.3

1.2

P/NTA (x)

2.0

1.6

1.5

1.4

Dividend (A¢ps)

58

64

70

74

4.7%

5.2%

5.7%

6.0%

ROE (%)

9.4%

10.2%

10.9%

11.1%

NIM (%)

1.69%

1.76%

1.79%

1.78%

100.0%

100.0%

100.0%

100.0%

EPS growth (%) PER (x)

Yield (%)

Aug Dec Apr Aug Dec Apr 12 12 13 13 13 14 BOQ S&P 300 Rebased

Franking (%)

SOURCE: IRESS

SOURCE: BELL POTTER SECURITIES ESTIMATES

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 8 THAT FORM PART OF IT.

Page 1

Bank of Queensland (BOQ)

5 August 2014

On and up Asset quality continues to improve Trends in BOQ’s Pillar 3 disclosures (Table 1) suggest asset quality has continued to improve across specific and general impairments. This is underpinned by strengthened credit management practices and lower appetite for excessive credit growth. Growth in gross credit exposures (GCE) was around 5.5% on a rolling 12-month basis in 3Q14, up from around 3% in the previous quarter and with the key driver being business lending (while mortgage lending growth inclusive of revolving facilities remains elusive). The GCE growth of 5.5% equates to around 1.25 times system growth that is in line with management’s blended target of 1.3 times system growth (ex-Investec). Impaired assets were lower in 3Q14 at $359m ($364m in 2Q14) and 39% lower on a PCP basis ($588m in 3Q13). These are likely due to further improvements in the commercial property space in all states and better realisation especially in the >$5m bucket. As a percentage of GCE, impaired assets have fallen to 99bp (vs. 104bp in 2Q14 and 171bp in 3Q13 and having peaked at 177bp in 2Q13). The behaviour is similar for 90 days past due loans, having fallen to 66bp of GCE (vs. 73bp in 2Q14 and 89bp in 3Q13 and having peaked at 139bp in 3Q11). Specific provisions and GRCL remain more than adequate in our view at 159bp of risk weighted assets (vs. 120bp on average for the majors and 100bp for the other regional banks). The current trend in the specific impairment expense suggests a BDD charge in 2H14 that is below the $46m incurred in 1H14. BOQ’s prudential buffers continue to be conservative. With growth in lending not being excessive, retail deposit funding should exceed 74% as reported in 1H14 (likewise the retail deposit to lending ratio should remain over 68% while the High Quality Liquid Assets ratio should be stable at around 15%). BOQ’s CET1 ratio climbed to 10.5% as a result of the capital placement related to the Investec acquisition. Post consolidation of the Investec business, the CET1 ratio should stabilise at around 8.8% (still the highest in the sector).

Table 1 – Pillar 3 asset quality trends still favourable BOQ Basel II Pillar 3 ($m)

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

Gross credit exposures (GCE)

29,119

29,232

32,987

33,381

33,027

33,483

34,141

34,131

33,699

33,741

34,417

34,224

34,400

34,879

36,305

Gross credit exposures - mortgages

19,458

19,876

23,551

23,943

24,141

24,525

25,126

25,374

25,056

24,776

25,294

24,934

24,973

25,015

25,205

Total loans - drawn

22,931

23,353

26,720

27,228

27,196

27,432

27,994

28,312

27,914

-

-

-

-

-

-

Home loans - drawn

17,244

17,654

20,990

21,448

21,443

21,657

22,276

22,727

22,342

-

-

-

-

-

-

RWA

19,152

18,946

20,225

20,525

20,475

20,671

20,947

21,098

21,274

21,346

21,752

21,552

21,474

21,717

22,138

Level 2 Tier 1 capital

1,718

1,718

1,718

1,718

1,740

1,520

1,969

1,998

2,000

2,177

2,153

2,155

2,147

2,215

2,634

Level 2 Tier 1 capital ratio

8.7%

8.7%

8.4%

8.4%

8.5%

7.4%

9.4%

9.5%

9.4%

10.2%

9.9%

10.0%

10.0%

10.2%

11.9%

Gross im paired loans (GIA)

251

421

446

442

421

576

592

515

512

596

588

500

417

364

359

90 days pas t due loans

320

344

460

461

447

364

365

327

326

354

307

281

279

256

241

Specific provision balance

91

140

151

173

158

249

258

247

253

214

198

173

163

150

148

Charges for specific provision

31

48

11

23

-16

91

9

-55

5

-13

-14

-25

-10

-14

-3

Write-offs

18

12

11

20

50

38

22

83

29

67

49

53

34

38

23

Specific impairment expens e

49

60

22

42

34

129

30

28

34

54

35

28

24

24

- YTD

173

1H/2H BDD charge

134

66

FY BDD charge GRCL

221 328

73

201 115

114

121

123

60

198

213

68

55

401 121

21

151 46

115

184

185

221

212

208

207

204

204

Growth Gross credit exposures - mortgages

-18.7%

2.1%

18.5%

1.7%

0.8%

1.6%

2.5%

1.0%

-1.3%

-1.1%

2.1%

-1.4%

0.2%

0.2%

0.8%

Impaired loans

-43.2%

67.4%

6.1%

-0.9%

-4.7%

36.7%

2.8%

-13.0%

-0.5%

16.4%

-1.5%

-15.0%

-16.6%

-12.5%

-1.3%

90 days pas t due loans

-30.7%

7.5%

33.8%

0.4%

-3.1%

-18.5%

0.3%

-10.5%

-0.2%

8.6%

-13.3%

-8.6%

-0.5%

-8.2%

-6.0%

Specific provision balance / GIA

36.4%

33.2%

33.8%

39.2%

37.5%

43.2%

43.6%

47.9%

49.5%

35.9%

33.8%

34.5%

39.1%

41.2%

41.1%

Impaired loans / GCE

0.86%

1.44%

1.35%

1.32%

1.28%

1.72%

1.73%

1.51%

1.52%

1.77%

1.71%

1.46%

1.21%

1.04%

0.99%

90 days pas t due loans / GCE

1.10%

1.18%

1.39%

1.38%

1.35%

1.09%

1.07%

0.96%

0.97%

1.05%

0.89%

0.82%

0.81%

0.73%

0.66%

Specific provision balance / RWA

0.48%

0.74%

0.75%

0.84%

0.77%

1.20%

1.23%

1.17%

1.19%

1.00%

0.91%

0.80%

0.76%

0.69%

0.67%

Ratios

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Page 2

Bank of Queensland (BOQ)

5 August 2014

At least $1.00 valuation upside post Basel II accreditation Note the above-mentioned CET1 ratio excludes the potential capital benefit to be derived from Basel II accreditation (i.e. under a level playing field scenario where BOQ’s average risk weight for mortgage lending falls from around 42% to around 23%). Based on current 2015e forecasts, we believe CET1 will increase by around 2% as a result of a lower risk weighted asset denominator – implying surplus capital of $484m ($1.34 per share). Utilising the surplus capital to boost spot lending by say $4bn (while maintaining the equity ratio at close to 7.0% that is still 1.0% higher than the average for the major banks) should further: 

Increase cash NPAT by around 10%;



Increase ROE by 1% to 12% and ROTE by 1% to 14%; and



Stabilise surplus capital at around $394m ($1.09 per share).

All else being equal, the higher resulting DCF in addition to surplus capital should increase BOQ’s valuation/price target by at least another $1.00 per share.

Table 2 – Potential impact of 23% risk weighting for residential loans BOQ ($m)

2015e

Level playing field - 23% residential risk weighting Revised residential risk weight

Pro-forma 1

Increased leverage

Pro-forma 2

877

1

P&L items

2

Net interest income

798

798

80

3

Other income

184

184

17

202

4

Operating expenses

-376

-376

-37

-413

5

Underlying profit

606

606

6

Impairment expenses

-88

-88

7

Contribution before tax

518

518

568

8

Corporate tax expense

-155

-155

-170

9

Minority interests & PEPs

0

0

0

363

363

398

10 Cash earnings as is

BOQ 2015+ management targets

666 -10

-98

11 Balance sheet items 12 Average equity

3,318

3,318

3,318

13 Average tangible equity

2,813

2,813

2,813

14 Average assets

47,065

47,065

4,444

51,510

15 Average IEA

44,569

44,569

4,444

49,013

4,444

52,029

16 Spot equity

3,555

3,555

17 Spot assets

47,584

47,584

3,555

18 Spot residential loans

27,580

27,580

4,444

32,024

19 Spot loans

38,680

38,680

4,444

43,124

20 Spot residential RWAs

11,584

-5,378

6,205

1,000

7,205

21 Spot credit RWAs

24,279

-5,378

18,901

1,000

19,901

22 Spot RWAs

26,477

-5,378

21,099

1,000

22,099

23 KPIs 24 NIM

1.79%

1.79%

1.79%

25 ROE

10.9%

10.9%

12.0%

26 ROTE

12.9%

12.9%

14.1%

27 ROA

0.8%

0.8%

0.8%

28 ROCRWA

1.5%

1.9%

2.0%

29 Equity ratio

7.5%

7.5%

6.83%

30 Residential risk weighting

42%

31 Other income as % of avg. assets

0.4%

32 Cost to income ratio 33 BDD as % of GLA

23%

23%

23%

0.4%

0.4%

Low-mid 160s 13%+

38%

38%

38%

Low 40s

0.23%

0.23%

0.23%

~20bp

2,385

34 Capital implications 35 CET1 capital 36

- As is

2,385

2,385

37

- Adjustments

-

-

-

38 Additional T1 capital

300

300

300

39 Tier 2 capital

474

474

474

40 Total capital

3,159

3,159

3,159

41 Risk weighted assets

26,477

-5,378

21,099

1,000

22,099

42 CET1 capital ratio

9.0%

11.3%

43 Tier 1 capital ratio

10.1%

12.7%

12.1%

44 Total capital ratio

11.9%

15.0%

14.3%

45 Implied surplus capital 46

- Per share

10.8%

484

394

$1.34

$1.09

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Page 3

Bank of Queensland (BOQ)

5 August 2014

The nuts and bolts Revisiting 2015+ management targets The current 2015+ targets exclude contributions from the Investec transaction and are thus considered ultra-conservative. As a guide, our medium term forecasts that include the Investec contributions are set out below relative to these targets: 1.

Loan growth at 1.1-1.2 times system vs. blended target of ~1.3 times system (1.2 times system growth for retail, 1.5 times system growth for business);

2.

NIM of 179bp (given the transaction’s higher incremental NIM) vs. target of low-mid 160s;

3.

Flat expense growth (given transaction synergies) vs. target of less than Inflation;

4.

Cost-to-income ratio of 38% vs. target of low 40s;

5.

BDD as a percentage of GLA of 23bp vs. target of ~20bp; and

6.

~13% ROTE that is broadly in line with the target of 13%+.

Maintain $13.50 price target and Buy rating Our estimates are largely unchanged (Table 3) and we have maintained the $13.50 price target and Buy rating. We remain positive on BOQ given progress to date in lowering operational risk and in strengthening both its operating platform and competitive positioning. We also see value upside flowing from the recent Investec acquisition (including cost outs) and redeployment of surplus capital following Basel II accreditation that would boost returns and valuations as described earlier. The price target is the equivalent of 1.4 times 2015e book value and 13.7 times 2015e cash earnings, and 1.3 times 2016e book value and 12.9 times 2016e cash earnings, not unreasonable given healthier earnings prospects and acquired growth options. The target PB multiples are in line with the bank’s medium term ROE outlook.

Table 3 – Estimate changes Bank of Queensland Y/e August 31 ($m)

2014e Current

2015e

Previous

Change

Current

2016e

Previous

Change

Current

2017e

Previous

Change

Current

Previous

Change

Profit & Loss Net interest income

725

725

0%

798

798

0%

852

847

1%

907

902

1%

Other income

165

165

0%

184

184

0%

196

196

0%

210

210

0%

Total operating income

889

889

0%

982

982

0%

1,048

1,043

0%

1,117

1,111

0%

Operating expenses

-380

-380

0%

-376

-376

0%

-396

-396

0%

-411

-411

0%

Impairment expenses

-87

-93

6%

-88

-88

0%

-94

-89

-4%

-104

-96

-8%

Net profit before income tax

422

417

1%

518

518

0%

558

558

0%

601

604

-1%

Corporate tax expense

-129

-127

-1%

-155

-155

0%

-167

-167

0%

-180

-181

1%

0

0

n/m

0

0

n/m

0

0

n/m

0

0

n/m -1%

Minority interests

294

290

1%

363

363

0%

391

390

0%

421

423

DPS (cps)

64

64

0%

70

70

0%

74

74

0%

78

78

0%

EPS (normalised cash basis) (cps)

89

88

1%

99

99

0%

104

104

0%

110

111

-1%

ROE

10.2%

10.1%

0.1%

10.9%

10.9%

0.0%

11.1%

11.1%

0.0%

11.3%

11.4%

-0.1%

NIM

1.76%

1.76%

0.00%

1.79%

1.79%

0.00%

1.78%

1.77%

0.01%

1.77%

1.76%

0.01%

NPAT (normalised cash basis)

Cost ratio Impairment expense as % of GLA

43%

43%

0%

38%

38%

0%

38%

38%

0%

37%

37%

0%

0.24%

0.26%

0.02%

0.23%

0.23%

0.00%

0.23%

0.22%

-0.01%

0.24%

0.22%

-0.02%

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Page 4

Bank of Queensland (BOQ)

5 August 2014

Bank of Queensland Company description BOQ is largely a retail bank with specialist business banking capabilities. It operates 262 branches and transaction centres (including 179 Owner Managed Branches and 75 corporate branches) and has access to 3,076 REDI and BOQ-branded ATMs. The regional bank operates predominantly in QLD (57% of retail loans, 59% of business before the Investec transaction [48% after]) with an expanding presence in WA (following the HME acquisition) and VIC, as well as through the Virgin Money Australia network.

Investment strategy BOQ is shifting towards the capital efficient wealth and higher spread asset finance businesses that should ultimately underpin higher NIM and ROE. Despite the BDD setbacks in 2011 and 2012, we feel the regional is now more than well capitalised and provisioned to start looking towards normalising and growing earnings again. With new management and tightened credit risk disciplines, leverage to the east coast and a better wholesale funding environment to look forward to, BOQ is potentially undervalued for its growth potential as and when operating conditions normalise.

Valuation The price target is based on the DCF valuation methodology (using 11.4% discount rate, 3.50% terminal growth rate and 8.5% ongoing Tier 1 requirement), earnings upside from increased leverage (including the Investec Australia transaction net of higher acquired loan book RWA capital requirements) and residual surplus CET1 capital under Basel II accreditation over current projected levels. The price target is the equivalent of 1.4 times 2015e book value and 13.7 times 2015e cash earnings, and 1.3 times 2016e book value and 12.9 times 2016e cash earnings, not unreasonable given better earnings prospects with its acquired growth options. The target PB multiples are in line with the bank’s medium term ROE outlook.

SWOT analysis Strengths 1.

New conservative management with the 3Rs banking experience (retail, rural, regional); and

2.

Strengthened credit rating, funding, capital and provisioning base.

Weaknesses 1.

Commercial property exposure at 2% of total exposures with the bulk in QLD;

2.

Proportion of wholesale funding although improving with expanding retail funding base; and

3.

Underperforming NSW OMB and WA but with the risk partially mitigated by new management with relevant experience and refocus on third party distribution.

Opportunities 1.

Multiple domestic retail banking, leasing and wealth management opportunities based on securing alternate distribution strategies (e.g. St Andrews purchase, acquiring building societies and health insurance);

Page 5

Bank of Queensland (BOQ)

5 August 2014 2.

Big Bang approach in creating Australia’s premier regional bank in challenging the majors by merging with another larger player; and

3.

Highly leveraged to economic recovery in QLD and NSW.

Threats 1.

Macroeconomic factors such as QLD seasonal factors, higher national unemployment and slowing credit growth;

2.

Changes in regulatory environment, especially the potential capping of banking fees that would crimp earnings growth;

3.

Customer leakage from adverse Storm and NSW OMB publicity, and related contingent liabilities; and

4.

Increased competition from the major banks especially in the retail deposit space.

Page 6

Bank of Queensland

Recommendation Price Target (12 months)

as at 5 August 2014

Bank of Queensland (BOQ)

Buy $12.26 5 August 2014 $13.50

Table 4 - Financial summary Bank of Queensland As at

Share Price (A$) Market Cap (A$M)

5-Aug-14

PROFIT AND LOSS Y/e August 31 ($m) Net interest income Other income Total banking income Funds management income Insurance income Total operating income Operating expenses Impairment expenses Net profit before income tax Corporate tax expense Minority interests NPAT (normalised) Adjustments - Amort'n of customer contracts - H/O restructuring costs - NSW OMB restructuring costs - HME integration costs - Gain on VISA IPO - Other NPAT (statutory basis) Add: RePS dividends & other Add: convertible note dividends Add: PEPS dividends Adjustments net of PEPS dividends NPAT (normal'd for dil. EPS)

2012 656 161 817 0 0 817 -373 -401 43 -12 0 31 0 -11 -5 0 -1 0 -31 -17 1 0 10 28 21

2013 694 162 857 0 0 857 -379 -115 363 -112 0 251 0 -9 -11 -38 -4 0 -4 186 0 1 2 74 263

2014e 725 165 889 0 0 889 -380 -87 422 -129 0 294 0 -5 0 0 0 0 -4 285 0 0 0 26 311

2015e 798 184 982 0 0 982 -376 -88 518 -155 0 363 0 -5 0 0 0 0 -2 356 0 0 0 24 380

2016e 852 196 1,048 0 0 1,048 -396 -94 558 -167 0 391 0 -5 0 0 0 0 -2 384 0 0 0 24 408

CASHFLOW Y/e August 31 ($m) NPAT (statutory basis)

2012 31

2013 251

2014e 294

2015e 363

2016e 391

Increase in loans Increase in other assets Capital expenditure Investing cashflow

-824 -821 0 -1,645

-1,062 540 -7 -530

-521 -161 -8 -689

-2,905 -1,528 -1 -4,435

-2,471 -613 -1 -3,085

Increase in deposits & borrowings Increase in other liabilities Equity raised Other Financing cashflow

1,545 -14 507 -186 1,852

527 325 -98 -273 481

1,130 -1,044 461 -221 326

2,994 1,238 85 -246 4,072

2,508 362 94 -269 2,694

237 671

203 873

-70 803

0 803

0 803

BALANCE SHEET Y/e August 31 ($m) Cash and liquid assets Divisional gross loans Provisions Other gross loans / inter div. Other IEA Intangibles PP&E Insurance assets Other assets Total assets

2012 671 34,340 -413 0 6,085 555 31 0 490 41,758

2013 873 35,302 -312 0 5,543 593 38 0 492 42,528

2014e 803 35,799 -289 0 5,985 600 45 0 211 43,155

2015e 803 38,680 -265 0 7,513 595 47 0 211 47,584

2016e 803 41,162 -276 0 8,127 590 48 0 211 50,665

Divisional deposits Other borrowings Other liabilities Total liabilities

31,172 7,149 538 38,859

31,699 6,692 1,320 39,711

32,829 6,787 181 39,797

35,823 8,025 181 44,029

38,331 8,387 181 46,899

2,464 196 106 133 0 2,899

2,563 0 111 144 0 2,818

3,023 0 105 230 0 3,358

3,109 0 105 342 0 3,555

3,202 0 105 458 0 3,766

41,758

42,528

43,155

47,584

50,665

264 265

314 347

331 360

367 396

374 403

Net change in cash Cash at end of period

Ordinary share capital Other equity instruments Reserves Retained profits Minority interests Total shareholders' equity Total sh. equity & liabs. WANOS - statutory (m) WANOS - dil. normalised (m)

12.26 4,444

VALUATION DATA Y/e August 31 NPAT (normalised) ($m) EPS (statutory basis) (cps) - Growth EPS (cash basis) (cps) - Growth P / E ratio (times) P / Book ratio (times) P / NTA ratio (times) Net DPS (cps) Yield Franking Payout (cash basis)

2012 31 -6 -110% 12 -85% 105.7 1.5 1.9 52 4.2% 100% 457%

2013 251 59 -1014% 80 590% 15.3 1.6 2.0 58 4.7% 100% 73%

2014e 294 86 45% 89 11% 13.8 1.3 1.6 64 5.2% 100% 75%

2015e 363 97 13% 99 11% 12.4 1.3 1.5 70 5.7% 100% 71%

2016e 391 103 6% 104 6% 11.7 1.2 1.4 74 6.0% 100% 71%

CAPITAL ADEQUACY Y/e August 31 Risk weighted assets ($m) Average risk weight Tier 1 ratio Core Tier 1 ratio Total capital ratio Equity ratio

2012 21,098 52% 9.5% 8.5% 12.6% 6.9%

2013 21,552 52% 10.0% 8.6% 12.2% 6.6%

2014e 22,102 53% 12.2% 10.8% 14.3% 7.8%

2015e 26,477 57% 10.1% 9.0% 11.9% 7.5%

2016e 28,242 57% 10.3% 9.2% 11.9% 7.4%

PROFITABILITY RATIOS Y/e August 31 Return on assets Return on equity ROTE Leverage ratio Net interest margin Cost / income ratio Cost / average assets Growth in operating income Growth in operating expenses Jaws Effective tax rate

2012 0.1% 1.0% 1.2% 4.8% 1.67% 46% 0.91% 1% 4% -3% 28%

2013 0.6% 9.4% 11.9% 5.2% 1.69% 44% 0.90% 5% 2% 3% 31%

2014e 0.7% 10.2% 12.9% 6.3% 1.76% 43% 0.89% 4% 0% 4% 30%

2015e 0.8% 10.9% 12.9% 5.7% 1.79% 38% 0.80% 10% -1% 12% 30%

2016e 0.8% 11.1% 12.9% 5.8% 1.78% 38% 0.79% 7% 6% 1% 30%

ASSET QUALITY Y/e August 31 Impairment expense / GLA Impairment expense / RWA Total provisions + GRCL ($m) Total provisions + GRCL / RWA Indiv ass prov / gross imp assets IBL / IEA

2012 1.17% 1.90% 483 2.29% 42% 96%

2013 0.32% 0.53% 383 1.77% 46% 95%

2014e 0.24% 0.39% 359 1.63% 51% 95%

2015e 0.23% 0.33% 335 1.26% 51% 95%

2016e 0.23% 0.33% 346 1.23% 51% 95%

1H12 326 77 403 0 0 403 -181 -328 -106 33 0 -72 0 -6 0 0 -1 0 -12 -91 0 0 5 8 -77

2H12 330 83 414 0 0 414 -192 -73 148 -45 0 103 0 -5 -5 0 0 0 -19 74 0 0 5 20 98

1H13 335 83 417 0 0 417 -187 -60 171 -51 0 120 0 -5 -11 -2 0 0 -2 101 0 1 2 20 124

2H13 360 80 439 0 0 439 -193 -55 192 -61 0 131 0 -4 0 -36 -3 0 -2 85 0 0 0 54 139

1H14 362 82 444 0 0 444 -195 -46 203 -63 0 140 0 -3 0 0 0 0 -3 135 0 0 0 14 149

-30 -6.4% 1.68%

39 8.3% 1.65%

39 8.9% 1.66%

41 9.8% 1.72%

44 10.3% 1.77%

INTERIMS Net interest income Other banking income Total banking income Funds management income Insurance income Total operating income Operating expenses Impairment expenses Net profit before income tax Corporate tax expense Minority interests NPAT (normalised) Adjustments - Amort'n of customer contracts - H/O restructuring costs - NSW OMB restructuring costs - HME integration costs - Gain on VISA IPO - Other NPAT (statutory basis) Add: RePS dividends & other Add: convertible note dividends Add: PEPS dividends Adjustments net of PEPS dividends NPAT (normal'd for dil. EPS) EPS (cash basis) (cps) Return on equity Net interest margin

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Bank of Queensland (BOQ)

Recommendation structure

5 August 2014 Research Team Staff Member

Title/Sector

Phone

@bellpotter.com.au

TS Lim

Head of Research

612 8224 2810

tslim

Sam Haddad

Industrials

612 8224 2819

shaddad

John O’Shea

Industrials

613 9235 1633

joshea

Hold: Expect total return between -5%

Chris Savage

Industrials

612 8224 2835

csavage

and 15% on a 12 month view

Jonathan Snape

Industrials

613 9235 1601

jsnape

Sam Byrnes

Industrials

612 8224 2886

sbyrnes

Sell: Expect 15% total return on a 12 month view. For stocks regarded as ‘Speculative’ a return of >30% is expected.

Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced

Industrials

Financials

Resources

operations or have been in operation for

Peter Arden

Resources

613 9235 1833

parden

some time but have only forecast cash

Stuart Howe

Resources

613 9235 1782

showe

flows and/or a stressed balance sheet.

Fred Truong

Resources

613 9235 1629

ftruong

Research Assistant

612 8224 2825

tpiper

Quantitative

Such investments may carry an

Tim Piper

exceptionally high level of capital risk and

Fixed Income

volatility of returns.

Damien Williamson

Fixed Income

613 9235 1958

dwilliamson

Barry Ziegler

Fixed Income

613 9235 1848

bziegler

Bell Potter Securities Limited ACN 25 006 390 7721 Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone +61 2 9255 7200 www.bellpotter.com.au

The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. TS Lim owns 407 shares in BOQ. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to Bell Potter, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.TS Lim owns 407 shares in BOQ.

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