Sandstone Insights: BOQ staff cuts and strategic overhaul ahead

ASX code: BOQ

Suggestion: Sell

Need to know

• Fiscal year (FY) 2026 estimated return on equity (ROE) target cut from over 9.25% to 8.00% due to margin compression and cost inflation
• Bank of Queensland (BOQ) will reduce staff by approximately 400 (13%) by December 2024 and increase cost savings to A$250 million by FY 2026
• Buying out 114 branches will cost A$115 million to A$125 million pre-tax in the second half (2H) of FY 2025.

Restructuring and financial strategy adjustments

BOQ staff reductions and cost savings

BOQ will reduce staff by approximately 400 positions, or 13%, by December 2024. The goal is to increase cost savings from A$200 million to A$250 million by FY 2026. BOQ has reported "identified further opportunities to streamline its operating model as part of its ongoing transformation.” However, the turnaround under Chief Executive Officer (CEO) Patrick Allaway is not progressing as planned, and more aggressive measures are required.

Branch conversion costs

Buying out 114 branches will incur a pre-tax cost of A$115 million to A$125 million in 2H 2025. BOQ announced it will convert all 114 of its Owner Managed Branch (OMB) networks to corporate branches. This in-house transfer will be amortised over four years starting from 2H 2025. From FY 2026, the restructuring is expected to bring an annual cash net profit after tax (NPAT) benefit of about A$20 million, with potential for growth in future years. However, this plan carries substantial risks, including challenges in execution, regulatory compliance, and potential loss of market share.

Changes to FY26 targets and capital settings

BOQ has adjusted its FY 2026 targets due to "ongoing industry-wide margin compression and elevated cost inflation" since the original targets were set in 2022. The new targets include an ROE of 8.00%, down from over 9.25%, and a cost-to-income (CTI) ratio of 56%, compared to the previous target of under 50%. Despite these changes, BOQ has kept its common equity tier 1 (CET1) target range at 10.25% to 10.75% and maintained its dividend payout target range of 60% to 75% of cash earnings.

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Investment view

BOQ is facing significant risks, including challenges in operational execution, heightened regulatory scrutiny, and possible market share erosion. Its smaller scale makes it difficult to meet its cost of capital, especially with new targets that fall well below this threshold amid growing regulatory demands and competitive pressure.

Market sentiment remains negative, and the current share price appears expensive given the bank’s low return on equity and the associated risks.

With a market capitalisation of approximately A$4 billion and a share register primarily composed of domestic retail investors, BOQ represents a tough investment. The CEO and management team face a difficult task ahead in turning the bank’s fortunes around. We maintain our Sell rating on BOQ.

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}