Bank of Queensland Limited (BOQ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the BOQ business update. [Operator Instructions] I would now like to hand the conference over to Ms. Tanya Aaskov General Manager of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us. My name is Tanya Aaskov, General Manager, Investor Relations. Before we begin, I would like to acknowledge the traditional custodians of the land upon which we are meeting today to Gadigal people and recognize elders past, present and emerging. In a moment, I will hand over to the BOQ Group Managing Director and CEO, Patrick Allaway, to provide you with further details following today's announcement of our integrated risk program, revision and goodwill adjustment. Following which, we will invite questions and ask that you limit all questions to only these 2 items in consideration of our upcoming half year results to be reported next Thursday, the 20th of April. I now welcome Patrick to take you through the detail of today's announcement.

Thank you, Tanya, and thank you, everyone, for joining us today. I'm also joined here by our Group CFO, Racheal Kellaway; and our Group CFO, David Watts. As Tanya mentioned, we're here to take you through our announcement this morning. BOQ is in a very strong financial position, supported by our increased capital and liquidity buffers, cash earnings and sound asset quality with prudent risk settings. Firstly, I'd like to take you through the detail around our integrated risk program. As detailed in our 2022 AGM, we announced a shift in our priorities to build a simpler more resilient bank, which include the program of work to uplift our financial and operational resilience and our risk culture. We've made good progress in strengthening our financial resilience with strong capital and liquidity buffers with a CET1 ratio of 10.71% and a liquidity coverage ratio of 143%, up from 9.57% and 139%, respectively, from the second half '22. We have announced a $60 million, $42 million after tax, noncash provision which will be reflected in our first half '23 results for the cost of a multiyear integrated risk program to further strengthen BOQ's commitment to risk management. This program of work is well underway and follows reviews which have identified a material uplift as required in respect of BOQ's operational resilience, risk culture and AML/CTF program and compliance. We continue to constructively engage with our regulators in relation to the scope and governance of the integrated risk program and have external subject matter experts working with us. Additionally, we've committed to having the program independently assured. Our strategy is focused around strengthening, simplifying, digitizing and optimizing BOQ and the integrated risk program is key to achieving this strategy. The key areas of focus in the program by enhancing our underlying systems, processes and control environment to achieve a stronger, simpler bank, improving risk capability, awareness and end-to-end connectivity across the 3 lines of defense, investing in our systems and processes to ensure that we comply with all of our AML/CTF obligations and creating an organizational culture that is characterized by strength in identifying, escalating and managing current and emerging risks. As mentioned, the program is multiyear, and we estimate to run for up to 3 years. We consider this investment prudent and timely given our strong capital position, our transformation agenda and the current uncertain economic environment. Now moving on to the goodwill adjustment. Following a review of the carrying amount of goodwill in accordance with accounting standards, BOQ has determined to write down $200 million of goodwill in our first half '23 statutory profits. Management and the Board are confident in the future cash flows supporting the carrying value of goodwill. However, the current share price and resulting market capitalization is trading at a material discount to BOQ's assets and liabilities. Accordingly, we have increased the discount rate used to determine the value and use, which reduces the gap between BOQ's market capitalization and value and use of the cash-generating units, which goodwill is associated. Both of these items announced today are noncash one-off items reflected in our accounts and do not impact the cash flows of the business. Importantly, these items have no impact on our intentions to pay an interim dividend of $0.20 per share. The decision in respect to payment of the dividend is subject to finalization of audited accounts and regulatory approval. Additionally, we note that APRA has provided its written approval to redeem $200 million of floating rate subordinated notes due on the first of May 2028. We announced today that BOQ would exercise the right to redeem these notes. We remain in a strong financial position and well progressed in the execution of our strategic priorities to strengthen, simplify, digitize and optimize BOQ. I will now open for questions. And again, remind you that we will only be able to answer questions relating to those 2 items today and look forward to sharing more with you at our half year results on Thursday next week. Thank you.

[Operator Instructions] Your first question comes from Brendan Sproules with Citi.

Look, I just had a question on how this cost provision that you're making today. Actually, given that it's sort of going to be spent on sort of ordinary banking business like AML and other risk management things that every bank needs to make. How does this interact with the guidance you've given on your operating cost line? Are we taking costs out of that and putting them below the line and capitalizing them? Or is this in addition to that $0.02 guidance you gave us at the last results back in October?

So I'll just pass to Racheal Kellaway, just to respond to that. Thank you, Brendan.

No, this is in addition to the cost guidance that we gave at the full year.

And so can you maybe then sum up the overall sort of cost guidance, I guess, when you tie this together, given it's in addition and new information. Are we seeing like high single-digit, low double-digit cost growth in this result when I put the 2 together? Is that how I should be thinking about it?

Thanks, Brendan. Look, we're going to give more light on this at the results. The intention today was really to update you on 2 items that will impact our statutory results announced Thursday, and we have given continuous disclosure obligations, we announced at today. In relation to the expense line, we will provide an update at the half year results in Thursday.

Your next question comes from John Storey with UBS.

Morning team, and thanks for the opportunity to ask a few questions. Two questions on my side is, firstly, are there any penalties that APRA is imposing on the Group, whether it's -- I guess, in particular, around risk-weighted assets increases around operational risk-weighted asset increases. And then just the second question is just the timing of the announcement. Why put the announcement out 4 days ahead of your results. And related to this, maybe just get your views and certainly some of the questions that we've been fielding this morning, just around kitchen sinking and your kind of thoughts on that. Obviously, the $200 million goodwill write-down, there is a little bit of a capital uplift that comes from it, but just a perception around kind of kitchen sinking and the timing of the announcement would be useful.

Thank you for your question, John. So first of all, on the penalties, there are no penalties for regulators. So that's very clear. From a timing perspective, this is a continuous disclosure obligation that all listed companies have. As we announced at the AGM, we've been working on a program to strengthen our operational resilience and risk management. We called that out at the AGM. We're following internal and external reviews that we've done over the past half. The work is now being completed, and we've clearly scoped that program of work and cost of that program would work. The Board met last night, and it's appropriate for us to call that out to the market given the timing of us formalizing that scope of work. In relation to kitchen sinking, there's no intent to kitchen sink here. We have to comply with accounting standards. As you know, our share price is trading at a material discount to net asset value and that's a leading in the kind of impairment and accounting standards require us to assess our goodwill. And our financial models support strong future cash flows of the business. But given where the share price is trading, we felt it appropriate to increase the discount rate that we've used, and that has resulted in a $200 million impairment. Now our Audit Committee and Board meet regularly to discuss this in the lead up to our results. Given we had formalized the decision on that last night, it was appropriate to disclose to the market. But there's no intention here to use your words, kitchen sink.

Patrick, just maybe one more, if I could, just around the expected overall cost of the program. Obviously, you got $60 million that you're provisioning for now. I mean, is there any insight that you could provide the market and ourselves around what the overall cost potentially could be?

So we've provided for the program. As I said, we've been through a very thorough process to scope the program of work. And the $60 million is our best estimate of our costs over the next 3 years and accounting standards required us to take that upfront as a provision.

Excellent. Thanks so much, Patrick. Appreciate it.

Thanks, John.

Your next question comes from Andrew Triggs with JPMorgan.

Patrick, interested in just the -- some more granularity around what's being spent in the integrated risk program. Can you give us any more details on this? And particularly, I'm interested in BOQ has been having to address some data latency issues which arose from the open banking noncompliance issue. Is that captured as part of the $60 million? Or should that be reconsider that those uplifts in data latency and systems being captured in BAU costs, please?

Yes. So they capture the BAU costs. So they're not related to this program of work. This program we work really would like to enhancing our underlying systems and processes and our control environment on issues identified on reviews that we have conducted over the past 6 months. And that's a real focus to improve our risk capability and our awareness of end-to-end connectivity across the 3 lines of defense. So we are investing in systems and processes to ensure compliance and we also are investing in uplifting our organizational culture to ensure that we identify, escalate and manage current and emerging risk.

And just turning to the dividend. Could you just elaborate, please, on the rationale for reducing the dividend? Obviously, this partly relates to the outlook for earnings. So can you talk to either that or the sustainable payout ratio that you think the bank can run to, please?

Yes. So we haven't changed our target dividend payout ratio of cash profits. Whilst the provision is a noncash item, we thought it appropriate to pay 60% of the payout ratio of earnings after deducting the provision. But obviously, the impairment that we have taken is not impacting the dividend. I do want to qualify the 20 sentiment by saying we have not finally order our results, so it will be subject to or the results and regulatory approval. Thank you.

Your next question comes from Richard Wiles with Morgan Stanley.

Patrick, you've said the balance sheet is strong. You've revealed the CET1 ratio and the LCR that leads to a couple of questions. Can you also give us an update on provision coverage? You've talked about strengthening the bank. I think that's an important part of it. Your collective provision coverage is below the group. So have you made any decision around provision coverage? And secondly, can you talk about why the CET1 ratio has moved up to 10.7%. How much of that movement is due to APRA's new framework, what's the change in the reported ratio resulting from the move to the new framework from 1st of January.

Thank you for your questions. So in related to provision coverage, we'll provide an update at the results in relation to that. So it's not appropriate for us to talk about today. In relation to CET1, yes, we have had a an uplift from Basel III. And we will give a detailed update at the results in relation to what Basel III has done to our CET1 ratio.

So Patrick, with the announcement today and the result not until next Thursday, how should investors sort of interpret the profit announcement? We're going to have 4 trading days. We don't know whether the earnings miss is due to additional provisioning, higher costs, a lower margin. How -- can you make a broad comment about the operating performance of the group and how investors should interpret this over the next 4 days before we get more detail?

So we will comment on the Board operating performance next Thursday. But what I will say is that the statutory profit that we're announcing today is not materially out of line with consensus if we exclude the 2 items that we've updated today. So we felt that from a continuous disclosure perspective, it was important to disclose the provision that we're taking and the impairment, which clearly reduces our statutory profits. But in terms of operating performance, it is appropriate to go into detail and provide the context around our operating performance on Thursday. But what we are telling you today is the group is in a strong financial position. It's producing strong cash flows and has strong capital liquidity buffers.

Your next question comes from Jonathan Mott with Barrenjoey.

Patrick. I'm just going to follow up directly from what Richard asked. We've been looking at the banks for a long time now, and we're seeing a lot of profit earnings come out, but I've never seen the company come out and provide a cash earnings number with no disclosure around whether this is driven by margins, volumes, cost, bad debt. And with the stock trading down sharply this morning and 3 or 4 more trading days, do you think it's appropriate that the stock continues to trade when there's such a lack of information about the earnings that the company has provided. And is it appropriate that the stock is trading? Or why won't you provide more information on the profit, which you've provided to the market?

Thanks for your comments, John. It is appropriate for the stock to continue to trade. As I said earlier, we've got a continuous disclosure obligation. And we felt it important that we actually provide our annualized cash after-tax earnings to support the comments that we are making in relation to the 2 updates that we've given today. They are under the order of results, and it is not appropriate for us to talk about the content of those results today. But the market should get comfort from the fact that we are calling out that we are paying a $0.20 dividend. We are calling out that our cash earnings are strong and that these are noncash one-off items impacting our statutory profits.

Okay. I'd be -- to define a few of those things. But if I move on to another question, you've talked a lot about the simplification program that's going to improve the efficiency, that we've also reduced risk. We literally see companies go through and have a material tidy up and increase the resilience and strength of their business, there's always a revenue impact because you stop doing business that you otherwise would have done. You've given us the cost targets for this program. What do you expect the negative revenue impact to be on the business?

So we don't expect any negative revenue impact from this program. This program actually will create a better bank that will better service our customers, and it doesn't impact revenues.

Your next question comes from Josh Freiman, Macquarie.

Just a quick question for me, conscious most have been asked on the integrated risk program. I guess I just have a quick question with respect of your dividend sort of expanding on that point. I noticed there's a line there, which has 1.5% DRP discount, just at the bottom, I think, of the first page. And your dividend cut there as well with what looks like a relatively adequate capital position. How should we read into that with respect to the DRP discount? Is that necessary at this point in time?

Look, our capital position is very strong. We have and we will update in more detail the content of our capital, but we're targeting a CET1 range between 10.25 and 10.75 and our capital position is at the top end of that range. We do think it's prudent in going into the economic cycle that we're going into at the moment to retain a very strong capital position. So we will keep the DRP on with a 1.5% discount. And we think that's appropriate to maintain a very conservative strong capital buffer in the current environment.

Your next question comes from Matt Dunger with Bank of America.

Yes. Thank you, Patrick and Racheal. If I could just ask, you've got a target out there for over 9.25% ROE by FY '26. And on my estimates, this goodwill write-down adds about 25% to your ROE or less equal. Would you take that into account when considering and providing a future update on these targets?

If you would like us to, we can absolutely call that out. But we are going to talk about ROE at the results. So I don't think it's appropriate for us to discuss it today.

Understood. And Patrick, you just called out the emerging risks that you're looking at for the integrated risk program. Does this include lending standards and credit risk? Or is this focused solely on operational risk?

This is focus solely on operational risk. Our credit book is very strong. We will give an update to the market at the full year results, and we have very prudent credit.

[Operator Instructions] Your next question comes from Nathan Zaia with Morningstar.

I just had a question about the risk program. Like how are you thinking in terms of beyond the 3 years? Like is there an expectation, the program identifies areas where you need to spend or increase your spend permanently? Or do you think once you complete those cost savings might offset some of that incremental spend? Like what are you thinking you find or could find as you complete the program?

So thank you for that. Look, we're on a continuous improvement journey in uplifting our risk management framework. But this particular spend is a one-off spend. It's focused on the key scope and work that we've identified through our reviews. At the end of the program, we would expect that we have it fully embedded and sustained and that the expense would not be repeated. Sorry, just on your second part of your question, obviously, on simplification, which we called out in the ASX release. We will update the market in the second half in relation to the program -- productivity program of work to simplify BOQ. And we do anticipate that we will get product to the savings and efficiency from that program.

Your next question comes from Ed Henning with CLSA.

Just given the integrated risk program, will this take capacity away from your IT staff in pursuing that simplification program and potentially push out further cost savings from what you've previously called out?

So this is very integrated in both our simplification and digitization program. They are all very aligned around strengthening the bank and getting off complex legacy manual controls and digitizing the bank. So if you look at the 3 programs of work across the risk program, the simplification program and the digitalization program they are fully integrated and aligned with strengthening the bank.

So this was all planned ahead. You're not fast-tracking your risk culture to then come back to the simplification program. You're not taking away capacity at least initially?

We're not taking away capacity. So maybe if you could just take you back to the AGM, where we said we'd shifted our priorities. So in early December, at the AGM, I made it very clear that we had shifted our focus to strengthening BOQ through a simple more resilient bank. The strategic update that we will give to the market on Thursday, we'll provide some more color to that, but we did call out at the AGM that there were 4 key programs to that work. One was strengthening the bank. The other was simplifying the bank. The third was digitizing the bank and the fourth was optimizing our returns. Those strategic priorities are very integrated and are well planned. And we will give the market an update of that on Thursday.

That's great. And then just a second one. Before you talked about you're pulling back your dividend, and you've still got 1.5% DRP discount and you're being conservative on your capital range. Given where your capital is and given those the discount in place. Are you worried about anything coming down the pipeline on capital, any hits to the capital base? Or you just want to run, be conservative at this point in the cycle?

No, we're not worried about anything and I think we feel it's absolutely prudent to hold higher capital buffers through the -- we're going into, ensuring that we come out of the cycle in a really strong position to pursue growth and we feel it's absolutely appropriate. But the high capital buffers are not anticipating anything that we're concerned about.

All right. And just one last clarification, one. Did the increasing integration risk program, did that arise from any particular issue or AML issue that's come through? Or it's just you guys that know that you -- after you've done some work that you need to fix up resilience in your operational risk.

Yes. So the program is driven by the Board, and it's appropriate and aligned with the shift in priorities that we announced at the AGM. We obviously have a very close working relationship as all banks do with our regulators. And it's aligned with their prudential requirements. But certainly, from our perspective, we are committed to the program of work. As I said, it's a continuous improvement journey with more work required and very aligned with prudential standards.

Your next question comes from Azib Khan with E&P.

Just on the $60 million cost provision, I understand that you're saying it's a one-off cost, and that's the reason why it's being created as a noncash item. But at the same time, Patrick, you've also mentioned earlier that the program of work involves enhancing underlying systems and processes. And to me, it is sounding like, and correct me if I'm wrong, but it is sounding like you're now making up for a lack of investment in the areas of resilience and risk capital over the last few years. So from that perspective, and given that it does involve enhancing underlying systems and processes, it doesn't sound like it should be a noncash item. So why is it being treated as a noncash item, given that it sounds like it's making up for what should have been BAU costs over the last few years?

I might get Racheal to talk to the accounting standards. But before she does, as I said, through a number of views and self reviews and external reviews, we have identified improvement required in our operational resilience and risk framework. This is a program of work to uplift those issues that were identified. We see it as a liability and have taken the appropriate accounting standards to reflect as a provision, but I might get Racheal to maybe make any more saves if she thinks it's appropriate.

Azid, I think Patrick's described the need for it to be raised the provision. I think that whilst we are always very conscious of not taking things out of cash and putting them in as noncash items. I think in this case, there's a precedent across the industry, but also the fact that it is a multiyear program, we felt that adjusting cash earnings for this in this period is an appropriate thing to do. So it's clear, particularly given the fact that there's sort of at least sort of 3 years' worth of costs associated with that provision.

And just to add to that, it's a one-off expense related to issues that we've identified in the probable work, and it's a commitment and an ongoing commitment from the bank over the next 3 years to spend that money. As I said, it's one-off. We anticipate those expenses are not ongoing that we will actually have an integrated sustainable program on rectifying those issues.

Just one more question, if I may. Outside of risk and resilience, Patrick, have yourself and the Board identified any other areas where you feel there's been under investment.

Look, we've previously called out under investment in technology and our digitization program that we've talked to the market about for the last 2.5 years is catching up to the material underinvestment that this organization has in shifting off its legacy complex platforms and moving from manual controls to digitized bank. But nothing outside of that to your question.

Your next question comes from Richard Wiles with Morgan Stanley.

Patrick, I've got another couple of questions on the dividend. You've talked about wanting to take a conservative approach on capital. Are you doing the same on the dividend? In other words, in making the decision to cut the dividend and what you describe as an uncertain economic environment, are you now confident that you won't have to take another dividend cut if that economic environment deteriorates?

We don't give outlook -- the outlook on dividends. We are making a decision today based on our capital position and where we'd like to hold our capital position. We also said it also reflects the provision that we've taken. So if you deduct that provision from our cash after-tax earnings, we're paying 60% after that deduction, which we think is appropriate. But I'm not going to give you an outlook on dividends, other to say that our target payout ratio on cash earnings still stands.

And then last year on the dividend, your payout ratio in the second half was higher than it was in the first half. You're below 60% in the first half and above 60% in the second half. Are you thinking about it the same way this year? Or should we expect that the payout ratio will be around 60% in each half of the year.

As I said to you, we're not going to give you an outlook. We do look at our dividend on an annualized basis, and we will make the appropriate decisions at the full year.

Your next question comes from Brendan Sproules with Citi.

I just have another couple of questions. Just on the AML component of the program. In the last couple of years, has BOQ been under investigation from AUSTRAC and if so, is there an enforceable undertaking in place as we've seen other banks find themselves in that position. And then finally, what are some of the AML issues that you are trying to address here in this program?

Brendan, we are not under investigation from AUSTRAC, and we do not have an enforceable undertaking. If we did, we would have a disclosure requirement. This is really about continuous improvement in our compliance with our AML/CTF program. And we recognize that we have more work to do. The bar is lifting consistently every year with regard to this. And we are continuing to see a significant increase in fraud and criminal activities. And we are very committed to ensuring that we actually have -- we have a strong AML/CTF program. I'm going to suggest that we close questions at this time, but I wanted to thank all of you for joining us today, and we look forward to speaking to you in more detail about our results next Thursday.

And that concludes our conference for today. Thank you for participating. You may now disconnect.