Bank of Queensland (BOQ) confronts a number of challenges. Notably the bank has a weaker funding mix and smaller scale compared with the majors. Its share price has also lagged its peers.

According to Morningstar analyst Nathan Zaia, investors may be avoiding the stock because of management issues.

In fact, since announcing the sudden departure of CEO George Frazis in November 2022, shares in BOQ are down 8%, underperforming Bendigo and Adelaide Bank (BEN) - its closest peer by loan size, which is up 9%.

“Stability in the top-job has been an issue for the bank since David Liddy passed the torch in 2011 after a 15-year stint,” acknowledges Zaia in a detailed note on the bank.

The average tenure of the four CEOs after Liddy lasted less than 3 years.

Frazis’ departure is marked by an unfinished major digital transformation strategy, a project he had initiated and flagged further details about the plan just a month before his resignation.

“The recent CEO sudden departure raises questions for investors,” says Zaia, calling out the potential for this digital strategy to be delayed under new management, resulting in potentially higher costs.

However, Zaia thinks the digitisation program to support loan and deposit growth, with productivity benefits, is largely intact.

Notably its acquisition of ME Bank has been successful with “cost synergy targets subsequently upgraded”.

Maintaining competitiveness


For Zaia, the current share price is not reflective of the bank’s outlook.

He expects loan growth to average 3% per year – slightly below the market as the bank struggles with aggressive pricing by the larger lenders in a higher rate market.

However, its investment in technology and digital offerings will help the bank remain competitive and importantly, the bank has not lowered its lending standards in a bid to drive loan growth.

Zaia also sees scope to grow its transaction accounts, crucial given that is a source of funding for banks. Around 31% of Commonwealth Bank's (CBA) funding and 27% of Westpac's (WBC) funding comes from transaction accounts, compared with just 6% for BOQ.

“The bank can grow its share of transaction accounts, which are the cheapest and stickiest source of funding,” adds Zaia.

On his assessment, BOQ grew its “transaction accounts by 19% over fiscal 2022. He attributes this good result to the bank finally launching a competitive banking app.

Management noted origination times on opening a deposit account are down to fewer than 5 minutes compared with 30 minutes previously, meaning more potential customers can convert

“This means owner branch managers and business lenders are finally happy to recommend the new offering to customers.”

Merger talks?


Finally, as Zaia was putting this note together, media reports of talks between BOQ and Bendigo and Adelaide Bank over a possible merger began swirling.

While unconfirmed, Zaia does not see any upside if a merger was to go ahead, in particular because of the disparate systems between the two banks.

“I think a merger can make sense if it’s possible to consolidate systems and processes to lower operating costs.

“I’m not sure if bringing together BOQ which has a branch franchise model and Bendigo which has community branch model makes that even more challenging.”

Bank of Queensland is currently trading at a near-20% discount to Morningstar's fair value estimate of $8.80 per share.

Morningstar Investor subscribers can access the full report here.