The Bank of Queensland Ltd (ASX: BOQ) share price dropped over 7% today after the regional ASX bank share announced a plan to improve itself.
Transformation plan
BOQ has been looking at ways to reduce complexity across the business and support the transition to digital banking to improve shareholder returns and enhance the customer experience.
The bank has progressed to having 25% of retail customers on the new digital platform and the successful migration of initial pilot cohorts of ME Bank customers onto the digital bank. Full ME migration for deposit-only customers is expected to be finalised during FY25.
The first phase of BOQ’s digital mortgage rollout is “progressing to plan”. The bank said digitisation will “continue to enhance customer experience and reduce cost to serve.”
BOQ announced it’s going to convert all 114 of its owner-managed branch network to corporate branches. This move will “align the branch footprint” with its digital and relationship model, with “consolidation opportunities” as customers shift to digital channels.
The bank also said this move would reduce origination, compliance and head office support costs and enable “investment through the branch network into business bank growth corridors.”
The conversion is expected to be completed in March 2025. BOQ said while customers are increasingly choosing to transact digitally. BOQ said it’s “committed to maintaining an appropriate physical presence in key markets, recognising that branches remain an important part of the banking experience for some customers.”
The company will also invest in business banking, with a material investment in additional business banker roles, starting with ten specialist bankers joining this half. They will focus on targeted sectors including healthcare, professional services and agriculture.
It will support the shift of the portfolio balance sheet mix, recycling capital from lower-returning assets to higher-returning specialist segments. It could be helpful for BOQ shares, if this pays off.
Costs
BOQ expects the cost of the branch conversion to be in the range of $115 million to $125 million, pre-tax and this cost will amortise over approximately four years, starting in the second half of FY25.
At conversion date, the annualised net cash profit is expected to be “broadly neutral” and the capital impact is expected to be approximately 30 basis points (0.30%). Commencing in FY26, the annual net cash profit after tax benefit will be approximately $20 million.
BOQ expects it will be possible to enhance the benefits in future years.
Simplification program and FY26 targets
BOQ announced that it is targeting productivity gains with the reduction of up to 400 roles across the business. It’s offering redundancies or deployment opportunities.
It’s expecting to recognise a restructuring charge of between $25 million to $35 million, after tax, which will impact FY24’s statutory net profit.
This initiative will deliver an annualised saving of approximately $50 million, in addition to the previously stated simplification target of $200 million cost savings by FY26.
Ongoing industry-wide margin compression and elevated cost inflation have impacted returns. Due to that, BOQ has changed its FY26 targets to a return on equity (ROE) and a cost to income ratio of 56%.
It still intends to have a dividend payout ratio of between 60% to 75% of cash earnings.
The banking industry is a difficult place to be right now, so I’m not surprised BOQ is having to make changes, which the market doesn’t seem to like. It’s doing what it needs to try to grow profitably, but I wouldn’t buy BOQ shares based on this.
