Bank of Queensland’s tech bet leaves operating performance to chance

The bank may achieve savings— or leave its operating performance structurally weaker.

The Bank of Queensland’s (BoQ) ongoing wager on tech upgrades to drive cost savings is leaving the bank vulnerable to a “structurally weaker” operating performance should it fail to achieve its targets, warned S&P Global Ratings.

The mid-sized Australian bank is aiming for operating cost savings through its ongoing program to upgrade its technology capabilities and simplify its processes and product suite. 

The move comes amidst an increasingly homogenized and price-sensitive nature of the Australian mortgage market, which is reportedly testing BoQ's ability to compete in its traditional retail banking business,” S&P said said in a report where it affirmed the bank’s 'A-/A-2' rating.

However, a delayed implementation or failure by BoQ to execute on its technology upgrade and simplification could heighten operational risks, and leave costs elevated.

Overall, S&P maintains its base case for BoQ as one of success, with a 1 in 3 chance that BoQ’s operating performance will be left weaker.

“In our base case, we expect that BoQ will be successful in restoring its earnings and lending growth to levels broadly in line with similarly rated Australian regional banks. The bank is targeting cost reductions and improvements in products and customer experience by 2026,” it noted.

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Negative outlook
S&P has also revised BOQ’s outlook to negative, noting that its profitability remained low compared to similarly-rated banks.

“We consider changes in the bank's senior management in the past two years to also underscore the strategic challenges it faces,” S&P said.

Margins remain under pressure due to competition on both sides of the balance sheet, it added, whilst costs may remain elevated over the next two years. 

The bank has announced a contraction to its loan book at its half year results presentation on 17 April 2024. BoQ's retail lending portfolio shrank by 2.7% for the 12 months to March 31, 2024; this includes a 7% contraction in the BoQ Blue brand.

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Positive base case
Benefits to BoQ’s successful tech transformation would include shorter turnaround times to origination.

The bank should also gain the ability to provide better pricing as digital lending lowers the cost of loan origination.

The negative outlook reflects a one-in-three likelihood that BoQ's operating performance could become structurally weaker compared to its peers. 

“This could eventuate if BoQ is unsuccessful in achieving its targeted operating cost savings via its ongoing program for a technology upgrade, or simplification of its processes and product suite,” S&P said.

The ratings agency said that it can revise its outlook of BoQ from negative to stable should BoQ’s earnings and lending growth be in line with its peers by 2026. This would reflect a successful implementation of its technology upgrade and simplification program, it said.