2017 Annual Report Year ended 31 August 2017 Contents Chairman and Managing Director & CEO’s letter 5 Directors’ Report 7 Directors’ Details 8 Operating and Financial Review 12 Remuneration Report Introductory Message 47 Remuneration Report 49 Lead Auditor’s Independence Declaration 75 Financial Report Income Statements 78 Statements of Comprehensive Income 79 Balance Sheets 80 Statements of Changes In Equity 81 Statements of Cash Flows 85 Notes to the Financial Statements 86 Other Information Directors’ Declaration 143 Independent Auditor’s Report 144 Shareholding Details 148 Shareholder Information 151 5 Year Financial Summary 152 Glossary 153 Find out more: boq.com.au/annual_reports/2017 Continuing to deliver results for shareholders Cash Earnings Statutory Net Profit Profit Results after Tax after Tax ($ Millions) $378m $357m $360m $338m $352m $301m $318m $261m 2014 2015 2016 2017 CASH EARNINGS AFTER TAX STATUTORY NET PROFIT AFTER TAX 5% increase 4% increase in earnings from FY16 in earnings from FY16 $378m $352m Basic Cash Earnings Dividends Special Dividend Earnings & Dividends per ordinary share per ordinary share per ordinary share Net interest margin (Cents per ordinary share) 97.6 8 89.5 97.3 95.6 % 74 76 76 66 1.87 Down 7bps from FY16 2014 2015 2016 2017 BASIC CASH EARNINGS DIVIDENDS SPECIAL DIVIDEND Cash cost to PER ORDINARY SHARE PER ORDINARY SHARE PER ORDINARY SHARE (Cents per share) (Cents per share) (Cents per share) income ratio ¢ ¢ ¢ 97.6 76 8 % Up 2% from FY16 Unchanged from FY16 46.6 Down 20bps from FY16 Loan Impairment Expense ($ Millions) 86 Cash return on equity 74 67 48 10.4% Up 10bps from FY16 2014 2015 2016 2017 $48m Down 28% from FY16 Bank of Queensland Limited and its Controlled Entities 3 Delivering our strategy Our strategy is to focus on niche segments where customers value a more intimate banking relationship. It’s all part of our mission to prove it’s possible to love a bank. Highlights for our 4 strategic pillars Customer in charge Grow the right way 190 $4.4 BILLION 190 branches including in lending to niche business segments 109 Owner Managed branches 11 BPS 192 Loan impairment expense 11 basis points upgraded ATMs of gross loans and advances 211,000 9.39% internet banking customers Common Equity Tier 1 capital 7,500 accredited brokers Always a better way Loved like no other DIGITISING LENDING 200+ PLATFORMS employees signed up to the with improvements to our retail, commercial Banking and Finance Oath and lease management systems 39% 1% women in leadership positions Underlying expense growth $577,500 in community investment ChairmanChairman’s and and Managing Director & CEO’s 2017 Message Managing Director & CEO’s Message Dear Shareholder Our 2017 financial year marks the fifth successive year that BOQ has delivered an to one per cent. Indeed, our continuous improvement program continues to create increased profit. Cash earnings after tax increased five per cent to $378 million savings that we are reinvesting back into the business, particularly in technology whilst statutory profit after tax grew four per cent to $352 million. Based on these projects that will help us future proof BOQ. This year’s result was also supported by a results, the Board has determined to pay a final dividend of 38 cents per ordinary $16 million profit on the disposal of a vendor finance entity. share. Following clarity from the Australian Prudential Regulation Authority on Importantly, we have also continued to deliver growth and profits without ‘unquestionably strong’ in July this year, and given our very strong capital position, compromising our robust risk management practices, with loan impairment expense the Board has also determined to pay a special dividend of 8 cents per ordinary reducing to 11 basis points of gross loans and advances. We remain committed to share, taking the full year dividend to 84 cents per ordinary share. creating a bank that is more resilient over the longer term. Our disciplined approach The financial services industry has faced further challenges over the past 12 months. to growth has also helped us maintain our strong capital position, giving us options Consumer concern about low wage growth and higher living expenses combined for the future. with APRA’s new regulations to slow residential and particularly investor mortgage 2017 was also a year characterised by greater political scrutiny of the banking sector. growth resulted in subdued credit growth. Low interest rates, higher term deposit We are proud to lead a business that upholds the highest ethical standards and we funding costs and continued intense competition for new customers has contributed have continued to focus on ethics, conduct and culture, ensuring we have a culture to margin pressure. Further, increased regulatory changes and technological that supports positive relationships with our stakeholders. advances present a growing expense burden. Our solid performance in this environment has only been possible through the Despite these challenges, we have continued to implement a strategy that positions ongoing efforts of everyone across the BOQ Group. We would like to thank all of our us well to embrace opportunities in this dynamic environment and deliver ongoing employees for making BOQ the great organisation it is today. value for shareholders. Our focus on niche customer segments has continued to deliver results with solid growth through BOQ Specialist, BOQ Finance and our target Finally, we would like to thank all of our shareholders for your ongoing support. Our niche commercial segments. We have also continued to expand our presence in clear strategy, strong capital position and prudent approach to risk management the broker market which has contributed to our Virgin Money business exceeding position us well in this environment to continue delivering value for you into the future. growth expectations in its home loan portfolio. Underlying this favourable trend is the continued exceptional service provided by our branch network which remains a core part of our business for both lending and deposits. We have also benefited from our disciplined approach to expense management Roger Davis Jon Sutton which has ensured we delivered on our promise to keep underlying expense growth Chairman Managing Director & CEO Annual Report 2017 BOQ.com.au 5 2017 Directors’ Report Directors’ Report For the year ended 31 August 2017 The Directors present their report together with the financial report of Bank of Queensland Limited (‘the Bank’ or ‘BOQ’) and of the Consolidated Entity (or ‘Group’), being the Bank and its controlled entities, for the year ended 31 August 2017 and the independent auditor’s report thereon. Directors’ Details The Directors of the Bank at any time during or since the end of the financial year are: Name, qualifications and independence status Experience, special responsibilities and other Directorships Roger Davis Mr Davis was appointed Chairman of the Bank on 28 May 2013 and has been a Director since August 2008. He has a Bachelor B.Econ. (Hons), of Economics (Hons) degree from the University of Sydney and a Master of Philosophy degree from Oxford. Mr Davis has over 32 Master of Philosophy years’ experience in banking and investment banking in Australia, the US and Japan. He was previously a Managing Director at Chairman Citigroup where he worked for over 20 years and more recently was a Group Managing Director at ANZ Bank. Non-Executive Independent Director Mr Davis is currently a consulting Director at Rothschild Australia Limited. He is currently a Director of Argo Investments Limited, Ardent Leisure Management Ltd and Ardent Leisure Ltd. He was formerly Chair of Charter Hall Office REIT (prior to its takeover) and Esanda, and a non-executive director of The Trust Company Limited (prior to its takeover) and Aristocrat Leisure Ltd. He is the Chairman of the unlisted entity, AIG Australia Limited. Mr Davis is Chair of the Nomination & Governance Committee, a member of each of the Audit, Risk and Investment Committees, and an attendee at all other Board Committees. Jon Sutton Mr Sutton was appointed as the Bank’s Managing Director and Chief Executive Officer in January 2015 following four months as Managing Director and Acting Chief Executive Officer. Mr Sutton originally joined BOQ in July 2012 as Chief Operating Officer. Mr Sutton has more than 20 Chief Executive Officer years’ experience in banking and prior to BOQ was the Managing Director of Bankwest. Before that, as Executive General Manager Executive of Commonwealth Bank Agribusiness (‘CBA’), Mr Sutton was central to the establishment of the CBA’s agribusiness segment which Director grew strongly under his guidance and leadership. Prior to this, Mr Sutton was General Manager of Client Risk Solutions at CBA, responsible for marketing derivative products including interest rates, commodities and foreign exchange. He was also Head of Resources and Agribusiness and Head of Corporate Risk Management Commodities, charged with marketing and commodity hedging products to Australian institutions within the base metals, precious metals and energy sectors. Bruce Carter Mr Carter was appointed a Director of the Bank on 27 February 2014. Mr Carter was a founding Managing Partner of Ferrier B Econ, MBA, FAICD, FICA Hodgson South Australia, a corporate advisory and restructuring business, and has worked across a number of industries and Non-Executive sectors in the public and private sectors. He has been involved with a number of state government-appointed restructures and Independent Director reviews including chairing a task force to oversee the government’s involvement in major resource and mining infrastructure projects. Mr Carter had a central role in a number of key government economic papers including the Economic Statement on South Australian Prospects for Growth, the Sustainable Budget Commission, and the Prime Minister’s 2012 GST Distribution Review. Mr Carter has worked with all the major financial institutions in Australia.