2018 ANNUAL REPORTYear ended 31 August 2018 Annual Report 2018 1 CONTENTS Message from the Chairman and Managing Director & CEO 5 Directors’ Report Directors’ Details 8 Operating and Financial Review 12 Remuneration Report Introductory Message 60 Remuneration Report 62 Lead Auditor’s Independence Declaration 90 Financial Report Income Statements 93 Statements of Comprehensive Income 94 Balance Sheets 95 Statements of Changes In Equity 96 Statements of Cash Flows 100 Notes to the Financial Statements 101 Other Information Directors’ Declaration 162 Independent Auditor’s Report to the Members 163 Shareholding Details 170 Shareholder Information 173 5 Year Financial Summary 174 Glossary 175 Bank of Queensland Limited ABN 32 009 656 740 AFSL NO. 244616 CHAIRMAN AND MANAGING DIRECTOR & CEO’S 2018 MESSAGE ABOUT THIS REPORT This 2018 Annual Report (Report) incorporates the Group’s audited financial statements and other statutory disclosures. The Report is lodged with the Australian Securities Exchange (ASX). Bank of Queensland (BOQ) is publicly listed in Australia. The financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Unless otherwise stated, the Report encompasses all BOQ activities for the financial year commencing on 1 September 2017 and ending 31 August 2018. All monetary values in this document are presented in Australian dollars, which is the Bank’s functional currency. OUR 2018 REPORTING SUITE BOQ produces a range of reports designed to meet the evolving expectations of a wide range of stakeholders. Our 2018 reporting suite consists of the following additional documents: 2018 2018 2018 CORPORATE ANNUAL SUSTAINABILITY GOVERNANCE REVIEW REPORT STATEMENT Year ended 31 August 2018 ANNUAL REVIEW CORPORATE GOVERNANCE STATEMENT BOQ’s 2018 Annual Review (Review) provides an overview Our 2018 Corporate Governance Statement discloses of BOQ’s operations across the Group and outlines our how we have complied with the ASX Corporate commitment to, and strategies for creating long-term Governance Council’s Corporate Governance Principles value for shareholders, customers, employees and the & Recommendations (3rd edition) and is available on the community. It can be found on the Annual Reports page of Corporate Governance page of our website. our website. We are always looking for ways to evolve and improve SUSTAINABILITY REPORT our reporting. Please send your questions, comments or suggestions to our Investor Relations team at Our sustainability reporting evolved this year from online [email protected]. content to a standalone 2018 Sustainability Report available on the Annual Reports page of our website. This report is supported by supplementary information available on the Sustainability section of the BOQ website. It outlines information about our performance against BOQ’s social, environmental and economic opportunities and challenges. Annual Report 2018 3 OUR 2018 PERFORMANCE PROFIT RESULTS ($m) EARNINGS & DIVIDENDS (¢ per ordinary share) 8 357 318 360 338 378 352 372 336 89.5 66 97.3 74 95.6 76 94.7 76 2015 2016 2017 2018 2015 2016 2017 2018 Cash Earnings after Tax Statutory Net Profit after Tax Cash Basic Earnings per Ordinary Share Dividends per Ordinary Share Special Dividend per Ordinary Share 2018 CASH EARNINGS STATUTORY NET PROFIT CASH BASIC EARNINGS DIVIDENDS AFTER TAX AFTER TAX PER ORDINARY SHARE PER ORDINARY SHARE (¢ per share) (¢ per share) $372m $336m 94.7¢ 76¢ Unchanged from FY17 2% from FY17 5% from FY17 3% from FY17 NET INTEREST MARGIN CASH COST TO CASH RETURN ON EQUITY INCOME RATIO 1.98% 47.5% 9.9% Up 5bps from FY17 Up 90bps from FY17 Down 50bps from FY17 LOAN IMPAIRMENT EXPENSE ($m) 74 67 48 41 $41m 15% from FY17 2015 2016 2017 2018 4 Bank of Queensland Limited and its Controlled Entities MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR & CEO EARNINGS & DIVIDENDS (¢ per ordinary share) Dear Shareholder We are pleased to update you on another solid twelve months for Bank of Queensland. While there is no doubt that 2018 has been a year of turmoil for the banking industry, at BOQ we have been focused on implementation of our strategy and ensuring the fundamentals of our business remain strong. In terms of financial performance, we delivered cash earnings after tax of $372 million. This was a reduction of $6 million or two per cent on 2017. After adjusting for the $16 million one-off profit on the disposal of a vendor finance entity which occurred in 2017, the result was a three per cent increase on an underlying This investment in the future will provide a much needed boost basis. The final ordinary dividend of 38 cents per share was to our customer offering and allow us to compete maintained, taking the full year dividend to 76 cents per share. more effectively. The Group’s balance sheet continued to grow with lending We announced the sale of the St Andrew’s Insurance business growth of $1.5 billion funded by an improved mix of deposits. to Freedom Insurance Group in April 2018. The dynamics of the The niche commercial lending segments, as well as housing loan insurance market have changed significantly since the acquisition growth in Virgin Money Australia and BOQ Specialist contributed of St Andrew’s in 2010, and it was determined that a sale was strongly to this lending growth. The BOQ Finance business the best outcome for shareholders as well as for the St Andrew’s provided a solid contribution with growth of $250 million in its business. This transaction is subject to regulatory approvals. asset finance portfolio. Deposits were driven primarily through the branch network, which focused on encouraging more The banking sector has faced intense scrutiny in 2018. The customers to make BOQ their main financial institution. Despite number of inquiries, reviews and the Royal Commission into a number of margin headwinds emerging during the year, this Misconduct in the Banking, Superannuation and Financial supported an improvement in net interest margin to 1.98 per Services Industry has highlighted how the sector has fallen cent. short of meeting community expectations. Some of the findings that have emerged reflect poorly on the industry and has Operating expenses were well contained, while important tested the reputation of all banks. In the case of BOQ, we have investments in the business were made in line with the Group’s been increasing our focus on ensuring that ethical conduct is strategy. This included a new web experience platform which embedded in everything we do and when mistakes are made, has delivered an improved digital experience to customers we fix them. across all of our brands. Further work is underway on the modernisation of our technology architecture. We have also Looking ahead, the operating environment remains challenging commenced development which will facilitate participation in with ongoing scrutiny, regulatory change, slowing credit growth, the New Payments Platform, an industry initiative which will technological change and higher funding costs all adding improve the experience for consumers making payments. pressure to earnings growth. Asset quality metrics remain a key strength for BOQ. The We remain confident that we have the right strategy to navigate ongoing improvements are a direct consequence of deliberate this environment and to continue delivering value for our steps taken to clearly articulate risk appetite, lift risk capability stakeholders into the future. and embed more stringent risk practices across the business. We would like to thank all of our people and shareholders for Impaired assets reduced by 15 per cent to $164 million, while loan your ongoing support and encourage you to review our annual impairment expense reduced 15 per cent to $41 million. Loan reporting suite for more detail on what has been happening arrears remain at benign levels. Regulators have been focusing at BOQ in 2018. on responsible lending practices. We are pleased to report that BOQ has been ahead of the curve in this regard. Our strong capital position has provided flexibility to consider a range of options for capital management. As a result, we have announced plans to increase our capital investment in 2019, with a focus on enhancements to our digital platforms and customer experience. Roger Davis Jon Sutton Chairman Managing Director & CEO Annual Report 2018 5 2018 DIRECTORS’ REPORT DIRECTORS’ REPORT For the year ended 31 August 2018 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 2018 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 Chair of BOQ on 28 May 2013 and has been a Non-Executive Director since August 2008. He has over 33 years’ experience in banking and investment banking in Australia, the US and B.Econ. (Hons), Japan. He was previously a Managing Director at Citigroup where he worked for over 20 years and more Master of Philosophy recently was a Group Managing Director at ANZ Bank. Chairman Mr Davis is currently Chair of AIG Australia Limited and a Non-Executive Director of Argo Investments Non-Executive Limited and Charter Hall Retail Management Limited and was formerly a Non-Executive Director of Independent Director Aristocrat Leisure Ltd, Ardent Leisure Group, Ardent Leisure Management Ltd and Ardent Leisure Ltd. Mr Davis has a Bachelor of Economics (Hons) degree from the University of Sydney and a Master of Philosophy degree from Oxford. Mr Davis is Chair of the Nomination & Governance Committee, a member of each of the Audit and Risk Committees, and an attendee at all other Board Committees.