This was published 3 months ago
BOQ profits stifled as inflation, higher funding costs shred margins
Regional lender Bank of Queensland will shift its focus away from growth to improving returns for shareholders after reporting a 33 per cent slide in half year cash profits and a cut to its dividends.
Inflation, stronger competition and higher cost of funding has continued to stifle BOQ’s bottom line, and it declared an interim dividend of 17¢ per share, down from 20¢ last year.
However, investors rewarded the mid-tier bank on Wednesday after its half-year results beat analyst expectations of a 40 per cent crash in profits. BOQ shares jumped over 8 per cent in early trade, before closing 5.26 per cent higher at $6.10.
Inflation, competition, margin pressures and the bank’s higher cost of funding has continued to stifle BoQ’s bottom line, according to chief executive Patrick Allaway. Credit: Dan Peled
Chief executive Patrick Allaway said the regional lender was committed to delivering better outcomes for shareholders despite continuing to contend with a raft of structural challenges.
“These are all industry headwinds so many of them we can’t control, but the big message today is we’re focused on what we can control, and we’re delivering on our commitments in relation to our key strategic [decisions],” he said.
“We’re very focused on strengthening the bank, meeting our obligations under enforceable undertakings, the simplification program we committed to at the end of last year to deliver $200 million in productivity, which we’re halfway through, digitising our bank … optimising our return and shifting the focus away from asset growth to return equity.”
BOQ unveiled a cash profit of $172 million in the six months to February 29, down 33 per cent compared to the first half of last year. Its net interest margin – what it charges for loans compared with funding costs, a key measure of bank profitability – decreased 24 basis points to 1.55 per cent compared to the same period last year.
Its operating expenses rose 6 per cent to $524 million due to inflationary pressures, as well as investment in risk, compliance and technology. While its loan impairment expenses fell by more than 50 per cent to $15 million reflecting higher house prices, that was partly offset by the impacts of cost of living and interest rate pressures.
The bank was last year had to set aside $50 million in regulatory capital as part of an enforceable undertaking it entered into with AUSTRAC and the Australian Prudential Regulation Authority (APRA) after BOQ failed to correct significant risk management issues first identified more than a decade ago.
As part of its pledge last year to deliver $200 million in productivity by 2026, BOQ axed up to 250 jobs and reduced about 6000 square metres of corporate property. Allaway said on Wednesday that the bank had a strong business banking presence in niche markets, such as medical practices, which he expected to help turn around BOQ’s financials.
Following reports in The Australian earlier month the bank was considering selling a business it purchased from Investec almost a decade ago, Allaway said, “there’s no substance to that speculation”.
But he reaffirmed the Brisbane-based bank was reviewing its portfolio of non-core business it could potentially sell, such as its New Zealand assets it announced earlier this year.
E&P Capital analyst Azib Khan said while the bank’s profit beat expectations, it was a “low-quality beat” driven by costs and bad debt charges.
“Lower-than-expected costs have been assisted by the [percentage] of investment spend expensed remaining well below general industry levels,” Khan said.
“BOQ has said this percentage will rise, and we continue to see enough cost pressure over the next three years. On asset quality, there remains a notable uptrend in both commercial and housing 90-day arrears. With the above points in mind, and BOQ’s balance sheet shrinking, it is difficult to be upbeat about BOQ’s outlook.”
Allaway said arrears were continuing to rise as high interest rates and persistent cost-of-living pressures continued to bite. He said consumer financial stress had not yet hit a peak, but it had been moderating in recent times.
“Arrears will grow and the number of people in hardship will grow until the rate cycle turns,” he said.
Read more:
- Under water and under pressure: The fight to fix flood insurance
- Bank profit margin crunch to continue as customers shift deposits
- Banks are changing the way they fight the mortgage war
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.