Bank of Queensland lifts half-year profit 9pc, declares outlook ‘more positive’

Bank of Queensland is eyeing green shoots in the small business sector, as it books a rise in interim profit.

Bank of Queensland CEO George Frazis has handed down interim profit results. John Feder/The Australian.

Bank of Queensland chief George Frazis expects business loan growth will emerge from the doldrums and swing to positive this year, underpinned by an economic rebound and rising confidence.

Mr Frazis noted green shoots in the small business sector and anticipated business credit would reverse its negative growth trend, as the economy continued its COVID-19 bounce back and more certainty was provided around vaccine rollout.

“My sense is it will go into positive territory but how much at this stage it’s unclear,” he said in an interview, suggesting that 1 per cent to 2 per cent annual growth was a possibility. “The first thing businesses will do is kind of utilise cash, which a lot of them have tried to conserve cash before they actually borrow, but that will eventually come.

“A lot of businesses do use their house to support their growth so the housing (price) growth is also another element of supporting economic recovery.”

According to Reserve Bank data, business credit across the economy contracted 0.2 per cent in the year ended February 28, while housing loans expanded 3.8 per cent.

Mr Frazis’ comments came as Brisbane-based BoQ reported a 9 per cent rise in interim profits, buoyed by home lending, and declared a first-half dividend of 17 cents per share.

On Queensland’s economy, Mr Frazis said the state had received a boost from being a net beneficiary of state migration as COVID-19 spurred more moves outside of major cities.

But he said areas that were heavily reliant on international tourism were still facing difficulties.

“Particularly the tourist areas that are relying on international travel, until we get that (border) opening that’s going to be a tough road.”

Mr Frazis said BoQ did not have a meaningful exposure to the Queensland tourism industry across its lending portfolio.

Across the nation’s business sector, BoQ is seeing strength across its agriculture and construction customers and the bank is not seeing a marked increase in business stress given the end of the JobKeeper payments.

“We’re really pleased with how business customers have transitioned through this,” Mr Frazis added.

“Australia is relatively well placed for economic recovery, with less likelihood of negative impacts on unemployment and house prices given the success of government stimulus. The national COVID-19 vaccine rollout will enable the economy to open further and build confidence.”

The bank’s net cash profit printed at $165m for the six months ended February 28, up from $151m in the same period a year earlier. That came in at the top end of its earnings guidance, and statutory profit slightly beat guidance, jumping 66 per cent to $154m in the first half.

BoQ’s revenue from ordinary activities climbed 6 per cent in the period to $577m, underpinned by home loan growth that was tracking at 1.6 times the sector’s rate. The net interest margin - what is earned on loans minus funding and other costs - edged up three basis points to 1.95 per cent in the first half, compared to the prior six months, underpinned by lower wholesale funding costs and reduced deposit rates.

“Everything is pointing in the right direction. (BoQ’s) Lending is growing above system, interest margins are strong and productivity is improving,” Regal Funds Management’s Mark Nathan said.

“Customers choosing to keep their money at call, rather than locking it up in term deposits was a benefit. We expect to see this benefit across the broader banking sector.”

Despite initially rising on Thursday, BoQ’s shares dipped 0.8 per cent to close at $8.83.

Citigroup analyst Brendan Sproules said there were “few surprises” in the BoQ result, given prior guidance. “However, the turnaround in lending growth and the strong contribution from lower funding costs provides a strong base for the second half 2021,” he added.

BoQ’s interim dividend came after COVID-19 limits on distributions were eased by the banking regulator from January 1. A year ago, BoQ was the first bank to defer making a decision on its first-half dividend given regulatory guidance when the pandemic was gripping global markets.

When it resumed payments, the bank paid 12c across its 2020 financial year.

BoQ said it remained committed to “sustainable profitable growth” and a dividend payout ratio target range of 60 – 75 per cent of cash earnings.

The bank also noted it was assessing on a quarterly basis whether it needed to write back loan provisions, given better COVID-19 outcomes.

BoQ’s loan impairment expense decreased 14 per cent in the first half, compared to the prior corresponding period.

“BoQ remains prudently provisioned to withstand potential future losses arising as a result of COVID-19 as the government stimulus measures are reduced.” the bank said.

About 0.5 per cent of BoQ’s small business lending book and 0.3 per cent of its mortgage portfolio remained on loan repayment deferrals as at March 15. The bank said as at March 31, 95 per cent of housing loans and 97 per cent of small business loans on relief packages had returned to performing.

BoQ’s $1.325bn purchase of ME Bank, announced in February, marked a notable strategic move as the bank looks to boost its presence in the mortgage market.

Mr Frazis said the acquisition was tracking “on schedule” , noting integration planning and the regulatory approval process. The bank expects the deal will complete by the end of its financial year.

In February, BoQ had signalled first-half statutory profit growth of 60 per cent to 65 per cent, and a rise in cash net profit of 8 per cent to 10 per cent.

With its interim results on Thursday, BoQ reaffirmed full-year guidance including that it wanted to beat industry lending growth rates and that the net interest margin would be broadly flat in its latter half.

The results showed the business banking unit experienced a 7 per cent drop in net cash earnings, versus the same period a year ago, while the retail unit - which houses the BoQ and Virgin Money brands - saw net cash earnings climb 27 per cent.

BoQ’s common equity tier one ratio increased by 25 basis points during the half to 10.03 per cent.

Total income increased 5 per cent in the half, versus the year earlier period, as net interest income rose and offset a decline in fee revenue. Expenses climbed 4 per cent to $306m.

In an update on BoQ’s transformation program, it said the first phase of the Virgin Money digital bank launched to customers last month.

Originally published as Bank of Queensland lifts half-year profit 9pc, declares outlook ‘more positive’