BoQ profits down after year of scrutiny

PROFITS at BoQ have dipped following a rise in work expenses and financial hits from a class-action lawsuit and the royal commission. While the bank has talked up areas of improvement, analysts aren’t painting such a rosy outlook.

PROFITS at BoQ have dipped, following a rise in expenses including hits from a class-action lawsuit and the banking royal commission.

The lender, started in 1874 as First Permanent Building Society in Queensland, also posted sluggish home loan growth. But positive signs have kept flowing from BoQ’s focus on specialised banking areas such as lending to doctors.

The 176-branch BoQ also expressed confidence about riding out the commission storm.

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“We don’t have the sorts of issues the big banks actually have - we’re not vertically integrated, we’re not having to change our business model substantially. And I think that puts us in good stead in a difficult environment,” BoQ managing director Jon Sutton told The Courier-Mail.

BoQ still faces threats; the commission’s interim report last week belted the bank over a customer’s business loan. It also questioned how BoQ’s franchise network will fit with new remuneration and sales practices.

Mr Sutton argued BoQ was already changing remuneration scorecards, focusing on areas such as compliance, and “well advanced” in considering any final commission recommendations on pay.

Mr Sutton also confirmed BoQ hoped to proceed with a proposed $65 million sale of its insurance arm St Andrew’s to Freedom Insurance, which in the commission faced horror stories.

Bank of Queensland chairman Roger Davis said the banking sector had “faced intense scrutiny in 2018”. Picture: Liam Kidston.

BoQ’s full-year profits dipped on several gauges — statutory earnings were down 5 per cent to $336 million and return on equity also fell.

Income growth rose 1 per cent to $1.11 billion. But expenses lifted 3 per cent - among costs were higher wages and $9 million in regulatory legal fees.

Another $5 million expense arose from BoQ settling a class-action lawsuit from financial planning customers of convicted fraudster Brad Sherwin.

Ordinary dividends were flat at 76c per share.

BoQ argued that underlying cash earnings, stripping out the impacts of events such as an asset sale a year earlier, had improved 3 per cent to $372 million.

UBS analysts estimated if some expenses were included, such as legal fees and software costs, profits were 6 per cent below market expectations.

While BoQ’s margin result - up from 1.93 per cent to 1.98 per cent - was strong, UBS analysts said “the outlook remains challenging”.

DNR Capital chief investment officer Jamie Nicol said low bad debts were another positive result. They fell from $48 million to $41 million.

Regional banks had an opportunity to differentiate themselves, Mr Nicol said. “But they (tend) to be at a bit of a scale disadvantage,” he added.

BoQ shares closed up 24c at $11.01. The stock has been under pressure, dropping from $12.59 to $11.49 between August 2017 and August 2018.

Mr Sutton’s pay dipped slightly to $3.21 million. Short-term bonuses were assessed partly on BoQ’s cash earnings, the accounts said.

The revenue line was hit with a dip in non-interest income – such as falling levels of merchant fees or insurance income.

Housing loans rose 2 per cent to $30.5 billion, a growth rate that BoQ said was 0.4 times what the industry was achieving. The accounts linked this slow rise to not being heavily involved in hot markets of Sydney and Melbourne, and prudent lending.

Mr Sutton argued that BoQ had long been tough in assessing loans, such as in validating potential customers’ expenses.

“There is a long way to go with certain other players in the market,” he said.

Operating expenses lifted 3 per cent to $527 million, which included rises in information technology costs and employee costs. BoQ employs 2564 staff, up on 2374 from a year earlier.

BoQ’s new chief financial officer Matt Baxby said core expenses only grew 1 per cent — a “very strong result”.

It came amid an internal push to keep a lid on expenses during the year. But, as reported by The Courier-Mail, staff and the Finance Sector Union were ticked off when directors in May then flew to Israel for a five-day “fintech and innovation” study tour.

Big jumps were recorded in BoQ’s growth in its niche lending arms — such as its “Specialist” division which focuses on professionals such as doctors or dentists. Commercial loans rose 6 per cent to $9.9 billion.

Mr Sutton argued the bank was carefully targeting to whom it was lending. “It’s not putting the balance sheet out to rent,” he said.

The market could still grow, he added. “There’s still need for more medial practioners in the economy, and we work very hard at getting those customers when they actually start their undergraduate degree at university,” he said.

Branch numbers at BoQ also continued to shrink, down from 183 to 176. It included a drop in owner-managed branches at the bank.