APRA’s move on housing will take froth out of the market, says Bank of Queensland

Bank of Queensland still sees growth in housing in the coming year, but warns it will slow in the wake of APRA ordering lenders to be more cautious when assessing home loans.

Bank of Queensland CEO George Frazis. The lender’s full-year result beat expectations as its home lending grew above system. Picture: Nikki Short

Bank of Queensland expects the froth to come out of the housing market following the banking regulator’s move to step in with lending restrictions, but still sees house price growth of around 8 per cent in 2022.

Speaking after handing down the lender’s full-year result, which showed cash earnings jumped 83 per cent for the year, boosted by home lending, CEO George Frazis said the Australian Prudential Regulation Authority had used the right tool to cool down the hopping market.

“It’s a delicate balance when it comes to housing because it’s a really important element of consumer confidence. It is also really important for small businesses and the economic recovery,” Mr Frazis said.

“We’re very supportive of APRA’s move. I think they’ve used the right tool and it’s a sensible, measured approach. We’ll still see a healthy housing market ahead, this is just about taking the froth off the top end.”

The regulator this month told banks to lift the interest rate buffer they use when assessing home loans to at least 3 per cent above the loan product rate, up from the current 2.5 per cent commonly used by the banks and credit unions.

The move will make it tougher for over-committed borrowers to take out a loan, and came after house prices surged 20 per cent over the past year, marking the fastest growth rate since June 1989.

After seeing above-system growth in its home loans for the 12 months to August 31, Mr Frazis is confident the lender can again grow better than system in the coming year in its BOQ and Virgin Money brands, while bringing ME Bank up to system, even with the regulator tapping the brakes.

“We’ve got three distinct brands and they compete in different markets and provide an alternative to the majors, which is really compelling for customers,” Mr Frazis said.

“It’s all about fundamentally improving the service to customers and also making it really easy to take out a home loan.”

For the 12 months to August 31, the Brisbane-based lender booked cash earnings of $412m on the back of above system home lending growth, aided by an improved net interest margin and disciplined expense management.

Analysts had expected cash earnings to come in around $400.4m, based on Bloomberg consensus estimates.

Excluding ME Bank, which BOQ took ownership of on July 1, cash earnings rose 73 per cent to $389m.

Despite the better-than-expected result, it wasn’t good enough for the market, with BOQ shares down 4.4 per cent at $9.29 by the close of trade.

Its final dividend of 22c a share was also well above analyst expectations of a 12c per share payout.

The result showed its progress on returning the group to sustainable profitability, Mr Frazis said.

“We have achieved this during a period marked by uncertainty, and also in a year where we executed the transformative acquisition of ME Bank.

“This transaction delivers further scale in retail, enhances our portfolio diversification, and we have accelerated capturing synergies from the integration,” he said.

The integration of its $1.3bn acquisition of ME Bank was also ahead of schedule, he told investors.

For the 2021 financial year, net profit jumped to $369m, also above expectations, as income rose 13 per cent to $1.25bn. Excluding ME Bank net profit increased to $352m while income rose 5 per cent to $1.18bn.

Its net interest margin, or NIM, was 1.92 per cent for the year, while its underlying NIM, which excludes the impacts from ME Bank, increased four basis points for the year to 1.95 per cent. It was flat half on half.

While acknowledging the challenges of Covid-19, Mr Frazis flagged the lender was positioned to benefit from the improved economic outlook in the year ahead.

“The lower unemployment rate is a sign that economic conditions improved for the nation and we are well positioned to capitalise on greater consumer and business confidence from the vaccine rollout,” Mr Frazis said.

“We continue to execute on our strategy, the digital transformation and the ME Bank integration. We improved the digital experience for our customers as we delivered the first phase of the retail digital bank. This lays the foundation for all our retail brands to operate from a common cloud-based digital platform.”

The lender is cautiously optimistic on Australia’s economic outlook and expects to benefit further from rising house prices as it chases another year of above-system growth.

BOQ expects positive jaws of at least 2 per cent this year — meaning its income growth is exceeding its expense growth — driven by above system lending in its BOQ and Virgin Money brands, and by returning ME Bank to around system growth by the end of the year.

But it expects NIM to fall by 5-7 basis points this year, amid fierce competition and a low interest rate environment. It also sees expenses rising by 3 per cent on an underlying basis as it grows the business, but this will be offset by some cost savings, it said.

Citi banking analyst Brendan Sproules said the lender’s outlook was broadly in line with expectations as he noted the ME Bank integration was moving faster than expected.

“While this serves to offset strong mortgage market margin headwinds and stronger underlying cost growth, the net result is that we expect modest changes to earnings expectations,” Mr Sproules said.

BOQ’s final dividend of 22c per share takes the total for the year to 39c a share. That represents a 61 per cent payout ratio for the year.