Bank of Queensland tips V-shaped economic rebound following COVID-19

Bank of Queensland becomes first lender to delay dividend payment after regulator called on banks to conserve cash.

Bank of Queensland CEO George Frazis. Picture: Ryan Osland

Bank of Queensland chief executive George Frazis is cautiously optimistic of a strong rebound across several sectors of the economy – a so-called “V-shape” recovery – as the impact of COVID-19 fades away.

However in the near term growth with be hit with the regional lender tipping a 6 per cent drop in output during the June quarter, while growth will contract 3 per cent for the year.

The comments came as BOQ became the first domestic lender to defer its dividend payment, after the banking regulator this week urged capital be conserved to support the economy.

“Is this a V-shape, U-shape or some other letter recovery?.. I think we are more likely to see an initial V, but then a general U, depending on the industry,” Mr Frazis said.

Earlier Wednesday Mr Frazis handed down a 10 per cent fall in BOQ’s cash profit to $151m for the six months ended February 29, compared to the same period a year earlier.

BOQ will not pay a first-half dividend, after declaring a 34c per share interim dividend a year ago. That was cut to 31c per share in the second half of its financial year.

Mr Frazis didn’t rule out paying an interim dividend in coming months, but said firstly BOQ would need to lock down revised stress test modelling and analysis with the Australian Prudential Regulation Authority.

“It actually means deferral,” he told analysts and investors on an earnings call. “It (dividend payment) will depend on if there is clarity on what we are leaning into.”

Late on Tuesday APRA urged banks to cut their dividends – and consider their suspension – during the current crisis to help support the economy and ensure credit keeps flowing.

“BOQ understands the impact of this decision on shareholders, however also acknowledges this guidance as a prudent step for the industry,” BOQ chairman Patrick Allaway said.

“While BOQ has considered these downside scenarios in light of the impacts of COVID-19, based on this APRA guidance, BOQ has determined that it is prudent to defer the decision on payment of an interim dividend until the economic outlook is clearer and stress testing results have been discussed with APRA,” the bank said in a statement to the ASX.

BOQ's shares tumbled 6.6 per cent to $4.80 in early trading, before regaining some ground to close at $5.03, which is down 2.2 per cent on the session. Bank stocks have all been hit hard as investors digested the implications of APRA’s dividend guidance and prospects for the broader sector.

APRA’s dividend update and came after regulators in New Zealand, the United Kingdom and Europe told banks to cease paying dividends during the COVID-19 fallout.

Mr Frazis said the profit result reflected a transitional year for BOQ as he continued to execute a transformation strategy, despite the challenges of pandemic and the “extraordinary economic dislocation” it was causing.

“In these extremely uncertain times, we are doing all we can to support our customers and our people with prudent and meaningful measures and to ensure the strength of the bank,” he said. “I am proud of how our people have responded, swiftly adapting to this unprecedented event. We are here for our customers.”

In light of uncertainty around COVID-19, BOQ last month dumped its earnings guidance for annual 2020 cash earnings to come in at 4 per cent to 6 per cent lower than the prior year.

BOQ’s common equity tier one ratio printed at 9.91 per cent in the half, up 87 basis points from its 2019 result.

Mr Frazis said the bank was well capitalised and had a “necessary buffer” to respond to rapidly changing economic conditions.

“We moved early to strengthen our capital position, raising a total of $340m in the recent capital raising, which included our proactive decision to increase the size of the retail share purchase plan to $90m,” he said.

BOQ’s results also increased its provisioning for potential bad loans on Wednesday, citing the potential impact of COVID-19.

“Based on the facts and circumstances existing at 29 February 2020, a $10m COVID‐19 overlay was recognised in 1H20. Inclusive of this $10m overlay, based on forecasts of future economic conditions and other supportable information available as at 7 April 2020, the estimated impact of COVID‐19 in financial year 2020 is in the range of $49m‐$71m.”

BOQ’s net interest margin – what it earns on loans less funding and other costs – dipped to 1.89 per cent in the six months ended February 29, from 1.92 per cent in the prior half. That was despite some benefits booked from repricing initiatives.

Total income fell 1 per cent in the first-half to $541m, as net interest income climbed but revenue from fees fell. Operating expenses increased 8 per cent.