Bank of Queensland warns of tough year ahead, as cash profit drops 14pc

New Bank of Queensland boss sets out priorities as cash profit falls 14pc and dividends are cut.

New Bank of Queensland boss George Frazis. Picture: Britta Campion

Troubled regional lender Bank of Queensland has slashed its dividend for the second consecutive half, as new chief executive George Frazis warned on Thursday that his transformation strategy would take time and 2020 would be a “difficult” year.

The bank unveiled a 14 per cent slump in cash earnings to $320 million, driven by slowing credit demand, lower interest rates, a rise in regulatory costs and an increase in bad debts. The all-important net interest margin eroded by five basis points to 1.93 per cent.

“Clearly the results are disappointing,” said Mr Frazis, who has been in the job for only six weeks.

“It underscores the need to bring about a change in our culture; the way we do business, and how we prioritise our investments that will change our future.”

Investors paid the price, with the annual dividend down 14 per cent from 76c to 65c, after the board cut both the interim and final payout.

Mr Frazis flagged lower cash earnings in the new financial year.

While revenue and impairments would be in line with 2019, post-Hayne regulatory and compliance costs would be higher, as would operating expenses due to the group’s investment in technology to bridge the digital gap with its peers.

The BoQ chief said he was “very focused” on delivering sustainable growth and improved shareholder returns.

However, the market was disappointed with the continuing flow of bad news from the regional bank and marked the stock back 23c, or 2.4 per cent, to $9.42.

“Another tough result for BoQ, with a second consecutive dividend cut. Things are not getting any easier,” UBS analyst Jon Mott said.

Mr Frazis foreshadowed a strategic update in February, where he would set down performance milestones to measure progress against five priorities outlined on Thursday. Apart from profitable and sustainable growth, they included a purpose-led customer culture, continuing to strengthen the balance sheet, and closing the digital and data gap by delivering investments in BoQ mobile banking and the new Virgin Money Australia (VMA) digital bank.

He said the business would be simplified with a focus on lending processes, productivity would be improved and the bank’s elevated cost base would be addressed.

On lending processes, Mr Frazis said BoQ was “close to the slowest bank in the market” in relation to providing final approval to customers.

This had contributed to a further, $1.4 billion contraction in the retail bank’s home-lending book, although the Virgin Money portfolio expanded by $914m to $2.4bn. The bank would invest $30m in the current financial year to complete the stage-one proof of concept for VMA, targeting the launch of a transaction and savings account offering later in the year.

A further $10m would be invested in the back end of the financial year, with the new digital banking platform likely to be expanded across the group.

“BoQ is a fundamentally a good business, but while there are a number of foundational investments already under way, as we work towards building an organisation that is innovative, nimble and makes banking easy for our customers, this will take time,” Mr Frazis said.

The bank’s common equity tier one ratio fell 22 basis points to 9.04 per cent because asset growth was tilted towards more capital-intensive business lines.

With balance-sheet strength a “key priority”, BoQ remained “well positioned” to achieve APRA’s unquestionably strong benchmark in 2020 on the back of a good funding position and sound underlying asset quality, he said.

Mr Frazis said clarification was needed from APRA on the revised risk-weighting framework due to be implemented in 2022.

The loan impairment expense of $74m was equivalent to 16 basis points of gross loans, up seven basis points, although two large exposures worth a collective $9m weighed down the second half.