BoQ hit with $50m capital add-on over risk management weakness, shares dive

BOQ shares dived after the prudential regulator imposed an extra $50m regulatory capital requirement for material weaknesses in its risk management systems and compliance with anti-crime laws.

Bank of Queensland shares dived on Wednesday after Australia’s banking regulator said it had imposed a $50m capital requirement on the lender for material “weaknesses” in its risk management practices and risk culture.

Shares closed 5.36 per cent lower at $5.47 after the Australian Prudential Regulation Authority and the anti-money laundering watchdog said they had accepted legally binding agreements from BOQ to improve its risk management practices and compliance with anti-money laundering and counter-terrorism financing laws.

The regulatory action follows several breaches of various prudential standards in 2022 and 2023 and binds the company to prepare remediation plans and appoint an independent reviewer to provide written reports on the plan’s implementation.

“Businesses which do not have a strong AML/CTF program in place are vulnerable to exploitation by criminals, which is why Austrac has been working with BOQ to harden their processes,” Austrac chief executive Nicole Rose said.

The bank last month said it would take a $60m provision for the cost of a three-year “Integrated Risk Program” following reviews that identified that a “material uplift” was required in respect of its operational resilience, risk culture and compliance with anti-money laundering and counter-terrorism financing laws.

APRA said BoQ had acknowledged its past risk management and risk culture weaknesses, and its remediation plan would need a clear timeline for implementation that specifies “accountable and responsible persons” for each remediation activity.

The $50m in additional capital requirement ed to price downgrades from stockbrokers, with Goldman Sachs downgrading its 12-month target price on the bank to $6.20, from $6.45.

Evans and Partners banking analyst Azib Khan told clients there was the announced highlighted that BOQ faced “increased upward pressure on costs and an increased likelihood of continued subdued balance sheet growth”.

“We believe today’s announcement further explains why BOQ’s home loan growth significantly slowed around mid-2022, such that APRA data shows BOQ’s mortgage book contracted between June 2022 and March 2023,” he said.

The extra capital requirement will remain in place until BoQ delivers the remedial action plan under the enforceable undertaking “to APRA’s satisfaction”, the regulator said in a statement.

“Although BOQ is financially sound and comfortably above its core capital and liquidity requirements, there are significant gaps in its risk management framework that must be addressed as a priority, particularly in the non-financial risk, anti-money laundering and counter-terrorism financing spaces,” APRA chair, John Lonsdale, said.

“I have communicated APRA’s concerns directly to the BoQ chair and CEO. They understand what we require, have taken important steps towards being able to deliver that in recent months, and we look forward to receiving and approving a final, comprehensive remediation plan that will address the underlying issues raised.”

The regulator said BoQ had breached liquidity, outsourcing and business continuity management standards. That included breaches of a standard requiring the bank and its board to review and test its contingency funding plan every year to ensure its operational feasibility.

The enforceable undertaking incorporates the findings of an independent report on the root causes of the issues completed at APRA’s request in April 2023, the regulator said. As part of the enforceable undertaking with Austrac, BoQ will engage an external auditor who will report back to the regulator.