BOQ shares hit 16-month low as margin pressures intensify

Bank of Queensland boss Patrick Allaway has blamed the economic cycle, margin pressures across the industry and the bank’s higher cost of funding for its weaker results as its shares dropped to a 16-month low.

In an announcement to the ASX on Wednesday, BOQ reported an eight per cent drop in cash earnings to $450 million for the 2022 financial year and a final fully franked dividend of 21 cents a share.

Chief executive Patrick Allaway recognises the difficulty the bank has faced.Credit: Dan Peled

Allaway said the bank’s results reflected some of its failings but also the market cycle, industry margin headwinds from inflation, heightened competition across lending and deposits and investment in the bank’s risk capability, customer experience and digital transformation.

“We recognise that this has been a difficult year for our shareholders and take accountability for the operational risk failings that led to the two court-enforceable undertakings,” he said. “There have also been lower margins across industry as the economy goes into a more difficult period, which was exacerbated for BOQ because our cost of funding is higher as a smaller bank.”

Shares in the BOQ slipped 7.4 per cent to $5.35 a share at the close and were 30 per cent lower over the year.

However, Allaway said the bank was improving its return on equity, following its transformation plan, delivering on budget and improving customer experience. “When the cycle turns in the next 12 months, we’re well positioned for growth,” he said.

BOQ’s net interest margin – what it charges for loans compared with funding costs – dropped two basis points over the year to 1.69 per cent, driven by competition for lending and higher funding costs across the industry.

‘There may be a rate decrease towards the end of next year, but it will be a more difficult period for consumers in 2024.’

Patrick Allaway, Bank of Queensland boss

Allaway said margin pressure was an “industry phenomenon” as banks competed to meet repayments on the Reserve Bank’s term funding facility lending, the bulk of which is set to be repaid in the next six months, pushing up the cost of funding. On the asset side, he said the mortgage market remained under pressure throughout the year, with management deciding to moderate growth where economic return could not be achieved, but that it would probably turn around soon.

“It’s hard to forecast the mortgage market, but I can’t see the current cycle continuing in the medium term,” he said.

However, Citi analyst Brendan Sproules said the market was currently expecting mortgage pricing to deteriorate.

While the bank’s total income grew five per cent over the year, it was partly offset by an eight per cent increase in expenses and a return to a “more normalised level” of loan impairment expense.

“We have seen a small increase in arrears in our mortgage book from the lagged impact of 12 consecutive interest rate rises and the cost of living,” Allaway said. “But the book is well secured, we’re not alarmed by those increases, and we don’t anticipate material losses.”

While BOQ grew its retail deposits by $3.1 billion, Allaway warned that interest rates would probably stay higher for longer.

“Inflation has been quite stubborn, and we may need at least one more rate increase in the near term,” he said. “There may be a rate decrease towards the end of next year, but it will be a more difficult period for consumers in 2024.”

Sproules said BOQ’s results came in below consensus expectations, especially in terms of its revenue and net interest margin.

“The second half of 2023 represented a difficult half, with underlying earnings declining by 20 per cent,” he said. “The 2023 financial year net interest margin was two to three basis points below expectations.”

However, Sproules said the bank’s outlook commentary suggested earnings had not yet troughed.

“BOQ is flagging slower credit growth as they manage margin over volume, but it comes after a half where neither have been accomplished,” he said. “It was a very weak result, with the likelihood of further negative revisions to the 2024 financial year consensus expectations.”

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