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Bank of Queensland's earnings fall short

Nicholas Grove  |  06 Oct 2016Text size  Decrease  Increase  |  

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The regional lender's full-year earnings arrive just shy of Morningstar's expectations amid a challenging climate of low interest rates, market volatility and intense competition for loans and deposits.


Bank of Queensland's (ASX: BOQ) cash profit for the fiscal year ended 31 August 2016 rose 1 per cent to $360 million while basic earnings per share (EPS) fell 2 per cent 95.6 cents, after the regional lender battled an environment of record low interest rates, market volatility and intense competition for loans and deposits.

The cash profit result was shy of Morningstar's forecast of $365.9 million and modestly below consensus estimates.

Statutory net profit after tax rose 6 per cent to $338 million, the bank said.

The bank declared a final dividend of 38 cents a share, taking full-year dividends to 76 cents a share fully franked, up 3 per cent on the previous year and in line with Morningstar's expectations.

The final dividend will be paid on 22 November 2016 to shareholders on record as of 28 October 2016, the bank said in a statement to the ASX.

The bank said it further strengthened its capital ratios during the year with its CET1 ratio
increasing 9 basis points to 9 per cent.

BOQ's asset quality improved over the year, with loan impairment expense down 9 per cent to $67 million and impaired assets down 2 per cent to $232 million.

Net interest margin--the difference between the interest income generated by bank and the amount of interest paid out to its lenders, relative to the amount of interest-earning assets--fell 3 basis points to 1.94 per cent.

Morningstar head of Australian banking research David Ellis said the soft result was as expected and highlighted the tough operating conditions facing the smaller regional banks, with pressure on NIMs the main culprit.

"Increased funding costs, intense competition for mortgages and term deposits and historically low interest rates were behind the deteriorating NIM," he said.

"We expect these headwinds to continue into fiscal 2017 as the bank struggles in a competitive market with funding costs substantially outside of its control."

The bank's return on equity fell 40 basis points over the year to 10.3 per cent.

Regardless, Bank of Queensland CEO Jon Sutton said he was pleased the bank had achieved another profit increase.

"BOQ has delivered increased cash earnings after tax for the fourth consecutive year, a significant achievement in an environment of low interest rates and intense competition," he said.

Sutton said a number of industry-wide headwinds had emerged in 2016, which saw the bank adapt its focus to fit the operating environment.

"Expectations of lower interest rates in Australia for longer has meant a lower rate of return on capital and low-cost deposits," he said.

"A widening of spreads in term deposits and other liabilities also emerged alongside fierce competition for deposits and pricing for new lending."

Sutton said the bank had taken steps to adapt to the low interest rate environment.

"Given the expensive funding environment and increased competition, we slowed asset growth in the second half, following a strong period of growth in the first half," he said.

"During this period we have focused on deposit gathering and growing in niche segments where we believe specialisation can deliver superior returns."

Sutton cautioned that while some of the headwinds experienced over the past year may be one-off in nature, there are a number which will continue through fiscal 2017.

"Managing our costs in a disciplined way remains a key focus for the year ahead and this will be supported by the rollout of further efficiency initiatives and improvement in our digital capability," he said.

"I remain confident about the future for BOQ as we continue to build a bank that can deliver consistent performance and solid returns to shareholders over the long term."

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Nicholas Grove is a Morningstar journalist.

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