BOQ prefers wholesale funding

Bank of Queensland will seek to wind back what it regards as excess liquidity, and emphasise wholesale funding in its plans for the next year.

Ewan Cameron, the bank's new chief financial officer, told an investor briefing yesterday that the bank held $1.5 billion of excess liquidity. He said the bank planned to reduce its liquidity levels to around 15 per cent, and down from 17 per cent now.

Cameron said the bank projected an increase of five percentage points in wholesale funding, and which will take the proportion to 25 per cent in 2011.

On the margin front the bank is seeking to push the 2010 net interest margin of 1.60 per cent (and lower in the second half) toward 2 per cent, and then higher.

Cameron told the briefing that the CIT acquisition will help lift the margin.

The bank is counting on the opportunity to lift loan margins for all customers, however.

"If there's no improvement in the marginal funding rates, and they weigh into our portfolio, and there's no further asset repricing, then of course NIM will continue to deteriorate by approximately five to 10 basis points across the year," Cameron said.

"So in order to reach [a net interest margin of]175, the assumption is both there'd be an expectation that we'd see some improvement in the funding costs both retail and wholesale which we are seeing some signs of recovery there.  

"And also there's an anticipation which I think the market expects at some point, is that there'd be some out of cycle raises.  But you know, we haven't necessarily put those in full to our projections for next year."

Other levers the bank can pull to reach its ROE target of 15 per cent are more elusive.

One of them is to simply wait for adverse costs to wash out, such as the fees paid to the Australian government for the wholesale guarantee.

Ram Kangatharan, chief operating officer of the bank, said that the guarantee fee was "taking 1.6 per cent off the ROE right now".

A decline in bad debt levels is also required to lift returns, though BOQ says these have peaked.