BOQ result leaves analysts cold

The big news in the wider Australian banking sector this week was the release of first-half earnings for Bank of Queensland.

Brokers were cautious, given they'd been caught out by a very disappointing result from regional rival Bendigo & Adelaide the week before, but were confident given BOQ had not long before provided an update in which profit growth guidance for the half of 25 to 28 per cent was confirmed.

Bank of Queensland achieved profit growth of 29 per cent but not without a few accounting fiddles.  Certain one-off items were taken above the line so as not to affect the profit result, leaving earnings per share a lot less than analysts had assumed.

Counting back these one-offs to below the line showed BOQ only really achieved profit growth of around 16 per cent.

Management has provided guidance for second-half profit growth in the range of 20 to 25 per cent, but analysts for the most part find this ambitious (accounting fiddles not withstanding).

While part of the lost earnings was attributable to restructuring expenses, which are one-off, there was also a 20 per cent increase in loan impairments, which are not.

Analysts assume loan impairments for the regional bank will continue to rise in the second half, particularly as unemployment numbers start to really grow.

BOQ's problem, and Bendigo's problem, is that while the big four are whingeing about funding cost increases, they are experiencing solid deposit growth to offset the need for offshore funding and are also attracting a greater slice of new loans at much better margins, as noted above.

The big four can also attract cheaper funding due to their AA ratings. The regionals are not AA-rated, and although BOQ did enjoy growth in deposits, its base is proportionately much smaller than the biggies'.

Regional banks previously relied on cheap asset-backed securitisation funding but the credit crisis has ended that game. The regionals are not building up the same helpful buffers against increased funding costs, and cannot now compete as effectively against their national equivalents for new business.