BOQ shifts its focus to efficiency

Bank of Queensland chief executive David Liddy highlighted the big fall in the bank's cost to income ratio during his presentation yesterday of the bank's results for the six months to February.

With higher capital and liquidity ratios likely to be a permanent feature of the banking market in future, banks will struggle to get their return on equity back to the levels they were reporting a few years ago. One way to do it is to get more efficient.

Bank of Queensland cut its cost to income ratio from 54 per cent in the February half last year to 45.1 per cent in the latest half. The significant cuts were in employee expenses.

Liddy said the bank had a sustainable cost structure and was aiming to get its cost to income ratio down even further. It also had some "headroom" for investment in IT systems and brand marketing this year.

The bank reported net profit of $90.9 million for the February half, down four per cent on the prior half but up 96 per cent on the previous corresponding period.

After adjusting for non-recurring items, including restructuring costs and a hedge ineffectiveness charge, the bank reported normalised cash net profit of $97.2 million, which was six per cent down on the prior half but 15 per cent up on the previous corresponding period.

Earnings per share of 42 cents were down nine per cent on the previous corresponding period. This was due to the dilutive effect of the bank's $340 million equity raising last September.

Return on equity was 10 per cent. Liddy said the bank was targeting an ROE of 15 per cent.

Unlike the big banks, which reported earlier this year that their bad debt charges had peaked, BOQ increased its loan impairment charge from $27.6 million in February last year to $51.4 million in the latest half. Liddy said he expected the bank's bad debt cycle to peak this year.

The weak spot in the portfolio is business lending. Business loans 90 days or more in arrears jumped from around one per cent a year ago to 1.74 per cent at the end of the latest half. Business and leasing make up 76 per cent of bad debts but only about 20 per cent of assets in BOQ's loan book.

Liddy said the bank's current operating weakness was in the area of non-interest income, which fell from $77 million in February last year to $68 million in the latest half.

To overcome this, the bank would look for acquisitions that would improve its performance in that area. In March it bought St Andrews Insurance from Commonwealth, which had picked it up as part of its BankWest acquisition.

And on March 29 BOQ announced that it was conducting due diligence for the purchase of a vendor finance business from CIT Australia and New Zealand.