Returns lower for BOQ

Bank of Queensland grew its loan portfolio and its retail deposit book at rates well above system during the six months to February 2008 but it made a smaller return on that expanding pool of assets. The bank's return on assets has fallen from 0.8 per cent in the second half of the 2006/07 financial year to 0.5 per cent in the latest half.

BOQ chief executive David Liddy said lending was up by 27 per cent during the half compared to system growth of 16 per cent. Retail deposits were 26 per cent, compared to system growth of 12 per cent.

The bank acquired Home Building Society, based in Western Australia, in December 2007.

The bank suffered a heavy fall in its net interest margin, down 23 basis points from 1.85 per cent in the first half of the 2007 financial year to 1.62 per cent in the latest half. Fifteen points of the 23 basis point fall occurred during the last six months, which more or less overlaps the beginning of the credit crunch.

Despite the margin decline, Liddy said the strategic focus for the second half would be on maintaining strong growth in deposits. He said deposits increased by 26 per cent in the current half over the same half 12 months ago, a rate of growth that ignores the deposits purchased through the takeover of Home.

Liddy adopted a looser approach to defining the bank's goal in the short term. This is now to "grow in line with our funding plan" rather than the prior goal of asset growth of between 1.5 times and two times system credit growth.

BOQ reported a normalised cash profit after tax of $65.3 million for the six months, an increase of 33 per cent over the previous corresponding period. Allowing for the increase in equity following the Home acquisition, the increase in cash earnings per share was 10 per cent. The bank expects to repeat that level of EPS growth this year.

The cost to income ratio fell from 64 to 59 per cent. Asset quality was sound, with underlying bad debts rising from $7.9 million in the previous corresponding period to $9.8 million, and the ratio of impaired assets to non-securitised lending remaining steady at 0.09 per cent.

The bank increased its liquidity to a record 14 per cent in response to the capital market crisis and this took another four basis points off the margin.

While the bank will continue to target asset and liability growth rates above system, in other areas it is being more cautious.

Chief financial officer Ram Kangatharan said he had a much stronger focus on cost control. Staff recruitment would slow in the second half and there would be less use of consultants and other third-party service providers.

The bank is also taking a more cautious approach to its interstate expansion.

The bank did not say which brand it would trade under in the long term in Western Australia, but did say there was interest in the bank's model of owner-managed branches.

Liddy said the bank had de-risked its balance sheet by outsourcing non-conforming loans to Challenger, credit cards to Citibank and margin loans to Macquarie Bank. "We are in retail banking only and we have low-risk assets."