Exposure to the healthcare, property and construction sectors in its SME banking division and to Queensland tourist districts in its home lending business account for Bank of Queensland’s high rate of loan deferrals.
Last month, when APRA released loan deferral data at the lender level, BOQ had the highest level of deferred loans. The bank’s 2019/20 financial report, released yesterday, explains why.
At the end of August, 16 per cent of BOQ’s SME loan balances were in deferral – down from a peak of 18 per cent in April and May.
The bank has a strong niche business in healthcare, which makes up 24 per cent of its SME portfolio balance. Healthcare loans accounted 37 per cent of SME loan deferrals.
Property loans accounted for 14 per cent of BOQ’s deferrals and construction 11 per cent.
In the bank’s home lending business, 12 per cent of loan balances were in deferral at the end of August – down from 15 per cent in April and May.
Forty-five per cent of the bank’s home loans are to Queensland borrowers. Earlier this month Equifax identified Queensland as the deferral hotspot, reporting nine of the top 10 regions for mortgage deferrals were in the state.
With its high exposure to borrowers needing assistance, BOQ added a COVID-19 provision of A$123 million to its loan impairment expense in the second half. The expense for the full year was $175 million, compared with $69 million in 2018/19.
The big increase in loan impairments plus some restructuring costs were the main reasons for a fall in the bank’s net profit from $298 million in 2018/19 to $115 million for the year to the end of August.
The profit in the second half of the year was just $22 million.
The underlying business performance was flat, with some key metrics deteriorating.
Net interest income rose 2.6 per cent to $986 million and non-interest income fell 14 per cent to $110 million. Total income rose 0.9 per cent to $1.1 billion.
Operating expenses rose 7 per cent to $594 million. The net interest margin fell 2 basis points to 1.91 per cent, cost-to-income rose from 51 per cent to 54.2 per cent and return on equity fell from 8.3 per cent to 5.4 per cent.
The home loan portfolio increased by 2 per cent to $31.1 billion, compared with system growth of 3.2 per cent. Net loans and advances were up 2 per cent to $46.7 billion.
Customers deposits grew by 7 per cent to 34.7 billion.
BOQ chief executive George Frazis is pinning a lot of his hopes for the future of the bank on digitisation. Spearheading the development is the relaunch of Virgin Money Australia as a cloud-based wholly digital bank later this year.
Frazis said: “This is a very important investment for us. We are deploying market-leading technology and it is a pathway for the whole bank.”
Despite flat operating conditions, Frazis increased capital investment from $95 million in 2018/19 t $100 million last financial year. That spend was focused on core infrastructure modernisation and the Virgin digitisation.