BOQ on back foot as earning slump bites

BOQ shares dived yesterday after the bank warned of ongoing earnings pressure from tighter regulations.

Market watchers said the warning could reinforce perceptions that higher funding costs and fallout from the royal commission hit smaller players harder than big banks.

BOQ shares slumped 63c, or 6.3 per cent, to $9.32, and are trading at 2013 levels.

That creates another headache for investors after BOQ chief executive, Jon Sutton, suddenly resigned last year.

BOQ said cash earnings for the half year were likely to land between $165 million and $170 million. In the first half of financial year 2018, earnings were $182 million and analysts had expected about $185 million this time.

The bank said revenues had fallen up to $10 million in areas such as trading income, insurance and fees, including ATM fees.

The insurance fall came as the bank unsuccessfully tried to offload its St Andrew’s Insurance arm to Freedom Insurance last year. BOQ said its net interest income would be flat compared with a year earlier at $475 million and margins would be squeezed, which was linked to higher funding costs and price competition for new loans.

It also said “non-recurring costs” had hurt, which include almost $1 million paid out to Mr Sutton, who had ill health.

BOQ further warned market conditions would remain “challenging” in the second half. “We expect regulatory costs to increase as BOQ adapts to changes … including the im- pacts of the royal commission,” it said.

Credit Suisse market watchers said Boq’s alert would broadly “play into the growing view that the royal commission outcomes and increased funding costs for the smaller players is a positive for the Big Four”.

Last week, fellow Brisbanebased lender Suncorp detailed a 4.7 per cent drop in half-year profits at its banking arm to $182 million. Bendigo and Adelaide Bank posted a 12.3 per cent fall to $203 million.

Boq’s overall expenses from bad loans were to lift slightly to between 11 and 13 basis points of gross loans; it was 10 basis points in the previous corresponding period.

CLSA analysts said the increase was mainly due to new accounting standards, which could “create some volatility in provisioning going forward”.

Stockmarket watchers had already been jittery about BOQ. Morgan Stanley analysts last week flagged “challenges at Boq’s retail bank, given stalling volumes and falling margins despite consecutive repricing”.