Bank's Sunny Result Fails To Shift Market Clouds

The Age

Friday April 11, 2008

Vanessa Burrow, Markets Reporter

AN UNCERTAIN future has tempered the response to Bank of Queensland's strong growth and record half-year profit of $65.3 million.

Shares fell for the fifth day in a row, slipping 2.2% to $15.75, while the broader market fell 1.3%.

"I don't understand it - you come out with a record result and the stock goes down," said BoQ managing director David Liddy.

"We exceeded the analysts' expectations in terms of the headline profit."

Mr Liddy said BoQ, which has 283 branches, had increased lending by 27% between September 1 and February 29, while retail deposits had grown 29%.

Net profit increased by 33%, compared with the first half of 2006-07. During the period, the bank also merged with Western Australia's Home Building Society, gaining 30,000 customers.

Bad debts, which have plagued some of BoQ's bigger competitors, declined slightly.

"We're not a corporate bank and we've only got 59 exposures over $10 million - the majority of our business is in housing and consumer," Mr Liddy said.

"I won't say we're protected from bad debts, of course we're not . . . but our performance has been very strong and our credit quality is pristine."

Mr Liddy acknowledged the stress in the consumer market and said high interest rates were biting, affecting retail sales and house prices.

The increased cost of wholesale funding was also putting pressure on banks' profit margins, prompting them to increase their standard variable housing rates without a lead from the Reserve Bank. BoQ has increased this rate to 9.37%, while the official cash rate remains at 7.25%.

"The big risk is purely in margin deterioration, in terms of wholesale funding costs," Mr Liddy said, referring to the environment for all Australian banks.

"We're not planning for the securitisation markets to open up at all in this calendar year, and I don't expect wholesale funding costs are going to come down significantly at all."

But BoQ expects to achieve its 10% earnings per share target over the second half of 2007-08. "Our second half is traditionally stronger than our first half," Mr Liddy said.

JPMorgan chief banking analyst Brian Johnson said Bank of Queensland was growing rapidly and loan losses were low, but its margins were contracting.

Like all banks, Bank of Queensland was being forced to use more short-term funding, and the terms were getting shorter and shorter, Mr Johnson said.

JPMorgan has an "underweight" rating on the banking sector, indicating it expects banks to underperform the broader market.

Bank of Queensland will pay an interim fully franked dividend of 35? a share.

Last year the bank paid 32? in the first half and 37? in the second.

KEY POINTS

? Bank of Queensland posts strong growth and record result.

? Market reaction to 33% after-tax profit rise perplexes bank's chief.

LINK

? www.boq.com.au