My long term readers would know that I have been concerned about Queensland banks for well over a year. Ever since I noted the downturn in housing sales volumes back in June 2010 I have been watching them nervously. Yesterday the Bank of Queensland released its latest financial statement and the news wasn’t too good:
Bank of Queensland Ltd (BOQ)’s annual net profit fell by 14 per cent to $158.7 million as it forecast a fall in bad debts for fiscal 2012.
BOQ’s net profit for the year to August 31 was $158.7 million, down from $179.6 million in the previous corresponding year, it said on Thursday. Normalised cash profit, which takes out one-off items, was $176.6 million, down 10 per cent from $197.1 million in the previous year.
BOQ’s board declared a final dividend of 28 cents per share, fully franked, and two cents higher than the previous corresponding period. That brought the full year dividend to 54 cents per share for fiscal 2011.
Underlying cash profit increased 18 per cent to $447.4 million during fiscal 2011 from $379.1 million a year earlier.
BOQ’s declined in net profit came on the back of a spike in bad debts to $200.5 million, partly caused by one-off commercial deals, current economic conditions and Queensland’s floods and cyclones in early 2011, which also caused housing loan arrears to rise.
But Acting chief executive Ram Kangatharan said the bad debts rise was temporary and the underlying performance of the bank had improved significantly.
I note the positive tone but I am not so optimistic. A look at the appendix A of their financial statement shows the damage:
You can see from the image that what actually caused most of the balance sheet write-downs were events that occurred pre-floods. The bank actually reported this back in December 2010 before any natural disasters had occurred:
A profit warning from Bank of Queensland last night shows times remain tough in the sunshine state’s commercial property market. Negative fallout from the downgrade could hit cross-town rival Suncorp Metway.
It seems that two impairments across two of the bank’s retail shopping centre exposures prompted BoQ to review its commercial property lending book, with a focus on the top 250 exposures.
The outcome is a $37 million increase in BoQ’s expected bad debt charge for the first half of fiscal 2011. Now the bank is tipping a bad debt expense charge of between $85 million and $90 million for the half, bucking the trend of its bigger rivals where bad debts have reversed.
The acting chief executive Ram Kangatharan used the improvement in the bad debts from H1 to H2 in 2011 as a sign that the bad debt position was recovering. But the reason the position is better was because the commercial write-down in H1 was so large. The underlying trend in the provision data is still upwards. I get the feeling that the bank is trying to leverage the natural disasters to portray this as a “one-off” but the asset quality metrics in their own balance sheet don’t seem to support this. Loan repayments overdue by 90 days have continued to increase in 2011 H2 and are now almost 50 per cent greater than 12 months ago at $483 million.
On top of that is the evidence from the RBA’s latest SoMP which clearly shows Queensland is suffering from an upward trend in arrears for less mature loans:
The current credit environment and falling house prices across Queensland is not an environment that is supportive of falling arrears, though there has been a slowing in the most recent months. As I have said previously:
There is no way banks were going to see large increases in defaults in a rising market, anyone in financial trouble has been able to sell their property for a higher price, pay down their debt and move on with their lives. Even those who have recently been in financial trouble have been able to access hardship assistance which would have given them time to sell their house if need be. It is when the market begins to fall that the potential for trouble begins.
I get the feeling that this is the real underlying issue with BoQ’s loan book. Hopefully the flattening of interest rate expectations will limit the downside before this gets worse.