The blue canary wails a sad song


Well this is no surprise – the Bank of Queensland (BOQ) is going to post a first half loss on a near tripling of its bad loan impairments. Is this the canary in the housing mine or just another notch in the pistol grip for the big four banking oligopoly?

From The Cupboard:

Bank of Queensland (BOQ) expects to post a $91 million first half loss because of a large increase in impairments on loans.

The bank announced plans to raise $450 million in response to the larger impairment costs, and flagged its results for the six months to January 29.

BOQ impairment costs on loans will be $328 million for the six months to February, up from $134 million in the same period in the previous year.

That will lead to a $91 million loss for the first half, down from a $48 million profit in the previous corresponding period.

Delusional Economics late last year pointed out that BOQ was still blaming the Queensland floods and expected only a “temporary” rise in bad debts:

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….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.

European or Queensland banks, DE gets it right again. The real reason behind the result is the heavy exposure BOQ has to the QLD housing market, where, since the start of 2008, Brisbane home values are down by -4.1%, and have fallen by -7.6% over the twelve months to February 2012, according to RPData:

Although higher prices help on the capital side of the book, its the flow of sales that generate the profit. Again this is another area that is easy to ascertain, with Queensland mortgage issuance and home transfers (sales) running near decade lows according to State Government data:

You’ll only hear this as an addendum to the result, with the high AUD and natural disasters to take most of the blame:

“BOQ’s underlying performance was achieved against a backdrop of continued variability in the strength of the Queensland economy, which has negatively impacted the commercial and residential property market,” managing director Stuart Grimshaw said in a statement.

“Queensland has been negatively impacted by the flow-on effects of a downturn in tourism and has endured recent natural disasters such as floods and cyclones….conditions in Queensland were expected to remain challenging in the next few years, due to the high Australian dollar.”

This is not a good result for shareholders, besides the lack of accountability and explanation behind the struggling business model. The bank also announced a mammoth capital raising to “strengthen” – or patch up with bog – its balance sheet. How this can be explained as “providing capacity for growth” when its clearly designed to cover the holes created by an over-leveraged balance sheet from mortgage issuance is beyond me.

BoQ says it plans to strengthen its balance sheet by selling about 74 million new shares, which represents about one-third of the shares it currently has on issue.

Existing shareholders will be offered around $300 million new shares in an entitlement offer, and a further $150 million could be raised through the placement of shares to institutional shareholders.

Prepare to be diluted when BOQ comes out of a trading halt shareholders – and watch the other regionals, including Bendigo/Adelaide Bank and Suncorp. At Friday’s close, BOQ’s share price, save for brief moments during the GFC overshoot and last years correction, is at a 10 year low:

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