Investors ended up being pretty sanguine on Friday about the shock announcement from the Bank of Queensland of $260 million in provisions and writedowns, lower profit, a reduced dividend and possible pressure from regulators like APRA on the bank.
The equanimity of local investors about problems in a local bank was noticeable, judging by the performance of Bank of Queensland shares in trading, especially after the recent spate of problems in the sector in the US and Europe and the way those events shook markets, especially bank shares.
Friday saw Bank of Queensland shares fall to an early low of $6.24 before closing at $6.43, down 0.9% from Thursday’s $6.49.
Perhaps investors were too accepting about the story from the Bank of Queensland. It is clear that by the close of trading on Friday there were a lot more questions being asked by analysts and some shareholders than at the start of the session
The Australian Financial Review reported on Friday that “Bank of Queensland’s chief executive Patrick Allaway couldn’t really explain much when he fronted analysts on Friday before abruptly ending the call when he was asked if the financial crimes regulator is investigating the bank.”
The disclosure was so scant that it led Citi analyst Brendan Sproules to promptly issue a note titled: “Why so shy? Many questions, little to say” in the aftermath of the discussion.
What is clear from Friday’s statement is that it is a two- or three-part story – linked to three ASX filings this week – one on Tuesday and two on Friday.
And it is also clear that the bank has attempted to manipulate investor views on the bank and its financial position ahead of what could have been a terrible interim result release next Thursday.
The Brisbane-based bank surprised with an announcement early Friday detailing the $60 million for increased spending on risk monitoring and a $200 million writedown of the balance sheet value of goodwill.
As well, Bank of Queensland revealed weaker interim cash earnings – down 4% to $256 million for the six months to the end of February, from $268 million but also a plunge in statutory earnings to just $4 million after the write downs ($212 million for the six months to February, 2022).
But to reassure nervy shareholders, the bank promised an interim dividend of 20 cents a share, which down from 22 cents a share a year ago (analysts had been tipping a 24-cent interim).
The $60 million provision to pay for better risk monitoring at the bank grabbed the lion’s share of attention on Friday.
The AFR commented that “Regulators have demanded a “material uplift” in Bank of Queensland’s risk and compliance management, “
Stand-in CEO Patrick Allaway was on the front foot on Friday, reassuring shareholders and investors that “BOQ is in a strong financial position supported by increased capital and liquidity buffers, cash earnings and sound asset quality with prudent risk settings.”
“The investment in our Integrated Risk Program will further strengthen our operational resilience. Our shifted focus on strength and simplification whilst digitising BOQ is designed to deliver a low-cost bank with strong foundations.”
The statement to the ASX on Friday morning and Mr Allaway’s comments in the statement had all the hallmarks of a campaign to try and control market reaction to what would have been a damaging shock if dumped onto investors all at once next Thursday.
What was not explained on Friday was the announcement on Tuesday, April 11 which revealed the reclassification of nearly $2.9 billion of funding and deposits. Those moves were unexplained as to how the original miss-classifications occurred and the reason for the changes (was it regulator-driven by APRA, or by auditors?).
All Bank of Queensland said in the statement on Tuesday “As a result of a realignment of liquidity reporting definitions, $414 million previously in short-term wholesale funding was reclassified as customer deposits as at Financial Year 2022 (FY2022) end. This impacted the deposit to loan ratio at FY2022, which increased from 74 per cent to 75 per cent.”
“Further, to align underlying product characteristics, $2.5 billion as at FY22 and $1.9 billion as at Half-Year 2022 were reclassified from Term deposits to Savings and investment accounts.”
That sounds very much like the bank’s staff didn’t know their term deposits from wholesale funding or savings or investment accounts. The larger reclassification is remarkable given the size and their nature.
Some analysts speculated that the other financial regulator AUSTRAC (the same organisation that investigated the Commonwealth Bank, Westpac and NAB as well as the Star and Crown Casinos and exposed massive money laundering breaches) may be involved, but there was no confirmation on Friday.
In Friday’s main statement containing news of the write down and results, BoQ explained the increased risk monitoring spend followed the annual meeting last November, where the bank said it was “prioritising strengthening and simplifying BOQ whilst delivering a digital data led bank.”
Was this extra spending linked to the reclassification on Tuesday?
“To that end “BOQ will undertake an Integrated Risk Program to strengthen its commitment to risk management and will reflect an anticipated $60 million cost of this program in its 1H23 results being announced on 20 April 2023.”
The goodwill write down was mentioned in the same breath, which looks completely unrelated.
“In addition, following a review of the carrying amount of goodwill in accordance with Accounting Standards, BOQ has determined that it is appropriate to write-down $200 million of goodwill. Both adjustments are non-cash items and will appear within the statutory net profit after tax in the 1H23 results.”
“The majority of goodwill held on the BOQ balance sheet relates to the acquisition of Home Building Society Limited in 2007.
“As at 28 February 2023, BOQ considers that the share price and resulting market capitalisation does not appropriately reflect the value of BOQ’s assets and liabilities.
Accordingly, BOQ has increased the discount rate used to determine the value in use. This reduces the gap between BOQ’s market capitalisation and value in use of the cash generating units in which goodwill is associated.”
In other words, the bank’s weak trading performance and share price (down more than 19% in the past year) has not been good enough to support the current goodwill valuations in the balance sheet, hence the writedown.
Seeing goodwill was $767 million at the end of the 2021-22 financial year (unchanged from the year before) the $200 million impairment is a hefty 30% of that figure, a size that underlines the weakness of the bank’s recent performance.
To reassure the market the bank said its capital position remained strong with a CET1 ratio of 10.71%, up from 9.57% at the end of the August, 2022 half year with the bank’s liquidity ratio at 143%, up from 139%.
The high capital position was the only positive from Friday’s announcement.
A third announcement (the second on Friday) revealed APRA has provided its written approval to redeem $A200,000,000 Floating Rate Subordinated Notes due 1 May 2028 and “that BOQ would exercise the right to redeem as set out in that announcement.”
The redemption will occur at the first date in the term sheet, a sure sign bank of Queensland wants to cut its debt burden while it undergoes what could be a major change in risk monitoring.
The need for the notes to be quickly redeemed was not explained by Bank of Queensland either. But APRA has been telling banks and other financial group taking this route that they can’t use new tier 2 debt to pay for the redemption.
So it would seem APRA is confident Bank of Queensland has the financial strength to payout the notes and accrued interest. It’s a big deal for the bank whose shares are down in the past year and its market cap is only just over $4.1 billion. That means the redemption will be equal to 5% of the bank’s market value.
