Bad debts take toll on BoQ bottom line

BoQ, which, along with Suncorp and the Bendigo and Adelaide Bank, is one of the three main contenders to the big four banks, saw its statutory net earnings drop from $182 million to $158 million for the 12 months ending on August 31 this year.

The slide - which was accompanied by a 10 per cent drop in cash profits, the industry's preferred measure of earnings, to $176 million - was a direct consequence of the poor "current economic conditions", one-off commercial deals and natural disasters earlier this year.

Queensland was hit particularly hard by widespread flooding and cyclone Yasi.

The bank's bad-debt charge almost doubled - from $104 million to $200 million - while its impaired assets also jumped sharply, by almost $300 million to $444 million.

The latter represents 1.71 per cent of the bank's non-securitised loan book as against just 0.6 per cent a year ago. BoQ has made specific provisions of $173 million against those impaired assets.

Yesterday's result had been flagged by the bank in a profit warning earlier this year and investors were relieved that the lower figure fell within its guidance.

That, coupled with 2? a share increase in the final dividend to 28?, making 54? for the year, helped lift BoQ's share price 11? to $8.10.

The stock was also underpinned by an 18 per cent increase in underlying pre-tax earnings to $447 million, a figure struck before impairment charges.

The acting chief executive, Ram Kangatharan, highlighted a recovery in the bad-debt position in the second half of the year - when impairment charges fell $68 million against the previous period - as a sign the bank was over the worst.

The trend was set to continue during the current year, Mr Kangatharan said. He is standing in as CEO before the arrival next month of Stuart Grimshaw as successor to David Liddy. Mr Liddy retired at the end of August after 10 years in the job.

"We believe bad debts will fall [in the 2012 financial year] and our focus remains on well secured housing and small and medium enterprise lending," Mr Kangatharan said. The bank was also taking a "more prudent approach" to managing its provisions.

Analysts have indicated that BoQ still has some way to go before it sees a recovery in its earnings position. "Credit quality is the key risk that is holding back BoQ's returns and share price," a Royal Bank of Scotland analyst, John Buonaccorsi, told investors last week. "Although the Queensland economy is now picking up, a recovery in property valuations will lag the improvement in the wider economy."

Like its main rivals, BoQ is also suffering from lacklustre credit growth across the industry, which translated into a $700 million fall in new lending, to $11.8 billion.

However, on the plus side, retail deposits rose strongly, up $2.2 billion, or 12 per cent, to $20.3 billion from $18.1 billion the year before. This helped to reduce the bank's overall cost of funding.