BOQ builds the foundations

Stuart Grimshaw, as both the new chief executive of Bank of Queensland and as a vastly experienced banker, would have known that an incoming bank CEO only really gets one opportunity to wipe the slate clean.

Today's announcement of a first half loss for the bank and a $450 million capital raising is therefore a mixture of opportunity and necessity.

Grimshaw was only appointed chief executive of the bank in November but immediately conducted a review of the group's lending book and its provisioning against loss which resulted in today's disclosure that impairment expenses had soared from $134 million in the first half of 2011 to $328 million in the latest half, forcing the bank to a $106 million loss.

Much of the total of impairment losses relates to a $160 million increase in Bank of Queensland's collective provisions, although there were $166 million of specific provisions and write-offs against loans.

There is no doubt that an increase in impairments does relate to an actual deterioration in the bank's credit quality due to the problems in Queensland's historically volatile commercial property market (not surprisingly, the bank singled out its Gold and Sunshine Coast exposures) and an increase, albeit to still quite modest, in arrears within its residential housing loan book.

The flow-on effects from last year's floods and cyclones, the downturn in tourism and the broader loss of consumer confidence were inevitable for a Queensland-focused bank and the political backdrop that led up to the weekend's gutting of the former government wouldn't have helped.

With impairments apparently stabilising, an underlying profit (pre-tax and pre-provisioning) that rose from $216 million to $222 million and a core tier one capital ratio of 6.4 per cent before the capital raising, the provisioning and the size of the capital raising could appear overly conservative.

Grimshaw, however, has had senior roles at ANZ, NAB and Commonwealth Bank and would have known that he needed to understand where bedrock lay within the loan portfolio and ensure that he took out sufficient insurance against the continuing risks in the Queensland and global economies to be able to withstand whatever might emerge.

New CEOs tend to try to wipe the slate clean at the outset. New bank CEOs know that they really only get one shot at it – neither the market nor regulators are keen on CEOs who materially misjudge the quality of their loan books.

The planned capital raising will lift Bank of Queensland's core tier one capital ratio to 8.6 per cent and its tier one ratio to 9.5 per cent. It will be as conservatively capitalised and provisioned as any of the major banks.

That can be viewed as either insurance or, if conditions improve, as foundations for future growth.

As a small bank operating largely within what has been a historically volatile economy, Bank of Queensland has to be particularly conservative. It has been reducing its exposure to wholesale funding, with deposits now accounting for 54 per cent of its funding, but if the global financial crisis were to flare again it would be aware that its status as a non-major means it is vulnerable to a loss of confidence. Bank of Queensland needs to be transparently clean and conservative.

Grimshaw is re-making the bank, bringing in new senior executives from outside the bank and re-positioning it more distinctively as a challenger to the majors. The capital raising, assuming that the assessment of the bank's credit quality is ultra-conservative, should give him some financial stability as he tries to finesse the bank's positioning.