Moody's punishes BoQ rating

BANK of Queensland has been hit with a credit rating downgrade by Moody's, which cited the bank's deteriorating loan quality and possible commercial property defaults.

By InvestSMART · 21 Jan 2012

By InvestSMART ·
21 Jan 2012

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BANK of Queensland has been hit with a credit rating downgrade by Moody's, which cited the bank's deteriorating loan quality and possible commercial property defaults.

Late yesterday, just before the close of trade, Moody's said it would downgrade Bank of Queensland to A3, down one notch from A2.

The downgrade will increase funding costs for the bank, as lenders will expect higher returns for increased risk.

"Bank of Queensland's loans quality deteriorated markedly over 2010-11, mostly as a result of a number of large commercial property loans," said Moody's Marina Ip.

"While the banks has completed a comprehensive review of its largest commercial exposures, identifying and providing for weaker loans, the weakening economic environment will render it difficult to resolve these loans, as well as raising the risk of further asset quality deterioration, including more depressed collateral valuations."

Ms Ip said smaller banks were facing pressure from shareholders to provide the same returns as the major banks, and that this may push smaller banks to take higher risks.

BOQ's chief executive, Stuart Grimshaw, said that while he was "disappointed" with Moody's decision, the bank was well capitalised. Securing funding in 2012 was "extremely manageable".

In a statement to the stock exchange posted after the market closed, Mr Grimshaw said offshore wholesale funding would make up just 1.5 per cent of the bank's total funding needs in 2012.

"We believe BoQ remains a well-capitalised Australian bank with a strong funding a liquidity position," he said.

While the rating remains in the single-A band, it could be cut to BBB band if there are any single large impairments, and increase in wholesale funding, or if the bank struggles to refinance maturing debt.

The bank's shares closed 19 cents, or 2.6 per cent higher at $7.59.

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Frequently Asked Questions about this Article…

What credit rating change did Moody's make for Bank of Queensland (BOQ)?

Moody's downgraded Bank of Queensland one notch from A2 to A3, citing concerns about the bank's deteriorating loan quality and potential commercial property defaults.

Why did Moody's cite deteriorating loan quality for BOQ's rating downgrade?

Moody's said BOQ's loan quality worsened markedly over 2010–11 largely because of a number of large commercial property loans, and that a weakening economic environment could make it harder to resolve those loans and depress collateral valuations.

Will Moody's downgrade increase Bank of Queensland's funding costs?

Yes. The downgrade will likely increase BOQ's funding costs because lenders normally expect higher returns when they perceive greater credit risk.

Under what conditions could BOQ's rating fall further to the BBB band?

Moody's said the rating could be cut to the BBB band if BOQ suffers any single large impairments, if there is an increase in wholesale funding, or if the bank struggles to refinance maturing debt.

How did BOQ's management respond to Moody's downgrade?

BOQ chief executive Stuart Grimshaw said he was 'disappointed' but stressed the bank was well capitalised, that securing funding in 2012 was 'extremely manageable', and that offshore wholesale funding would make up just 1.5% of the bank's total funding needs in 2012.

What did Moody's say about smaller banks and shareholder pressure?

Moody's noted that smaller banks face pressure from shareholders to deliver similar returns to major banks, and that this pressure may push some smaller banks to take higher risks.

How did BOQ's share price react after the Moody's announcement?

BOQ's shares closed 19 cents, or 2.6% higher, at $7.59 on the day of the announcement.

What should everyday investors monitor after Moody's downgrade of BOQ?

Investors should watch for any updates on BOQ's commercial property loan performance, announcements of large impairments, changes in the bank's wholesale funding mix or refinancing issues, and any further rating actions from Moody's, since those factors were highlighted in the downgrade.