Moody's punishes BOQ rating

Late yesterday, just before the close of trade, Moody's said it would downgrade BOQ 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 bank 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 might 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 this year 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 this year.

"We believe BOQ remains a well-capitalised Australian

bank, with a strong funding

and liquidity position," he said.

While the rating remains in the single-A band, it could be cut to the 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?, or 2.6 per cent, higher at $7.59.