Moody's punishes BOQ rating

Moody's downgraded Bank of Queensland's credit rating one notch from A2 to A3, citing deteriorating loan quality—particularly large commercial property loans—and the risk of commercial property defaults in a weakening economic environment.

Moody's analyst Marina Ip said BOQ's loan quality deteriorated markedly over 2010–11 mainly because of a number of large commercial property loans. The agency also noted that weaker collateral valuations and a softer economy make resolving those loans harder.

The downgrade is likely to increase BOQ's funding costs because lenders typically demand higher returns when they view a bank as higher risk. Moody's said the downgrade signals elevated risk that could push funding costs up for the bank.

BOQ chief executive Stuart Grimshaw said he was "disappointed" with Moody's decision but stressed the bank was well capitalised with a strong funding and liquidity position. He also said securing funding this year was "extremely manageable."

BOQ said offshore wholesale funding would make up just 1.5% of the bank's total funding needs this year, according to the statement posted to the stock exchange after the market closed.

Moody's noted that while BOQ's rating remains in the single-A band, it could be cut to the BBB band if the bank suffered any single large impairments, increased reliance on wholesale funding, or had trouble refinancing maturing debt.

Moody's said smaller banks face pressure from shareholders to deliver returns comparable to major banks, which might push some smaller lenders to take higher risks—an issue highlighted in the context of BOQ's commercial exposures.

Despite the downgrade, BOQ's shares closed 2.6% higher at $7.59 on the day the rating change was announced.