BOQ: Highest provision writeback in the sector

The Bank of Queensland’s announcement that $75 million will be released from their collective provision took the country’s banking analysts by surprise. 

The regional lender said on Wednesday that its third-quarter update will include a decrease in the collective provision of $75 million, driven "primarily by the improved economic outlook, with a further reduction from improvements in data quality relating to collateral".  

Citi’s Brendan Sproules said the timing of the release was unusual given that BOQ was due to release its third-quarter Pillar 3 release in just six weeks' time. 

“This action equates to more than half of $123 million 2020 Covid-related collective provision top-up, the current highest Covid provision write-back in the sector,” he said.  

He further noted that the release provided a $52 million profit boost for the second half of 2021 as well as a better-than-expected final dividend.  

Sproules said full year cash earnings will likely be boosted to $385 million, up from $333 million before the announcement. 

Earlier and larger 

For its part, Morgan Stanley said the release of $75 million was “earlier and larger” than they had expected but noted that the release of this magnitude suggests that the Australian banks' upgrade cycle will continue to be supported by provision releases and a more modest rise in underlying loss rates.  

Last month, when the banks reported interim results, the broker said bank earnings will be bolstered by a further $3.6 billion in collective provision releases over the next two years. 

During the interim results, the major banks recognised a solid $1 billion of provision releases. 

At the time, Morgan Stanley calculated that the release of provisions lifted first half cash profits for Westpac, ANZ, and National Australia Bank, by 63 percent to $14 billion.  

Bank executives made large bad loan provisions during the middle of the Covid lockdowns in anticipation of a wave of customer defaults.  Luckily, the economic recovery has been swifter than anyone expected. Loan performance has held up and the Covid provisions weren’t needed, allowing massive write-backs.  

“The banking majors have reduced collective provisions by $1.9 billion from peak levels, but we believe coverage remains strong, with the average collective provision/risk-weighted average ratio of around 1.4 percent only modestly below its peak of 1.5 percent and still well above the 2019 level of 1.0 percent,” said Morgan Stanley analysts in May. 

“If coverage declined to its 2019 levels, future releases could reach $4.8 billion,” they concluded.  

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