A shrinking mortgage book caused Bank of Queensland to post a very weak first-half profit but the lender predicts a recent surge in home loan applications will see a return to growth in the second half of the year.
Cash earnings for the regional lender dropped 3 per cent to $175 million on the prior half with revenue falling 5 per cent to $532 million.
Chief executive Jon Sutton blamed intense competition in the home loan market and lower interest rates for the slide in earnings for the six months to February.
“We are operating in a rapidly-changing environment where regulation, competitive dynamics and customer demands are sifting,” he said.
However, he also said even though it has been a tough journey, the BOQ was at a ‘turning point’.
“We have seen a 30 per cent uplift in mortgage application volumes in recent weeks which gives us confidence of a return to growth in the second half,” Sutton said.
"A number of the headwinds that emerged in 2016 abated late in the half, which saw mortgage application momentum return and deposit spreads improve.
“It’s expected that this will contribute to better revenue momentum in the second half."
At what price?
Sutton said that the bank had focused on the quality of its loan portfolio rather than pushing for growth - a strategy which meant its mortgage book shrank by 3 per cent for the half.
But as he told analysts at a briefing: “We would like to have seen more growth in the first half but at what price?"
Net interest margin weakened 5 basis points to 1.85 per cent, as intense competition hit both loans and deposits.
Sutton told analysts that the margin headwinds “are abating” a view that is shared by Morgan Stanley’s Richard Wiles, who weeks ago forecast a 4 per cent plus plunge in margin for the half.
Wiles reckoned the market had failed to fully grasp the impact of negative loan growth and falling margins. But he agreed with Sutton that margin pressures will ease in the second half as BOQ has very aggressively increased mortgage rates and cut term deposit pricing.
The chief executive certainly focused on reducing costs - they were down a solid 5 per cent on the previous half, to $252 million.
“Efficiency remains a key focus. We are committed to delivering on the 1 per cent underlying expense target and have embarked on a transformation program to find further productivity efficiencies across the organisation," said Sutton.
Looking ahead, the BOQ chief said the bank’s focus will remain on growth prospects in niche customer segments and asset quality. BOQ further improved asset quality with bad debt charges sitting at a low $27 million - down 13 per cent on the previous half.
The Brisbane-based bank’s capital position is strong. Common equity tier one capital ratio rose 29 basis points to 9.29 per cent - although that’s because the book didn’t grow.