Bank of Queensland Limited (ASX: BOQ) shares may be hit today after the regional bank revealed impairments for its FY20 result.
FY20 impairments for BOQ
BOQ announced that it has completed its FY20 collective provision modelling and the FY20 loan impairment expense will be $175 million (pre-tax).
The regional bank said this includes a COVID-19 related collective provision expense of $133 million (pre-tax) which is based on updated RBA economic data, analysis on the banking relief package and their likelihood of recovery, and a significant exposure review.
BOQ also said that a (pre-tax) $11 million expense will be recognised after a review of historical employee pay and entitlements will be included in the FY20 result. It reviewed its payroll after seeing wage and superannuation issues elsewhere. BOQ initially found issues with super payments and then found issues relating to enterprise agreements. It has already paid $2.4 million to the ATO.
The FY20 impairment of $175 million equates to approximately 37 basis points (0.37%) of BOQ’s gross loans.
The total $133 million provision relates to $10 million from the first half and a further $123 million in the second half. This is expected to reduce BOQ’s CET1 ratio by 39 basis points (0.39%). However, the bank said it ended the year with its CET1 ratio comfortably above the 9% to 9.5% range thanks to “strong organic capital generation” in the second half, which offset the reduction.
After evaluating the latest RBA data and the bank assumptions, BOQ thinks there will be higher unemployment, downgrades to property prices and an increased duration of the economic downturn. It has also increased the probability weightings to the downside and severe case scenarios from its first half modelling assumptions.
Management comments
BOQ CEO and managing director George Frazis said: “The revised provision reflects the anticipated lifetime losses on the current portfolio reflecting to the impacts of COVID-19 in line with AASB 9 Financial Instruments.
“We are very pleased to see many of our customers returning to work and re-opening their businesses and will continue to work closely with those that require further assistance.”
Dividend
Regarding the dividend, Mr Frazis said: “We are very aware of the importance of dividends to our shareholders, including to our significant number of loyal retail shareholders. We have completed our scenario analysis in relation to dividends and have consulted with APRA in line with guidance issued on 29 July 2020. The Board will make a determination on dividends in relation to FY20 at our full year results.”
Summary
I don’t think investors can be too surprised that BOQ would have to increase its COVID-19 provision. Impacts from recessions are one of the main reasons why I’m not interested in buying bank shares.
BOQ isn’t a terrible business, I just don’t think think it offers much growth potential. There are other ASX dividend shares I’d want to buy first such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
