In a research note this week, Morningstar analyst Ravi Reddy noted that BOQ has taken a “cautious approach to residential lending” and reduced its exposure to the Brisbane CBD, Sydney and Melbourne markets.
The latest APRA figures show the regional bank’s mortgage book reduced by approximately 3 per cent over the 12 months to 31 March.
“Management contends tighter lending standards and reduced lending via the broker channel during 2016 were the key reasons for below-system residential loan growth,” Mr Reddy said.
“The problems with the broker channel have been fixed and BOQ expects to grow its residential loan book broadly in line with system in fiscal 2018.”
In its results presentation for 1H17, BOQ revealed that it had seen only $50 million in growth from the broker channel during the half, compared with an average of around $500 million in the four prior half-year periods.
Managing APRA’s 10 per cent cap on investor lending growth has proven problematic for the bank, which BOQ chief financial officer Anthony Rose admitted “did create issues for us in the broker market”.
“Firstly, there has been a lot of regulatory focus on serviceability calculations and ensuring living expenses are appropriately considered as part of any lending application,” Mr Rose said.
“We have been very diligent in this space, taking a prudent approach to these assessments and ensuring we are meeting the regulator's expectations. It’s fair to say there have been some different policies in use across the industry, and variability by borrower type, geography, income levels, etcetera,” he said. “In many cases, we have found that we were willing to lend a lower maximum amount than our peers, particularly in the Sydney and Melbourne markets where the strongest growth has been.”
As a result, Mr Rose admitted that BOQ found itself “off the consideration set” for many brokers.
“Secondly, our application processing for broker generated loans has been more onerous for a couple of reasons,” he said.
As of 30 March, BOQ completes validation of 100 per cent of loan applications. Mr Rose explained that this “time‐consuming process” involves reviewing the customer’s application and ensuring that the income and expenses declared and used in the assessment can be verified from supporting documentation and are consistent with activity on an applicant’s bank statements.
“We have also still been in the process of rolling out the second phase of our retail lending origination system, with the second drop of code for this system landing in December. This will enable up to 70 per cent of applications to be processed through the new system over time.”
BOQ is still working to improve other elements of the end-to-end lending process, to ensure it becomes easier to deal with for brokers, branches and customers.
The banks expect that by the end of this calendar year it should be in a much stronger position.
[Related: BOQ acquires SME funding business]