Speaking in his address at the bank’s 2017 annual general meeting last week, Bank of Queensland (BOQ) chairman Roger Davis noted that there have been several “challenges that have impacted the industry during the year”, highlighting the introduction of a major banking levy, the prospect of a Royal Commission, major compliance and conduct issues, allegations of anti-money laundering breaches, multiple government enquiries, new class actions, declining system growth and several major new macro-prudential policies affecting risk policies and compensation.
While Mr Davis emphasised that BOQ had “enjoyed success operationally, financially and strategically”, he added that the bank needs to “embed in its operating model and business platform an appropriate degree of optionality so that [it is] well positioned for whatever challenges and opportunities [that] may arise in an uncertain future”.
“[W]e all know that the bank of tomorrow will be different from that of today, so as a bank, we need to be prepared and ready to successfully pivot for whatever may eventuate,” Mr Davis said at the AGM.
“I share many of the views of some of the major bank chairmen when I observe that the domestic banking industry at present, and perhaps globally, needs to win back community trust. As an industry, we need to better explain the value we bring to the community and the Australian economy and, in so doing, better preserve our social license to operate. This colours our future as an industry.”
He continued: “As a bank, whether or not we are directly involved in any banking scandals, we are indirectly impacted by negative community perception about whether bankers can be trusted to do the right thing.
“At BOQ, we are committed to changing this perception through an emphasis on ethics, full transparency, superior service and products and customer centricity.”
The bank has appointed a customer advocate to present customers and established a “sound ethical framework” to help raise the level of trust in the bank. Mr Davis added, however, that BOQ acknowledges that it “still [has] a long way to go before [it is] fully satisfied.”
Looking at the regulatory environment, the chairman also called for more policy reform “to not only reduce the artificial funding cost advantages enjoyed by the major banks, but also to address the significant gap that still exists between the capital requirements and risk weights of the major banks and standardised banks.
“Only then will we have a level playing field where our customers and shareholders will benefit,” the chairman said.
He also noted that the bank is working on digitisation, saying that “the use of robotics, data analytics and artificial intelligence” and “straight-through processing via [the] mortgage hub” was “well advanced”.
BOQ ‘wary of conditions in the residential apartment market’
As well as noting the current anti-trust attitudes towards the banks, Mr Davis also highlighted that the current market is characterised by “high household indebtedness in a low inflation environment, a rising cost of living, weak income growth, underemployment and potentially higher interest rates”.
He said: “This combination does pose risks for the housing market if risk is not properly managed. This explains why BOQ maintains conservative serviceability and credit settings and monitors our housing exposures very closely, sometimes at the cost of asset growth. It also partly explains why the regulator is using tougher macro-prudential policies to de-risk bank exposures and better align system and income growth so as to ensure the ongoing integrity and health of the financial system.
“However, while speculation of a housing bubble or even a housing collapse in these circumstances continues, BOQ takes some comfort from moderating east-coast housing prices and risk conditions, especially in Sydney, and sees no evidence of any systemic weakness in its housing portfolio or substantive increases in its mortgage arrears.”
He reiterated that the bank remains “wary of conditions in the residential apartment market, especially in Brisbane”, where the RBA is warning that this financial year is “crunch time”, given the oversupply, low rental increases, tightening credit conditions and ongoing targeted macro-prudential regulations.
However, the chairman noted that despite the difficult conditions, the bank had reported strong financial results. He said: “2017 has been a challenging year for all banks. However, BOQ can hold its head high with increased profits for the fifth year running, continued momentum against its niche business strategic objectives — especially at Virgin Money, BOQ Specialist and BOQ Finance — robust risk management practices and a sector-leading total shareholder return of 26.5 per cent.”
While he acknowledged that the outlook for revenue growth across the industry remained “subdued as the regulator attempts to reduce system growth to the levels of earnings growth”, Mr Davis believed that BOQ had the “optionality, right strategy, people and balance sheet to continue to provide opportunities for growth”.
The bank reported increased cash earnings for the fifth successive year to $378 million (up by 5 per cent on the prior year), a 10 basis point increase in cash return on equity (to 10.4 per cent), a “very strong” Common Equity Tier 1 Capital ratio of 9.39 per cent (up by 39 bps from 2016) and dividends totalling 84 cents per ordinary share (including an 8 cent special dividend).
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.