BOQ chairman flags ‘challenges’ in operating environment

Following on from the news that the non-major has entered into two voluntary enforceable undertakings (one relating to issues with its anti-money laundering and counter-terrorism financing program and another to weaknesses in its risk management practices), the new chairman of the bank, Warwick Negus, has written to shareholders.

In his letter to shareholders on Thursday (1 June), the newly appointed chairman noted the new undertakings, stating: “BOQ will use the commitments entered into as a platform to continue the work commenced under the Integrated Risk Program…

“Our Integrated Risk Program is aimed at addressing the operational resilience uplift and improvement in our risk culture across the bank.

“This is a well-scoped, multi-year program, focussing on building strong foundations while we continue to transform BOQ. We will continue to report to shareholders on the progress of the program,” adding that the bank has “already made good progress in strengthening its financial resilience and holds strong capital and liquidity buffers”.

The new chairman also noted that there were “a number of challenges in the current operating environment for both the bank and for its customers”, including sustained high inflation combined and increased interest rates.

“This reduces borrowing capacity and puts pressure on households. With softer property prices it also reduces the size of the mortgage market, intensifying competition,” Mr Negus said.

“There is pressure across the industry on net interest margins as wholesale funding markets have faced periods of uncertainty and increased competition with the sector’s replacement of Term Funding Facilities.

“There is greater pressure on deposit competition as an attractive source of funding as a result.”

While he noted that the Australian economy was “resilient” and “supported by low unemployment and strong terms of trade”, he flagged that the bank was “aware some of [its] customers will experience some financial difficulty” and that the lender would “support them through this”.

The chairman said that the bank had therefore already “deliberately reduced lending with high loan-to-variable ratios and high debt-to-income ratios over the last two and a half years”.

“While the mortgage market was highly competitive over this time, we were focussed on protecting shareholder value and did not actively participate in a market where mortgages were being written below the cost of capital,” he said.

“Accordingly, our mortgage growth was relatively flat for this period. However, our SME business growth in our target segments was above system, providing 1 per cent income growth against the prior comparative period and with a cost-to-income ratio of 40.2 per cent in the business bank.

“We have been careful in deploying our capital to these areas of our business which have favourable returns.”

The new chairman said that the bank also continued to work on its optimisation and digitisation strategy, and was “well progressed in building a low-cost, scalable national brand and operating model”.

He stated: “Our digitisation will allow us to decommission legacy systems and achieve a material reduction in operating costs, but we recognise that we can’t wait for this to occur, we have seen increasing costs due to our complex structure and duplication in processes.

“Accordingly, we are part way through detailing a simplification program which will offset the increase in our costs while we continue to invest in the transformation of the bank.”

Mr Negus also acknowledged the current “industry headwinds” and thanked shareholders for their patience amid the ongoing investment in the business.

“We understand the share price has been disappointing and we are confident that in undertaking these integrated programs, BOQ will emerge a stronger, simpler, digital bank, which will be in a position to grow at scale with a low-cost base and provide sustainable returns to our shareholders,” he stated.

The chairman concluded by stating the appointment of Patrick Allaway as chief executive and managing director would provide “stability and continuity, enabling the management team to focus on delivery of strengthening, simplifying, digitising and optimising BOQ”.

He concluded: “It was a great privilege to be elected chairman of BOQ, and together with the board, I am looking forward to supporting Patrick and the executive team in the coming years as they continue to transform BOQ to provide a world-class experience for our customers and our bankers.”

[Related: BOQ enters enforceable undertakings with APRA and AUSTRAC]