BOQ DEFENDS ASIC ACTION
Written on the 6 April 2011
BANK of Queensland (BOQ) is defending itself against an ASIC action and has its focus firmly on diversification after two more businesses were acquired last year.
ASIC announced at the end of last year that it had lodged legal proceedings against parties, including BOQ, seeking compensation for investors caught up in the collapse of Storm Financial.
Managing Director David Liddy (pictured), says the bank has received extensive legal advice on the matter and it will defend the action ‘vigorously’.
“At BOQ, we have a responsibility to all of our stakeholders and we believe it would irresponsible for us to breach our responsibilities and not fight this action,” says Liddy.
“In saying that, we have every sympathy for customers that lost money through the collapse of Storm Financial - we are providing financial assistance to more than 100 of our customers and we will continue to do so, regardless of the ASIC litigation.”
Liddy wants to set the record straight, saying there had been ‘confusion’ regarding BOQ’s involvement with Storm.
“There was no formal business relationship between BOQ and Storm Financial – we simply provided standard home equity home loans to customers who wanted to use their equity for investment purposes,” he says.
“BOQ provided loans to approximately 370 Storm-referred customers – ASIC advised in 2008 that Storm Financial had approximately 3000 customers using margin loans to invest in market-linked investments.”
The bank has undertaken a review of its portfolio and operations following the floods and cyclones and has reduced the FY11 profit guidance range by $35 million to between the range of $175 million and $195 million.
Liddy says changes in the bank’s competitive landscape and Government reforms have left an uneven playing field, with the big four banks dominating banking in Australia.
“Pre GFC, Bank West was taken over by the Commonwealth Bank and St George was taken over by Westpac, leaving Rams Home Loans, Aussie home Loans and Wizard Home Loans as the three largest non-bank distributors of mortgages,” he says.
“Two of those distributors have gone and Aussie Home Loans is now owned by the Commonwealth Bank so we’re left with three regional banks, all sub scale in terms of their size, compared to say, what a St George was.
“We have an uneven playing field in terms of the cost of funding because the four major banks are double A rating – two of the regional banks, ourselves and Bendigo are triple B plus rated and Suncorp is A rated.”
Liddy says one of the key reasons BOQ could once compete head to head with the big four, was because of securitisation – taking mortgages off the balance sheet where capital and funding relief were listed.
“We used to issue triple A securities into the markets, and then when the GFC hit, that stopped completely, so the Government came in and said, we’ll guarantee the banks deposits and borrowings,” he says.
“When the Government introduced that guarantee on borrowings, they applied a fee structure of 150 basis points for us and Bendigo Bank, 100 basis points for Suncorp and 70 basis points for the four major banks.
“Now, for the life of me, no-one can tell me why there was that disparity in those numbers – there was no consultation, so we pay 150 basis points, just to access the bank guarantee, whereas Westpac is only charged 70 basis points.”
Liddy identifies the combination of disparities between the banking point system, the removal of exit fees and the transferability of banking as factors that won’t help smaller banks, purely because of cost.
“If we raise term debt today to three term debts, it will probably cost us about 150 – 170 basis points – 50 – 100 basis points more than it was previously, so from a funding perspective the smaller banks are disadvantaged because of the cost.
“Another big issue is covered bonds, which the Government has restricted to 5 per cent of assets on the balance sheet, so obviously the larger banks with the larger balance sheets will be able to issue more covered bonds.
“What Australia needs in my view, is a strong competitor, or a group of strong competitors against the major banks and at the moment - the majority of business in Australia is now maintained in four hands and I don’t think that’s healthy.”
Liddy says the acquisition of St Andrew’s and CIT in July of last year came out of a desire to broaden the bank’s activities, instead of relying on housing.
“St Andrew’s is an insurance business and CIT is a vendor finance business – we were looking for capital light type investments at the time and we’re keen to grow both of them,” he says.
“St Andrew’s is light on capital and it provides fee income to the bank and CIT is higher margin diversity and revenue - we needed to diversify our revenue streams and broaden the base of the bank, so we’ll continue to focus on those two areas.”
BOQ also formed a new business called BOQ National Finance, which houses its vendor finance business and debtor finance business.
“This business is based on cash flow lending and we’ve just entered the motor finance business, so BOQ National Finance will be a growth vehicle for the bank and we’re always looking for more opportunities.”
Liddy says BOQ is in a stronger position now.
“Our capital today is around 11 and a half percent, which is probably the strongest of any of the banks and our core liquidity is 16 percent, much stronger than it was pre GFC,” he says.
“We’ve set ambitious goals to get our return on equity around 15 per cent by 2012 and to maintain our cost income ratio of 45 per cent - they’re stretched targets for a bank, but we’re confident we’ll meet them.
“My contract expires at the end of this year so I’ll sit down with the board shortly to discuss what’s going to happen going forward - I’ve been in banking 43 years, so I’ve got a bit of experience.”