House prices could fall by as much as 12.5 per cent this financial year under the most severe case scenario modelled by the Bank of Queensland that has prompted it to increase its provision for bad loans to $175 million as it braces for a longer and deeper recession.
Investors punished the bank on Tuesday causing the share price to slide by more than 7 per cent after revised modelling factored in the impact of mounting unemployment, sliding property prices and negative gross domestic product on BoQ’s loan book.
BoQ has already been the most exposed bank to loan deferrals, according to data released by the Australian Prudential Regulation Authority, with 12 per cent of home owners and 16 per cent of small business customers applying for loan relief.
The provision for loan impairments, up from $28 million in April, was based on new economic assumptions using Reserve Bank of Australia and internal data. The base case scenario predicts GDP will contract by 6 per cent, unemployment will reach 10 per cent, residential property prices will fall by 6 per cent and commercial property by 10 per cent this year.
On the most severe scenario, weighted by the bank as having a 5 per cent probability, GDP will contract by as much as 9 per cent, unemployment will reach 12 per cent, residential property prices will fall by 12.5 per cent and commercial property by 20 per cent this year.
Chief executive George Frazis said the revised provision reflects the impact of the virus but was pleased that a quarter of the bank’s customers who applied for loan relief had started making full or partial repayments.
“As we all know, this has been an unprecedented year and BoQ is committed to supporting our customers throughout this period. We are very pleased to see many of our customers returning to work and reopening their businesses and will continue to work closely with those that require further assistance,” Mr Frazis said.
Evans and Partners banking analyst Matthew Wilson said he was not surprised by the changes to BoQ’s loan impairment provision, saying he had forecast bad debts of $219 million.
Mr Wilson said the bank’s underlying assumptions were “rather bullish” as they relied heavily on the base case assumption, with only 20 per cent probability afforded the downside scenario and 5 per cent to the severe.
BOQ also announced it had conducted an audit of employee remuneration and found $2.4 million in superannuation had not been paid properly. The bank has set aside $11 million for wage issues and said it is still investigating the matter.
The Finance Sector Union national secretary Julia Angrisano said 750 staff would have to wait until March next year to be repaid, adding this was “not acceptable”. “This is wage theft and we are calling on the Bank of Queensland to accelerate the repayment program to pay affected employees immediately,” Ms Angrisano said.
Mr Frazis apologised for the errors and committed to contacting all impacted employees in the coming months. “We will get this right and we will make sure our people, past and present receive every cent they are owed. This is an absolute priority,” he said.
Mr Frazis did not provide an update on whether the bank would pay shareholders a dividend this year, only to say he realised how important the payments are to retail investors.
“We have completed our scenario analysis in relation to dividends and have consulted with APRA in line with the guidance issued on July 29, 2020. The board will make a determination on dividends in relation to FY20 at our full-year results,” Mr Frazis said.
BOQ’s full-year results will be announced on October 14.
Mr Wilson said he did not expect the bank to pay shareholders a dividend. “BOQ has much on its plate, rebuild the IT platform, rebuild the culture and grow.”
Morningstar analyst Nathan Zaia said BOQ’s deferred loan book was on the “upper end of the market” and predicted cuts to JobKeeper would put further pressure on the banks.
“The government is hoping that as they reduce JobKeeper, more of those jobs will come back so they offset each other,” he said. “But I don’t think that’s going to happen. I think we’re going to have a period where there’s more people doing it tough.”
BOQ’s share price closed at $5.89.
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