The Bank of Queensland (BOQ) has told shareholders it has written down $200 million in goodwill for the first half of the 2023 financial year (1H23) following a review aimed at ensuring compliance with accounting standards.
According to the bank, most of the goodwill on its balance sheet is linked to its $600 million acquisition of mutual bank Home Building Society Limited in November 2007.
The review found that as of 28 February 2023, the current share price and market capitalisation “does not appropriately reflect the value of BOQ’s assets and liabilities”.
The $200 million write-off has coincided with a redemption of Tier 2 capital notes of the same value.
The Australian Prudential Regulation Authority (APRA) has formally approved redemption of the capital notes, which were due to expire on 1 May 2028.
BOQ has the option to prematurely redeem all or some of the capital notes on 1 May 2023.
However, BOQ stressed the early redemption of Tier 2 capital does not imply or indicate further redemptions would be exercised for outstanding capital notes.
Tier 2 capital notes are issued to shore up liquidity and protect depositors in the event of a shock to financial markets.
The asset class recently made global headlines after Swiss regulators wrote-off $25 billion in Tier 2 capital notes issued by embattled banking giant Credit Suisse.
This was aimed at supporting UBS’ $4.8 billion acquisition of its embattled competitor.
Meanwhile, BOQ has also announced it would commence an Integrated Risk Program designed to bolster its risk management posture.
The program is expected to reflect a $60 million impairment in its 1H23 results, set to be released on Thursday, 20 April.
Both the goodwill write-off and risk management adjustments are non-cash items and will appear within the statutory net profit after tax.
Despite the hit to earnings, BOQ managing director and chief executive officer Patrick Allaway said the bank remains well capitalised.
“BOQ is in a strong financial position supported by increased capital and liquidity buffers, cash earnings, and sound asset quality with prudent risk settings,” Mr Allaway said.
He said the group’s strategy remains focused on simplifying the bank and driving digital transformation.
“The investment in our Integrated Risk Program will further strengthen our operational resilience,” Mr Allaway added.
“Our shifted focus on strength and simplification whilst digitising BOQ is designed to deliver a low-cost bank with strong foundations.”
Following BOQ’s announcements on the ASX, the group share price fell by up to 2 per cent before recovering to just under $6.50 per share.
Citi analyst Brendan Sproules has foreshadowed further stress to BOQ’s 1H23 earnings.
In a note on Thursday, 13 April, Mr Sproules forecast a sharper than expected drop in BOQ’s net interest margin (NIM).
“At Bank of Queensland’s upcoming half-yearly result announcement, we expect NIM to be a key focus for investors,” he said.
“We forecast a NIM of 1.80 per cent, 6 basis points below consensus expectations, and think the market could be underestimating the deposit beta given [its] relatively weaker deposit franchise versus peers.”
BOQ’s earnings update will be delivered by a new executive leadership team.
Late last month, Mr Allaway stepped down from his role as interim chair of the board to assume a permanent position as managing director and CEO.
Former non-executive director Warwick Negus was named as the new chair, effective from 27 March.
The changes followed the resignation of George Frazis, who served as chief since September 2017.
Mr Frazis reportedly lost the support of the BOQ board, which did not believe he was best suited to drive the bank’s transformation strategy.
“…The board has formed a view that different leadership is now required to ensure BOQ can continue to build a stronger and more resilient bank through future cycles,” Mr Allaway told shareholders at the annual general meeting late last year.
