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Royal commission has weakened regional banks

James Mitchell
— 1 minute read

Bank of Queensland posted a 14 per cent fall in profits for the 2019 financial year as the fallout from the Hayne royal commission burdens smaller players with higher regulatory costs.

On Thursday (17 October), Bank of Queensland announced FY19 cash earnings of $320 million, down 14 per cent on the previous year. The group said the poor results reflects a challenging operating environment characterised by slowing credit demand, lower interest rates and a rise in regulatory costs. 

The lender’s cost-to-income ratio increase 300 basis points to 50.5 per cent over the year. Operating expenses increase 4 per cent or $23 million from FY18. The increase in expenses was more pronounced in the second half, due to an increase in business deliverables addressing regulatory and compliance requirements. 

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BOQ managing director and CEO George Frazis explained that IT costs increased due to data collection activities addressing compliance requirements and new software services resulting from the bank’s transformation programs.

“General and other expenses increased, largely due to regulatory and compliance requirements. The transition between data centre locations as part of the bank’s infrastructure modernisation program also carried some additional cost,” he said. 

“Looking forward to FY20, we expect the regulatory uplift to continue, with the seven million dollars we incurred in the second half likely to be closer to 10 million dollars in each half of 2020.”

The former Westpac executive will conduct a review of the business in an effort to improve productivity and address BOQ’s growing cost issues. 

“A simpler business will also make it somewhat easier for us to navigate the rising investment and regulatory costs we face,” he said.

Commenting on the bank’s results, Morningstar analyst Nathan Zaia said higher regulatory and compliance costs and the increased operating expenses relating to investment in technology will continue to weigh on the company going forward. 

“Perversely, the competitive position of the regional banks appears to have weakened post the royal commission,” the analyst said. “In addition to failing to keep up with the mobile and digital investment of the majors. With smaller operations the added compliance and regulatory cost is putting pressure on an already low 8.3 per cent return on equity.”

Fellow regional banks like Bendigo and Adelaide and Suncorp are also feeling the cost pressure following the royal commission. 

Last month Bendigo and Adelaide Bank posted a 6.6 per cent fall in cash earnings after tax, citing $16.7 million in remediation costs and a 5.9 per cent increase in operating expenses. 

Suncorp Bank’s profits were down 1.4 per cent in FY19. The group blamed a “challenging operating environment and economic conditions combined with higher regulatory and compliance costs.”

 

Royal commission has weakened regional banks
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