Bank of Queensland’s Loan Deferral Update Provides Reassurance Loan Impairment Expenses Have Peaked

We retain our AUD 7 fair value estimate for Bank of Queensland, with an update on temporary loan deferral the highlight of the annual general meeting. As at Nov. 30, deferral balances have fallen to AUD 1.3 billion, down from AUD 2.3 billion in October, and a peak of AUD 7.2 billion in June. Current deferral balances represent 3% of home loan balances and 3% of the SME balances. While we had some concern Bank of Queensland’s business loan deferrals were not falling as quickly as peers', we had expected its large exposure to the medical industry would see the majority resume loan repayments once deferral periods ended. Many of these businesses, such as dentists and physiotherapists, were shut during lockdowns. In our view, falling deferrals provide comfort the bank's collective provisions are adequate. Our fiscal 2021 loan impairment expense forecast is reduced to 0.35% of gross loans from 0.45% previously, driving a 15% increase in fiscal 2021 cash profit. Longer-term forecasts are unchanged, hence the impact on our fair value is not material. Our loan expense forecast is still elevated relative to recent years, as stress across businesses and households will likely emerge as government support continues to be unwound. Conservative management teams across the banks are also likely to add to provisions as losses are realised.