Guarantee loss a B-grade move for BOQ
The Age
Thursday March 4, 2010
THE lingering effects of the federal government's soon-to-disappear bank funding guarantee will cost the Bank of Queensland $30 million a year in pre-tax profit and hamper its competitive position for another four years, its managing director David Liddy said yesterday.While the removal of the emergency financing system at the end of this month has been welcomed by the banking industry, Mr Liddy indicated that he would continue to campaign against its ongoing costs.The annual fees that are levied by the government for the use of its AAA credit rating will last for the term of the debt that has been raised by the banks €” a charge that will include the price differential that exists between the higher-rated banks and the lesser, regional ones.The guarantee was introduced in October 2008 when international and domestic debt markets froze in the global financial crisis.Using the government's sovereign credit rating was the only way banks were able to raise money to maintain lending in the months afterwards and they were charged different rates depending on their own credit ratings. The recovery in debt markets has reduced the need for the guarantee and it will be withdrawn on March 31.The BBB-rated BOQ has been paying 80 basis points (0.8 percentage points) more than the big four every time it raised money from debt markets. But Mr Liddy said investors were charging an additional 15 to 25 basis points because of the bank's lower rating and the perceived credit risks.The result was that the higher costs almost wiped out the bank's profit margins on the home loans it was able to offer, which in turn had a "tremendous impact" on the competitiveness of the smaller institutions in the mortgage market. "The disadvantage we have faced under the guarantee's pricing will become an albatross around our neck and that of competition in Australian banking well into 2014," he added.
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