Bank of Queensland seeks bounce back

It's an unofficial code: One banker avoids denigrating a specific rival when trying to woo a customer.

Except, that code got pushed to the edge earlier this year against Bank of Queensland.

The Brisbane-based institution had just bled a $90 million loss after new management set aside money for bad loans. The bloody headline led rival lenders, industry sources said, to poach BoQ customers.

Staff at rivals looked for a BoQ card in a customer's wallet, or a reference to BoQ on a loan application, or even stuck a sign outside their branch telling BoQ customers to come in for a chat.

No one, of course, went so far as to say BoQ was collapsing. (Even when unofficial rules are broken, there are still boundaries.)

But rival bankers didn't try to hide their own operations' comparatively positive aspects. If a customer drew a connection, well, too bad for BoQ.

How did BoQ get cornered into such a position? It's something shareholders might ponder as new chief executive officer Stuart Grimshaw oversees his first full-year results in October.

There are three main theories: old management miscalculated risk; new management, via accounting, is clearing decks today to make themselves rock stars tomorrow; or BoQ had accurately measured bad debts, but the state's economic crisis quickly disintegrated once-justifiable valuations. Some industry watchers think it's a mix of factors.

The situation is coloured by BoQ's expansive history.

BoQ went from 99 branches in 2002 to today having almost 260 outlets bearing its blue and gold Queensland shaped icon. It ventured into franchising a cheap way of network expansion and marched boldly from Queensland into NSW, Western Australia and beyond. The bank also went into higher-risk, higher-reward areas such as equipment-finance lending.

Profits jumped from $24 million in 2001 to $159 million in 2011 under the reign of CEO David Liddy, a mustachioed AFL lover with intimate banking knowledge from his start as a teller, and a temper when criticised. There was a cost-efficiency drive and ambitious target for a return on equity a profit gauge of 15 per cent.

But setbacks struck. The NSW franchise push, for instance, faltered and 20 per cent of branches there were shut in 2009. A related NSW court dispute is scheduled to start this week.

Yet when the GFC erupted, BoQ seemingly weathered the bad loan cycle well, copping a comparatively low level of bad debts compared to Suncorp or major banks. It seemed logical; BoQ was more a bread-and-butter lender and so less exposed to riskier commercial loans.

That comfort fractured by December 2010 when BoQ revealed big problems with its small book of commercial property loans.

Still, the bank issued reassuring words of bad debts having peaked. According to industry sources, BoQ internally was checking valuations were accurate and met standards. The logic goes that based on those numbers, it would inflict unnecessary pain on shareholders to set aside cash for loans that looked to be realistically covered.

The counter argument, others suggest, is BoQ unsuccessfully monitored risk.

There had been ominous signs. The Courier-Mail in 2010 revealed a BoQ senior risk manager had warned superiors of "widespread disregard" for policy. BoQ retorted this was merely an inflammatory comment in an internal draft review that contained errors.

A soft spot emerged with BoQ, according to sources, having too few collectors to lasso stray debtors. The situation worsened in 2011's floods.

By this April, the financial accounts got messy. New management painted red ink with impairment expenses of $328 million, more than double a year earlier. Almost $166 million was for specific problems while another $162 million was for collective provisions cover for potential problems given falling property prices.

The collective provision was "a prudent response to the continued weakness in retail and commercial property markets, and in the Queensland market generally", BoQ said.

The catch here is some set-aside money could be restored later if loans are not written off.

BoQ definitely has problem home loans, but is not alone; Westpac and Commonwealth Bank results show Queensland mortgages were worse than national averages.

The market downturn and an overly "bureaucratic" structure prompted a BoQ review, and a chop of 100 middle management and back office jobs. Top management has also been replaced, some after only short stints.

They were shake-ups under Grimshaw, who has been publicly diplomatic about BoQ's past since starting last November. But The Courier-Mail can reveal he publicly aired criticism last month.

"When I walked in there, there were two things that I suppose was quite evident," he told several dozen sports lovers at a Hockey Queensland Gold Medal Lunch. (Grimshaw played hockey for New Zealand.)

"There was a bit of a void of leadership. The CEO had announced 18 months ago his intention to leave but had stayed around due to floods and the like but that created a bit of a leadership void.

"(Secondly) the team that I inherited was probably not of the skill base that I would require."

He told the audience, as they sipped wine or beer, of his admiration for Steve Jobs of tech giant Apple. Jobs loathed committees, Grimshaw said.

"When I walked in (to BoQ), we had 20 committees, of which there was an average attendance of 25 people," he said. "Now, how you can get an outcome with 25 people in the room ... we got rid of them all (committees) and we haven't missed a beat."

Ironically for a banker regarded as a big-picture guy, Grimshaw highlighted Jobs' fetish for detail.

Grimshaw was later presented with a hockey stick decorated with Aboriginal art, but not before putting Jobs' story into BoQ's context.

Quality must not slip for a small player in a big industry, he advised. "It's the small stuff," Grimshaw said, "that makes a difference."