Whoa, what a way to ride the market lower. On a day when bank stocks were sold off heavily, dragging the wider market lower, the Bank of Queensland (BOQ) chose to reveal that it would have to take a $15 million hit to cash earnings for the six months to March 31 as it scopes a series of job cuts to try and protect the profit line against a margin squeeze.
CEO, Jon Sutton said the $15 million would be used to remove duplication and manual processes and to help get its cost-to-income ratio into the low 40% range.
That saw Bank of Queensland shares fall out of bed, dropping more than 8% to $11.66, the lowest close since early last October.
The wider market fell 3%, or 143.3 points,which wiped more than $40 billion off market values.
BOQ 1Y – BoQ to cut costs
The banks were responsible for 93 points of the local benchmark index’s drop. ANZ fell 4%, CBA 4.6% ahead of its interim profit announcement this morning, the NAB lost 4.8%, Westpac 5.2% and Macquarie shed 3.4% in value.
They were reacting to a continuing sell-off in European and US banks – the S&P financials index is down more than 20% since its peak last year and is therefore in bear territory, while European bank stocks have fallen by 15% to more than 60% in the past year on growing concerns about profits, problems in Italy and Greece, and the impact of the slide in oil prices on energy groups and shipping companies – which are major clients.
But the big factor in trading yesterday was the sell off in Tokyo as banks and other financials drove the Nikkei down more than 800 points, or over 5% after Japanese government 10 year bond yields dipped into negative territory for the first time.
They closed at a yield of minus 0.1% and have fallen 0.22% since the Bank of Japan announced its move to introduce negative yields on surplus cash banks park at the central bank.
That was the latest move in the Bank of Japan’s expansion plan, but it has backfired in that it has triggered a surge in the value of the yen and fears about corporate profits and investment in the coming year.
That in turn has sparked more concern about more measures from the central bank to try and pull Japan out of a deflationary rut which now threatens to drag the economy back into recession, along with economies in Europe, the US and China.
The continuing expansion in quantitative easing programs by central banks in Europe and Japan is also hurting profit forecasts for some big banks – such as BHP Paribas, Credit Sussie and Deutsche Bank in Europe, and Goldman Sachs, Bank of America and Morgan Stanley in the US.
The slowing pace of growth in housing and fears of rising costs pressures on weak profit margins has hit sentiment around local banks.
The slide in Japanese bond yields also helped tug our bond yields sharply lower and the 10 year yield ended at 2.40%, only 0.15% above the all time low reached on April 15 last year.
With that background yesterday’s surprise from the Bank of Queensland, small as it is in size, sparked fears of similar, larger moves being revealed by the big banks in months to come, starting with the Commonwealth today.
A spokesman for the Bank of Queensland confirmed the plan would include job losses, but said it would not be a large number.
“Jobs are going to change as part of this and some jobs are going to go, but we are not talking a big reduction,” he was quoted by Fairfax Media.
Most of the spending would happen in the second half of its 2016 financial year, But it will cut BoQ’s half-yearly results (for the half year to February 29), which are due out on April 7. Mr Sutton promised the bank would get a full return on the investment within 12 months of the end of the 2016 financial year.
And for the second time in the past four months, Mr Sutton has also warned its margins are being hit by higher funding costs and continued intensifying competition in the mortgage market as demand for home loans slows. “The uncertainty in the global economic outlook over recent months has resulted in a significant increase in volatility in funding markets,” he said yesterday in a statement.
Analysts fear that is a sentiment that will appear in interim reports and trading updates this month from the CBA, NAB and ANZ. Westpac does not issue trading updates.
But it has to be pointed out that for all the selling in the big bank shares (and shares in other companies),there are a whole line up of investors who take a different view and have been soaking up the shares.
At the moment there’s a preponderance of sellers, or momentum that is driving share prices lower. But there is also an army of buyers picking up the unwanted stock.