Free Essay

Boq Economic Analysis

In: Business and Management

Submitted By bmas
Words 671
Pages 3
Article:
Johnston, E. 2012, ‘BoQ pushes ahead with capital raising’, Sydney Morning Herald, 28 March, viewed 1 April 2012,
Summary
The article, ‘BoQ pushes ahead with capital raising’ (Johnston 2012) in the SMH Business News enlightens responders of the Bank of Queensland (BoQ) recent decision to proceed with a ‘$450 million capital raising’ plan (Johnston 2012). Moreover, earlier in the same week the bank had warned investors of a possible first half-year, $91 million loss (Johnston 2012).
Application of concepts
The recent decision by the BoQ to rise capital funding relates to the economic component of the PEST model. The significant performance fluctuations between last year’s profits as compared to this year’s potential loss, which is approximated to be $91m, can be explained to be consequential of the highly unstable economic environment (Johnston 2012). Factors such as post GFC strains including significant drops in consumer confidence and credit shortages are still prominent in many different sectors of the market (Reuters. 2011). For BoQ in particular, it was it’s adverse exposure to the ‘property market bust in the tourism hot spots’ that unfavourably affected its profitability (Johnston 2012).
However, fortunately for the bank institutional investors were able to raise $284 million and pick 92% of the banks entitlements (Johnston 2012). This strong support can be seen as a direct result of the bank’s diverse CSR operations. The bank’s diversification into programs such as carbon pollution reducing activities for the environment and ‘Banking on our kids’ programs to raise money for hospital foundations greatly assist in aligning BoQ’s business sector operations with profound community values (Bank of Queensland).
Analysis
Increasing a bank’s capital reserve not only allows the company to absolve any underlying debt obligations by increasing liquidity but it also increases the bank’s financial stability by softening any economic volatility. Periods of economic downturn, in particular tend to cause significant credit shortages. Banks are able to utilise any retained earnings or capital funds to operate stably during such periods until the economy once again obtains momentum. Hence, seeing as the current global economy still hasn’t recovered from the shocks of the GFC (Reuters 2011), capital rising provide BoQ with a ‘cushion’ by increasing short-term liquidity, enabling it to operate more stably during the financial crisis.
However, raising capital will result in a decrease of the bank’s profitability as by holding capital in excess of its minimum requirements it will reduce BoQ’s ability to invest. These requirements set out by the Australian Prudential Regulation Authority (APRA), which stem from the new Basel III accord recommendations state, banks should aim to keep their capital reserves between 8 to 10.5% of their risk weighted assets (Basel iii Accord 2010). In a 2011 media release the bank reported overall capital to be at 11.4% (Bank of Queensland 2011), well above the top range of the requirement set out by the Basel III accord. These excess liquid funds could be more productively used to re-invest and attain greater profits.
Nevertheless, amidst fears of a delayed recovery, largely due to the sluggish European economy, directly affecting the Australian economy (AAP 2011); capital raising definitely seems like an appropriate action. As BoQ rather decrease profitability in the short-run to cover any unexpected shortfalls in liquidity, then risk the possibility of business failure.

Reference List:

AAP. 2011, ‘Debt worries may eclipse inflation risk for RBA’, Sydney Morning Herald, 19 July, viewed 1 April 2012,
Bank of Queensland 2011, BOQ reports full year cash net profit after tax of $176.6m, media release, 13 October, viewed 1 April 2012,
Bank of Queensland, Corporate social responsibility, Bank of Queensland, Queensland, viewed 1 April 2012,
Basel iii Accord 2010, Implementation: from Basel II to Basel III, 16 December, viewed 1 April 2012, < http://www.basel-iii-accord.com/>
Johnston, E. 2012, ‘BoQ pushes ahead with capital raising’, Sydney Morning Herald, 28 March, viewed 1 April 2012,
Reuters. 2011, ‘Europe’s Debt crisis seen dragging on the world economy’, Sydney Morning Herald, 6 December, viewed 1 April 2012,

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