A few days in advance of its 1HY23 results, Bank of Queensland (ASX:BOQ) made a $200m goodwill impairment. Shares fell 3.5% at market open on Friday. What was the big deal about this?
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What is a goodwill impairment?
First of all, we must recap what goodwill is. Goodwill is a self-explanatory term – it is essentially a business’ reputation and brand. But it is included as an intangible asset on a company’s balance sheet.
So, what is a goodwill impairment? It is the process of recognizing that the value of an asset (in this case, goodwill) has decreased and must be written down in order to reflect its new market value. This write-down is made to ensure that companies’ financial statements accurately reflect the current worth of their assets.
Goodwill is only ever increased when companies buy others for a price that’s higher than their book value. Otherwise, goodwill never goes up because it is considered to have an indefinite useful life. Yes, even if it increases in theory, the Australian Accounting Standards (AAS) forbid it.
Point 4 notes that it is difficult to identify the events or transactions that contribute to it and even if they were, the extent to which they generate future benefits and the value of such benefits would not usually be capable of being measured reliably.
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A goodwill impairment is reflected in NPAT, but not EBITDA. Dependant on the size, it can make the difference between the business being profitable or loss-making. This is not a literal cash outflow, but represents a cost to the company in rebuilding that goodwill.
BOQ impairs goodwill
BOQ made a $200m goodwill impairment of its own last week just prior to its 1HY23 results. The goodwill impairment related to its 2007 acquisition of Home Building Society.
BOQ told shareholders that it increased the discount rate used to determine the value in use, thereby reducing the gap between the company’s market capitalisation and the value in use of the cash generating units in which goodwill is associated.
BQ also told shareholders it would still record a net profit, but barely – only $4m. Underlying cash earnings would be $256m, thereby indicating the impact of the goodwill impairment.
Due to the lower profit forecast, BOQ consequently cut its interim dividend, only intending to pay 20c per share (down from 22c last half). On an annualised basis, this is still a healthy 6.2%, but it’s a cut from previous levels nonetheless.
BOQ not in good shape
It is a difficult time for banks generally. Although interest rates have gone up sharply, there is cut-throat competition in the sector that is hitting non-Big 4 banks more than the majors. Bank of Queensland lacks the deposit base that its larger peers do, thereby inhibiting its ability to capture a fair share of the mortgage market.
It also intends to redeem $200m of tier two notes that weren’t due until 2028, another bad sign for the bank. To be fair, it is true that it is in a healthy financial position with a CET1 ratio of 10.71% and a liquidity coverage ratio of 143%, both up from 12 months ago. But BOQ is not in as fine shape as the Big 4 banks are in.
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