Bank of Queensland reported higher arrears in its mortgage, commercial and asset finance portfolios in the six months to February – particularly in the asset finance business. Most of the banks and other lenders that reported half or full-year results to the end of December showed no growth in arrears levels, with some showing falls. The BOQ result suggests higher interest rates are finally having an impact on credit quality. BOQ’s housing loan arrears (past due by 90 days or more) rose from 55 basis points in the six months to August last year to 60 bps in the six months to February. Commercial loan arrears rose from 61 bps to 74 bps over the same period and asset finance arrears rose from 24 bps to 57 bps. The bank reported a loan impairment expense of A$34 million, compared with a $15 million credit in the previous corresponding period. It increased its collective provision from $199 million in the February half last year to $217 million in the August half and $243 million in the latest half – an indication that it expects arrears and impairments to keep rising. BOQ chief financial officer Racheal Kellaway said the increases in arrears were a return to more normal levels and were still below historical averages. Kellaway said the proportion of high loan-to-valuation and high debt-to-income loans on BOQ’s books was below the industry average. “We are confident about the quality of the portfolio,” she said. The bank took a very cautious approach to business growth during the half, especially in the mortgage market, which chief executive Patrick Allaway said was characterised by “irrational pricing”. Kellaway said the bank slowed asset growth during the half to ensure it achieved appropriate returns. The total housing loan portfolio grew by 1 per cent compared with the August 2022 half to $58.3 billion. The BOQ Blue portfolio contracted 2 per cent. The bank diverted more of its capital to business lending. The commercial loan portfolio grew 5 per cent to $11.2 billion and the asset finance book grew 7 per cent to $6.8 billion. Customer deposits were up 15 per cent compared with the August half to $65.5 billion. Notably, transaction accounts fell 20 per cent as customers moved their money to term deposits and savings accounts. Mortgage offset balances also fell during the half. Net interest income rose 13 per cent to $840 million, compared with the previous corresponding period, and net operating income rose 9.1 per cent to $909 million. Operating expenses rose 7 per cent. Cash profit fell 4 per cent to $256 million but after a $200 million goodwill write-off and expensing of $60 million for a risk management program, the statutory net profit was $4 million. The net interest margin (on a cash basis) was 1.79 per cent – up from 1.74 per cent in the previous corresponding period.  The bank has not enjoyed much of the anticipated margin increase from higher interest rates. The February half NIM is below the NIM of 1.86 per cent in the August half 2021, before rates started to