MORTGAGE growth of 30 per cent or greater will drive an improvement in the second half for the Bank of Queensland (ASX: BOQ), according to CEO Jon Sutton (pictured).

Mr Sutton says operating conditions in the first half have been tough as strong competition in the sector slowed lending growth and put pressure on the bank's net interest margins, resulting in a  six per cent slide in profit to $161 million.

"There was a lot of competition in the first half and we are optimistic about the second half and we are forecasting that our margins will rise," Sutton told SkyNews Australia. 

"Particularly in the last six weeks, we've seen a real positive uptick in our mortgage applications across all of our channels and it's up around 30 per cent," he says.

"There are elements (from the half year report) which show the material change we've made in this business.

"The fact that our bad debt charge is down to 25 per cent is testament to the credit underwriting standards we have in place."

That decrease in charges for bad loans to just $27 million was a key driver in the result which also included a four per cent drop in revenue to $532 million for the six months to the end of February.

The bank's results were slightly below forecast earnings by Deutsche Bank analysts, and it kept a fully franked dividendof 38 cents a share from the prior half.

Sutton forecast that banking regulator APRA was likely to change lending conditions sooner rather than later, especially in relation to the cap on investor loans which currently sits at 10 per cent.

"We actually think the conditions have changed materially over the past six or seven weeks," Sutton says.

"Let's deal with the APRA investor cap. It currently stands at 10 per cent and we are well and truly below that.

"The regulator may come in and make all sorts of changes and it's really difficult to speculate what they may or, may not, do.

"I think there'll be further tightening but there could be a range of measures that could reduce the capfrom 10 per cent to say, seven, but we're well placed to cope with those sorts of changes.

The Bank of Queensland boss also took a swipe at his big four competitors, indicating their growth has been accelerated by their lending practices.

"There's a lot of prudential requirements around assessing living expenses for people when they apply for a home loan and we've seen a significant move towards tightening from some of our competitors back to where we are," Sutton says.

"We validate 100 percent of our mortgages and we see a good period of growth especially across our owner-occupier and investor loans."

As for predictions from some analysts of an east coast property downturn and possible crash, Sutton says the bank's loan books were roughly half in Queensland property which is a more stable market.      

"We run a diversified portfolio and what we have to watch is some of the commentary of late which has been bordering on hysterical," Sutton says.

"Australia is not a homogenous home loan market. Look at Western Australia where there has been significant declines.

"And then look at our home state of Queensland where property prices are relatively cheap compared to the capital cities and you are seeing net migration.

"Sydney and Melbourne are running quite hard over the past two or three years but you've got toask yourself 'why is that?'.

"Is it shortage of demand, net migration, is there enough land being opened up for further development? I don't think it's a one dimensional answer."

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