Most of the loans from Bank of Queensland to owner-operators of its franchised branches in Sydney appear to be impaired, and the bank appears to be increasingly willing to write off some of those loans.

Of 55 owner-managed branches in New South Wales for BOQ, most have been trading for only three years or less. More than three-quarters of the BOQ franchises set up in Sydney over the last three years are failing to meet business targets.

The bulk of these branches are producing new lending volumes of less than $2 million a month, which is half the target set under each franchise's business plan, and perhaps a third of the lending required to produce a viable income for the owner.

Reasons for the poor performance include the weak state of demand for credit in Sydney; declining property prices in many areas; and a lack of marketing support for a little-known brand. Franchise owners also complained about the cost of fit-outs, with work often undertaken by preferred contractors from Brisbane rather than through local carpenters. (A practice continued by BOQ in opening outlets in Melbourne as well.)

One consequence of this is that apart from the disappointing increment to new business from the Sydney expansion strategy for BOQ, the experiment is turning into a credit quality problem for the bank.

Taking into account the cost of a branch fit-out and the licence fee (almost always 100 per cent financed by BOQ), overdrafts, credit cards and lines of credit under home equity loans, the typical owner of a struggling BOQ franchise in Sydney would have aggregate loans to the bank of in excess of $1 million.

A rough estimate - worked out by talking to current and former owners of BOQ franchises rather than to BOQ - suggests that many of these loans must be impaired.

BOQ also appears to have already written off some of these loans.

Owners of BOQ outlets in Sydney often walk away from their businesses. The owners of the Kellyville and Rhodes franchises are two to have done so in the last two weeks.

When an owner of a franchise opts to walk away from the business (and its continuing losses) BOQ invariably employs the staff directly in order to keep the branch open.

In a number of cases BOQ has also hired the former franchisee as branch manager, a situation that appears to include relief from at least some of their liabilities to the bank as part of a package deal.

Current and former owners of franchises believe that some of their number have negotiated the write-off by BOQ of the bulk of their loans.

Some owners of franchises are attempting to join actions in the NSW Industrial Court brought by the former owners of several Sydney franchises; owners who decided to walk away early rather than incur steady losses.

BOQ declared impaired assets of $16 million at February 2008. That figure looks likely to climb, with a chunk of the trouble caused by the bank's loans to its own franchisees.