Bank of Queensland has branches owned by branch managers and corporate branches

Business Strategy & Outlook

Bank of Queensland is one of Australia’s top-10 largest banks, but is considerably smaller than the four major Australian banks. Preceding the global financial crisis, the bank grew aggressively via acquisitions and the rollout of its distinctive owner-manager branch franchise model. However, expanding the branch network and diversifying from traditional residential lending came at a cost, with additional equity required to fund growth, significantly increased bad debts, and multiple banking systems, which resulted in deteriorating cost/income and returns on equity. The successful integration of ME Bank is expected to materially lift earnings per share in the medium term. Other influences on earnings growth are modest credit growth, provisions for loan losses, and pressure on funding costs and intense lending competition constraining interest margins. Operating expenses are increasing on investment in the banking system and increased regulatory and compliance spending.

The strategic plan outlined by CEO George Frazis in 2020 centers on a digital transformation of the bank’s core banking systems, which should lead to better customer outcomes and operational efficiencies. The aim is to ensure the bank is more competitive, particularly in the home loan market, but this investment is not giving the bank any competitive edge. At best, it can narrow the gap to peers, but with the big investment budgets of the majors, those innovations are likely to be hard to keep up with. BOQ, Virgin Money, ME Bank, BOQ Business, BOQ Specialist, and BOQ Finance—are key differentiators or a source of competitive advantage. Bank of Queensland has branches owned by branch managers and corporate branches. The model has the potential for the bank to outperform its peers on customer service, with owner branch managers building relationships with local customers, and niche business lending specialists with an understanding of borrower needs and industry. Despite its strengths, a narrower business mix, smaller customer base, and higher funding costs see the bank struggle to generate margins comparable to those of the majors.

Financial Strengths

The capital structure and balance sheet provide comfort the bank can manage a large increase in loan losses. Common equity Tier 1 capital was 9.7% as at Feb. 28, 2022, or close to 9.8% post a securitisation in March 2022. This is well above APRA’s 8.5% minimum capital benchmark for standardized banks, and above the bank’s own 9.5% target. The bank is to pay out around 60% to 65% of earnings given the credit growth outlook, elevated investment in the banking platform, and integration of ME Bank. A 70% pay-out ratio from fiscal 2024 is expected. With the elevated savings rate in 2020 and 2021, the bank has been able to increase its share of funding from customer deposits. In March 2020 the RBA announced the Term Funding Facility, or TFF, which provided three-year funding at 0.25%. From Nov. 4, 2020, new drawdowns would pay 0.1%. The initial funding available via the TFF was set at 3% of the bank’s outstanding loan balance, with an additional 2% of balances announced in November.

Bulls Say

Management extract greater cost and revenue synergies from the acquisition of ME Bank.
Substantial capital raisings bolstered the balance sheet, ensuring that the bank satisfies capital rules and can still fund investments in technology and expand loan balances.
Productivity improvements not only lead to improved operating margins, but a more streamlined loan approval process lifts mortgage growth rates.

Company Description

Bank of Queensland, or BOQ, is an Australia-based bank offering home loans, personal finance, and commercial loans. BOQ operates both owner-managed and corporate branches, and is the owner of Virgin Money Australia and Me Bank. Its BOQ business includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cash flow finance, foreign exchange, interest rate hedging, transaction banking, and deposit solutions for commercial customers.

(Source: Morningstar)

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