Bank of Queensland set for growth through fixing ME Bank problems: JPMorgan

Bank of Queensland will look to reinvigorate ME Bank’s mortgage growth by cutting down on the lender’s loan turnaround times, says JPMorgan.

Bank of Queensland will look to reinvigorate ME Bank’s mortgage growth by cutting down on the lender’s loan turnaround times and delivering ‘easy wins’ on funding cost improvements, according to JP Morgan. Picture: NCA NewsWire/Dan Peled

Bank of Queensland will look to reinvigorate ME Bank’s mortgage growth by cutting down on the lender’s loan turnaround times and delivering “easy wins” on funding cost improvements, according to JPMorgan.

BoQ, which finalised the purchase of ME Bank for $1.325bn in July, could deliver peer-leading earnings growth over the next three years if it achieved its cost synergy targets, the investment bank told clients last week following the release of ME Bank’s 2021 annual accounts. The accounts showed that over fiscal 2021, ME Bank reported statutory net profit of $113m, which was a 40 per cent jump on the $81m earned in the prior year.

Revenue of $495m was also up, rising 3.3 per cent on the prior corresponding period, and came in higher than JPMorgan’s $490m estimate.

“The mix looked different to expectations, with -4 per cent mortgage growth implying solid margin expansion year-on-year,” the broker said.

“We believe BoQ’s immediate priority will be to improve ME Bank’s mortgage turnaround times while looking for ‘easy wins’ on funding cost improvement.”

ME Bank’s weakness in the competitive mortgage market was highlighted by BoQ when it announced the acquisition of the lender earlier this year.

The lender’s struggle reflected two main issues, JPMorgan said: brand damage from past treatment of home loan customers, and slow mortgage approval times.

“On the latter, we expect BoQ to work hard to deliver similar levels of mortgage net promoter score improvement as has been achieved by BoQ in its ‘blue brand’ over the last two years,” they said.

On the former, the corporate cop this month filed 62 criminal charges against ME Bank, accusing it of making false and misleading representations to mortgage customers and failing to provide appropriate notice about interest rate changes.

The charges were the first criminal prosecution under consumer protection provision s12DB of the ASIC Act.

The potential for legal action against the bank was highlighted in BoQ’s capital raising documents to fund the acquisition, which highlighted the risk of potential action from the corporate regulator, with regulatory indemnities included in the deal in the event ME faced penalties over the botched home loan communications.

The bank is facing a fine of up to $95m, with barristers already questioning whether all the charges were within the statute of limitations.

Analysts will be watching BoQ’s results, due October 13, to gauge whether a provision is made for the potential penalties.

For ME Bank, the annual accounts also implied an improvement in the net interest margin, JPMorgan said. When it announced the acquisition, Bank of Queensland pointed to ME Bank’s lower NIM and the potential to improve it by as much as 20 basis points.

“Even if ME Bank’s NIM expansion in FY21 suggests the prize might have shrunk a little, our forecasts do not allow for material revenue synergies and any delivery would therefore present upside to our numbers,” JPMorgan said.

The investment bank is overweight BoQ, which is its third preferred pick in the sector, behind Macquarie Group and NAB.

Originally published as Bank of Queensland set for growth through fixing ME Bank problems: JPMorgan