Bank of Queensland shares surge as investors back ME Bank deal

Bank of Queensland became the best performing ASX200 stock after a 98 per cent institutional take-up for its capital raising.

Bank of Queensland is buying ME Bank and funding the deal via a capital raising.

Investors have endorsed Bank of Queensland’s purchase of ME Bank and its earnings trajectory, sending the stock up more than 9 per cent on Tuesday, as it ruled off the issue of new shares to institutional investors.

BoQ on Tuesday said of about $673m raised in the institutional component of its $1.35bn capital raising, the entitlement offer raised $323m at the issue price of $7.35 per share.

Take‐up reflected about 98 per cent of eligible institutional shareholders. The placement of stock to fund managers raised about $350m, representing 48 million new shares.

BoQ’s shares surged as high as $9.33 on Tuesday, before retracing some ground to close 9.5 per cent up at $9.21.

The strong rally follows BoQ’s $1.325bn purchase of ME Bank, announced on Monday, that will create a lender with more than $88bn in assets, and $56.8bn in deposits.

“We are pleased that investors recognise the compelling strategic and financial proposition of this transaction and we are excited to work hard to deliver better outcomes for our customers, employees, the community and our shareholders,” BoQ chief executive George Frazis said on Tuesday.

The retail component of the BoQ’s capital raising — which starts on March 1 — together with the institutional entitlement offer, takes the expected size of the total equity raising to $1.35bn.

Several banking analysts revised their views on BoQ on the back of the ME transaction and an update on the bank’s interim earnings.

Jefferies analysts raised their rating on BoQ to “hold” while Morgan Stanley upped its price target to $8.60 and held its “equalweight” rating on the stock.

“BoQ’s pre-provision profit is tracking 6-7 per cent above our forecast, while the financial implications of the acquisition are positive,” Morgan Stanley’s Richard Wiles said.

Credit Suisse analyst Jarrod Martin raised his BoQ price target to $9.50 from $7.60, after the ME transaction and a profit update was announced the bank.

“While not without risk we find the financial outcomes compelling with plenty of buffers. Versus our previous review the underlying earnings of ME Bank are higher, the expected synergies greater and integration costs appear conservative,” he said. “With complementary technology platforms execution risk appears less. As such we see this acquisition as a spring board to increase scale and lower risk (mix and geographic diversification).”

JP Morgan analysts said while BoQ’s ME purchase added scale and improved geographical diversification, they warned of potential downside from the acquisition. Those related to the target being largely a mono-line mortgage lender and risks surrounding the integration of ME by BoQ.

“ME Bank generated a return on equity of just 8 per cent in FY, reflecting channel mix and high funding costs,” JPMorgan analysts told clients. “ME Bank loan growth slowed materially in FY20 and is not expected to grow meaningfully in FY21.”

On Monday, BoQ’s update on its first-half earnings reflected improving economic conditions enjoyed by the broader sector. The bank said it expected statutory net profit growth of 60 per cent to 65 per cent and cash net profit growth of 8 per cent to 10 per cent.

It flagged its net interest margin - what it earns on loans minus funding and other costs - would edge up three basis points in its first-half, compared to the prior six months. BoQ reports earnings in April.

Originally published as Bank of Queensland shares surge as investors back ME Bank deal