BoQ to buy ME for $1.33b, ramping up competition with big four

Bank of Queensland chief George Frazis says buying ME Bank for $1.325 billion will give the lender the technology, scale and diversity it needs to more aggressively take on the big four in their heartland of home loans and small business banking.

BoQ on Monday launched a capital raising to fund the all-cash acquisition of ME, a 27-year old challenger bank based in Melbourne that is owned by some of the country’s biggest industry super funds.

George Frazis, CEO of Bank of Queensland, said the deal would deliver sustainable profit growth. Credit: Paul Harris

In buying ME, BoQ is set to double the size of its retail bank, and leapfrog second-tier rivals to emerge with the sixth biggest loan book in the country, narrowly behind Macquarie Bank.

Mr Frazis said the “game-changer” deal would create a bank that was more efficient, less skewed towards capital-intensive business lending, with less exposure to customers in Queensland.

While some in the market have raised concerns about the complexity of bank mergers, Mr Frazis pointed to the productivity gains it hoped to extract, which should make it a more effective competitor to the major banks.

“In three years’ time we’ll be in a position that makes us very competitive from a customer service and a productivity perspective,” Mr Frazis said.

BoQ hopes to extract $70 million to $80 million in synergy benefits within three years, and Mr Frazis emphasised the fact that both ME and BoQ were moving to the same digital banking platform, while also foreshadowing likely changes in management.

Mr Frazis said the core system being adopted across the bank would allow BoQ to maintain the ME brand, alongside its Virgin Money brand, to target different customer segments more efficiently than it does today.

“The thing that is really unique about this, and an absolute game-changer, is that what we’re able to do is go all in, in terms of a cloud-based system,” he said.

Former ME director and federal Labor minister Greg Combet, who had advised ME’s board on the sale, backed BoQ’s decision to retain the ME brand and presence in Melbourne, while also highlighting the importance to ME of gaining scale.

“The motivation of the board in recommending a sale of ME Bank to the shareholders was based on an assessment of the future strategic and financial value of ME in a competitive banking market, where ME is only the10th largest bank,” Mr Combet said.

ME chairman James Evans said the two banks were a “natural fit,” and increasing the bank’s scale would benefit customers and staff because as a larger business it would be more able to compete.

Portfolio manager at Regal Funds Management, Mark Nathan, said the acquisition looked much less complex than GFC-era banking mergers including Westpac’s buyout of St George and Commonwealth Bank’s purchase of Bankwest. “It looks like a really good deal for them. The synergies look really good,” Mr Nathan said.

Jun Bei Liu, portfolio manager at Tribeca Investment Partners and a BoQ investor, said she would be supporting the capital raising and she thought the cost savings being targeted looked realistic. “It’s a very bold move for BoQ. It fits their strategy really well in terms of digitisation,” Ms Liu said.

As a result of the merger, which has been approved by the competition watchdog, BoQ will emerge with total assets of $88 billion and total deposits of $56 billion.

BoQ also upgraded its profit guidance. The lender said it was on track to boost cash profits by 8 to 10 per cent in the first half, as it had grown housing loan market share and was experiencing wider profit margins.

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