Why BOQ boss is finally tackling the proverbial elephant in the bank’s branch network
Patrick Allaway’s radical overhaul delivers another blow to the concept of branch banking. His move is not without risks.
Bank of Queensland has survived dramatic management turnover, a high-priced acquisition of ME Bank and several strategy resets, but in the end it couldn’t defy the force of digital change.
Former BOQ chair Patrick Allaway, who last year was parachuted into the chief executive role, has found the courage to confront the elephant in his suburban branches. He pulled the plug on a two decade-old banking experiment which has now become BOQ’s biggest cost centre.
Most customers wouldn’t be aware that the overwhelming majority of BOQ branches, even those in its home state of Queensland, aren’t owned by the bank. Instead they are franchises, usually with the branch manager being the owner and BOQ provides the banking and tech platform. The franchise owner employs the staff and generates income through the deposits and loans sold through the branch.
On Thursday, Allaway a former Citibank and UBS executive, called time on the adventure, in another sign that branch banking is destined for a bygone era.
BOQ will buy back all 114 owner-manager branches, and the most of the staff and managers will be offered jobs as they become new corporate-owned branches. It will cost up to $125m pre-tax and is set to take place over the next six months.
The move is part of Allaway’s three-pronged restructuring for BOQ to improve longer-term returns. Included in this as many as 600 jobs will to be cut, most of them in technology and support services. In addition to the cuts, BOQ will ramp up spending on digital while doubling down in small-to-mid-sized business banking where the regional lender already has made inroads.
The job cuts, revealed by my colleague Joyce Moullakis, mark a rapid pull forward of a longer-term ambition to slash headcount across the regional lender. There could be more job cuts to come. Critically, Allaway also backed away from 2026 profit and cost targets set by his predecessor, George Frazis, set down two years ago. That was behind a more than 7 per cent share price slide on Thursday.
OMB? OMG!
Owner-managed branches, launched in 2002 by then fresh-faced BOQ boss David Liddy, was suited for the times. The game then was all about sales through branches, with a physical network critical to generating deposit and loan growth.
Liddy’s franchise model was a cheap way for BOQ to push beyond the state borders and power a more ambitious national expansion. It was a more profit-motivated answer to Bendigo Bank’s Community Bank network, which on a strict interpretation was built on franchising.
In BOQ’s case, the more deposits and loans sold, the bigger the return for the branch owner.
It worked well for a decade, as the Brisbane-based lender was suddenly selling loans to homeowners in Melbourne’s northern suburbs. To get a sense of the scale of the expansion, even today BOQ has just 22 corporate-owned branches and the other 114 are franchise branches.
The model had another less obvious benefit which the bank was often loath to admit to. The complexity of the franchise deals made BOQ largely takeover proof. There was no point for a big bank to come and buy the regional lender if it couldn’t get the distribution network that came with it.
However, the structure came at a substantial cost.
BOQ could wear it while profit margins were thick, but competition, mortgage brokers and fast-rising compliance costs and big investments needed to run a bank have been steadily compressing margins over the decades.
Importantly, the rise of digital banking means anyone with a mobile phone is able to make a deposit or apply for a home loan, and this has fast diminished any advantages the network once represented.
Allaway says more of his customers today use digital channels over its branch network. This a sector-wide shift, as all banks – big and small – have been rapidly shrinking their branch footprint in recent years.
Today, it’s raw economics. It’s more expensive for BOQ to sell a loan in a branch than through a mortgage broker. The rule of thumb for banking is the equation should be the other way around.
“In the days of rivers of gold, when margins were higher, it was a very sustainable channel for us. But markets have shifted on us very quickly,” he says.
The additional costs mean BOQ now runs at a substantially lower margin than its peers, and that means a lower profit per dollar it processes. BOQ’s last accounts show its first-half net interest margin was at 1.55 per cent, down from 1.58 per cent on the same period a year earlier.
Its closest peer, Bendigo, returned 1.83 per cent and closer to 2 per cent in the previous half. A big bank like ANZ has its Australian retail business running a net profit margin at just over 2 per cent.
Risky business
The question is whether BOQ’s great branch buyback is needed at all as more and more banking moves online?
Allaway says yes, as this gives him more control over his branch network, allowing to move branches depending on where the growth is. There’s likely to be branch closures over time as BOQ’s digital banking business grows.
The lower cost of running the franchise network should deliver the much-needed and rapid margin uplift, as well as boost profit over time, the chief executive says.
The move is not without risk. BOQ loses its one-time calling card of the owner-managed branches whereby customers were loyal to a local branch. This may see some leakage of deposits and mortgages to rivals.
The experienced branch managers too may opt to compete against BOQ, mostly by becoming mortgage brokers. As part of the package, BOQ will buy back some underperforming branches and may eventually close some. BOQ could face a messy legal challenge, particularly from branches which are currently delivering high returns to owners. All this will need to be worked through.
Allaway says the decision to finally end the branch experiment was difficult but, with BOQ’s traditional retail bank in decline, the greater risk to the business is doing nothing.
Staying on course
It’s been a while since there was such a disconnect around strong financial performance while a chief executive is fending off deeply personal and damaging allegations around governance. Yet Super Retail is one.
Anthony Heraghty is named in an escalating battle with two former executives, who claim the CEO was involved in a secret affair with the head of human resources and misused company funds and secured a better redundancy package. They remain allegations and have not been tested.
After being heard by Fair Work Australia, the case is now in front of the Federal Court, including a separate battle to remove suppression orders on key documents. (News Corp, publisher of this masthead, is a party to that claim).
When asked, Heraghty says he is unable to comment on any of the allegations raised in the claim, including the current status of his relationship with the former head of HR, Jane Kelly.
The focus for him is on the performance of the business, and he insists the strong sales numbers delivered on Thursday – up 5 per cent since the start of July – show he and his management team are refusing to be distracted.
Super Retail chair Sally Pitkin has strongly supported Heraghty through the process, although it’s worth noting the board is in transition. Pitkin is about to retire and former Fonterra Asia Pacific boss Judith Swales will take charge from late October.
In her note to investors, Pitkin touched on the allegations in the context of board governance.
“Whilst we cannot discuss the proceedings … the board has reviewed and investigated these matters with the support of independent external advisers. The reviews and investigations concluded that none of the allegations were substantiated,” Pitkin says.
Super Retail intends to vigorously defend itself against the proceedings, she added.
The retailer has set aside a $14.1m provision to cover the specific legal action, noting the outcome and total costs linked to the case are uncertain.
The claims may spill into its annual meeting after the retailer was hit was a large shareholder protest last year.
Super Retail’s remuneration report received a more than 18 per cent “no” vote. That wasn’t quite enough to make a “strike” – but it was enough to send a message over concerns of excessive executive pay and low bonus hurdles.
The annual report shows Heraghty’s pay package for this year, of $4.1m, includes a cash bonus of nearly $1m and more than $1.5m in long-term shares and rights. However, the annual report revealed he got a small haircut to his short-term bonus, given the litigation matters.
He fell short of his maximum short-term bonus of $1.25m on a combination of an increasing rate of workplace injuries across the group, mixed financial performance of group brands as well as “risk factors” associated with the workplace litigation.
The total package was up from $3.9m last year. Heraghty is also in line for a small increase to his potential long-term bonus this coming year – if he hits targets.
The allegations are untested, although the remuneration tables show the board is in the CEO’s corner. There are clawback provisions for long-term bonus payments if there’s wrongdoing by any of the executives.
Super Retail shares surged more than 6 per cent on the strong start to the new financial year, and a doubling of a special dividend.
But longer-term calculation is what will be the ultimate cost to the board, and management of the messy legal action.
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