Bank of Queensland seals ‘defining’ ME Bank purchase

Bank of Queensland will embark on a bigger push to take on the big four following its $1.3bn purchase of ME Bank.

George Frazis says Bank of Queensland’s $1.325bn purchase of ME Bank is a ‘defining acquisition’. Picture Nick Cubbin

Bank of Queensland’s ascension to the nation’s sixth largest lender through the $1.325bn purchase of ME Bank, will see it embark on a bigger push to take on the big four in home loans, business lending and digital banking.

BoQ’s agreed acquisition of industry superannuation fund-backed ME will create a lender with more than $88bn in assets, and $56.8bn in deposits, and further diversify the Brisbane-based lender outside its home state.

The transaction was announced on Monday, alongside a capital raising of $1.35bn, comprising a share placement and offers to institutional and mum and dad investors.

BoQ’s chief executive George Frazis said the deal was a game changer for the bank and a “defining acquisition”, given it delivered scale, greater geographic spread and roughly doubled its retail operations across areas such as home loans and deposits.

“We went through a very detailed DD (due diligence) process so we understand exactly what the business is, where it’s at and where we would need to make improvements and we’ve taken all of that into account,” he told The Australian.

The capital raising will see the bank issue new shares at $7.35 apiece, a 12.6 per cent discount to where the stock last traded on Thursday.

BoQ’s statement said it expected the acquisition of ME to deliver low double-digit to mid-teens cash earnings-per-share accretion, including deal synergies, in the first year which is its financial year 2022.

Goldman Sachs analysts said a combined BoQ and ME would catapult the group to be the sixth largest Australian bank by loans, behind the four majors and Macquarie and up from BoQ’s ninth spot currently.

They also highlighted the deal further diversified BoQ’s loan portfolio away from Queensland, which will represent 31 per cent of the combined portfolio, versus 42 per cent of BoQ’s loan book now.

But analysts at Fitch Ratings stressed there were risks associated with bedding down the acquisition.

“Execution risk over the next two years is high, reflecting the substantial size of the acquisition and the system integration required at a time of lingering challenges stemming from the coronavirus crisis,” they said.

Opal Capital Management‘s Omkar Joshi said: “There’s substantial synergies from bringing the two businesses together and it looks like a reasonable deal given the price being paid.”

ME - which is owned by 26 industry superannuation funds - came under intense fire last year over a home-loan redraw fiasco after it changed customers’ ability to redraw funds from their mortgages without giving them ample notice, or in some cases any notice, of the change.

The policy was unwound given a heavy consumer backlash.

BoQ’s capital raising documents highlighted the risk of potential action from the corporate regulator, linked to the poor handling of the ME redraw change. The acquisition terms include regulatory indemnities in the event ME faces penalties or legal action over the incident.

Mr Frazis wouldn’t comment on the detail of the indemnities, but said the provisions were increasingly common in banking transactions.

The fact that both BoQ and ME use a Temenos core banking platform, albeit the latter an older version, also bode well for the transaction. Mr Frazis said that would see the migration of systems and data happen in a “a lot simpler” fashion.

BoQ was also said to have run a rule over AMP’s bank, which uses a different technology platform, but that auction was shelved earlier this month.

The BoQ-ME marriage is expected to be cash return on equity accretive - by more than 100 basis points - including synergies in the first year. The acquisition - which will see BoQ operate that brand alongside ME and Virgin Money - is anticipated to yield annualised pre-tax synergies of $70m – $80m, including cost savings.

The combined entity has a prospective cost-to-income ratio of 56 per cent.

Mr Frazis said the ME purchase would see BoQ provide a “compelling alternative” to the major banks, and he saw scope to grow all three brands.

He admitted last year’s redraw issue at ME had caused a drop in its net promoter score, although it was recovering.

On potential cost cutting after the ME acquisition, Mr Frazis said BoQ would agree to a 12-month moratorium to not axe frontline jobs, after it was proposed by the Finance Sector Union. BoQ will, though, assess the number of more senior roles required as part of the integration, which will cost $130m to $140m.

Underbidders for ME included Melbourne-based ANZ and Bendigo and Adelaide Bank.

Melbourne-based ME said the BoQ offer price of $1.325bn represented 1.15 times its net tangible assets, and BoQ said the deal was struck at an acquisition multiple of 1.05 times ME’s 2020 reported book value.

ME chairman James Evans, said the transaction was “in the best interests” of its shareholders and was unanimously supported.”

The deal has already received the green light from the competition regulator and also requires approval by Treasurer Josh Frydenberg.

BoQ has completed a string of purchases over the past decade, including buying Investec’s local professional and asset finance and leasing businesses in 2014. The prior year, BoQ acquired Virgin Money Australia. On Monday, BoQ also provided an update on its first-half earnings, which underscored the improving economic conditions enjoyed by the 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.

COVID-19 loan repayment deferrals decreased to 0.6 per cent for mortgage balances and 0.7 per cent for business lending balances.

BoQ’s first-half dividend is expected to be declared at 17 cents per share. The bank reports interim earnings in April.