BoQ ‘strengthens’ to launch $275m capital raising

Regional lender BoQ has announced a $275m capital raising that includes an institutional placement and share purchase plan.

Bank of Queensland plans to raise $275 million through a share placement and purchase plan. Picture: AAP

Bank of Queensland has declared it will be in a “very strong” capital position after tapping investors for $275m in an equity raising that will also help fund new CEO George Frazis’ turnaround plan for the under-pressure lender.

The regional bank raised $250m through an institutional share placement on Monday and will look to raise a further $25m through a share purchase plan.

The capital will be used to strengthen the bank’s balance sheet, raise its buffer above APRA’s “unquestionably strong” common equity tier 1 capital ratio benchmark and allow it to implement Mr Frazis’ strategic priorities.

The raising comes just weeks after the lender unveiled a 14 per cent slump in cash earnings to $320m for the 2019 financial year, a result that was driven by slowing credit demand, lower interest rates, a rise in regulatory costs and an increase in bad debts. Its net interest margin eroded by five basis points to 1.93 per cent in and its CET1 ratio fell 22 basis points to 9.04 per cent.

At the time Mr Frazis said he was comfortable with the bank’s capital position. The lender on Monday said it was targeting a CET1 ratio of between 9.00 per cent and 9.50 per cent.

“We said we were comfortable with our unquestionably strong capital position leading into January … That hasn’t changed,” Mr Frazis told The Australian.

“We have [now] set a CET1 ratio of 9-9.5 per cent. This capital raising of $275m on a pro forma basis gets us to 9.85 per cent. So it gets us above [our target] range. And we expect over the 2020 financial year to operate at the top end of that range. It gives us a good buffer above unquestionably strong.

“The raising gives us a good balance sheet, good capital position, and it also provides us strategic flexibility to get on with implementing our strategy.”

Shaw and Partners analyst Brett Le Mesurier said the timing of the raising was surprising.

“They didn’t give any indication at the result that they might be short but they’ve obviously had a good think and decided they were. So something happened between the result and now.

“The transformation plan is obviously going to be substantial, necessarily. It’s going to involve a lot of costs,” he said.

Bell Potter analyst TS Lim said it allowed the bank to reposition itself.

“It’s a new CEO coming in and cleaning up the whole business. He’s got a new strategy and now he’s got to find a way to pay for all of it.”

But he cast doubt on the lender’s ability to maintain its dividend.

“I will be very surprised if it’s maintained … any time you have a capital raising you have to start thinking about whether the current levels of dividends are sustainable.

“I think they could get away with [maintaining the dividend] but if you wanted to be prudent you’d have to look at it completely and start to rethink the whole thing… it depends on how much safety margin they’d like to put in.”

Mr Frazis flagged that to maintain the dividend ratio at between 70 per cent and 80 per cent for the first half of the 2020 financial year the lender may have to seek approval from the banking regulator due to the one-off costs sustained in its “transition” period.

“The guidance we’ve given is to have a dividend payout ratio of 70 to 80 per cent. That may require APRA approval because of the profit test. It doesn’t mean we can’t pay a dividend in the first half but to maintain that ratio… closer to the [first half result] date if we want to pay out more than our statutory profit we would go to APRA for approval,” he told The Australian.

The BOQ chief said he was focused on getting back to sustainable profitable growth to deliver higher earnings and dividend for shareholders.

“We’re doing a structural productivity review, an operating model review and importantly technological investment to put us on the cloud and simplify our infrastructure. We’re also looking at closing the digital and data gap we’ve got. It’s about what we need to profitably grow the business. And finally, how do we go about making sure we have a distinctive customer focused culture that marks us out in our industry.”

The placement price for the raising was between $7.69- $7.78 per share, a discount of up to 11 per cent to its last closing price of $8.64. It saw 32.5 million new shares issued at the $7.69 floor price, or about 8 per cent of BOQ’s existing issued capital.

The placement was more than covered at the underwritten price by Monday afternoon, BOQ confirmed.