Inside Bank of Queensland’s plan to shrink to greatness

Bank of Queensland’s CEO Patrick Allaway is chasing profitable growth. Picture: Jane Dempster

For years regional lender Bank of Queensland has sought to match its bigger rivals by playing like them. It quickly built out a branch network across Australia and undertook a string of acquisitions from credit cards, business financing and then under former boss George Frazis paid top dollar for ME Bank, a mid-tier lender that is still being digested.

All of this expansion barely made a difference to BOQ’s fundamental profitability measures. At times it went backwards. But under newish boss Patrick Allaway BOQ’s higher-octane growth days could be behind it.

Allaway, the bank’s former chairman and former global UBS banker, stepped into the chief executive job last year after forcing Frazis out the door.

Allaway inherited a bank reeling with a bloated cost base and legal demands from anti-money laundering agency Austrac to lift is risk management, all while trying to undertake the complex $1.3bn buyout of Melbourne-based ME Bank. His job is to bring it all under control.

To minimise disruption he kept Frazis’s ambitious cost and returns targets that were set down in 2022. If there was little hope of the goals being hit then when interest rates and inflation were still low, there’s even less chance now.

Allaway was speaking to The Australian as Bank of Queensland posted a 33 per cent drop in first-half cash profit to $172m. Despite the earnings fall on margin crunch and investment spend, the result was slightly ahead of what analysts had pencilled in, helping to push the bank’s shares more than 5 per cent higher.

The broader cost pressures aren’t unique to BOQ, with all lenders hit hard over returns. Costs are even the motivation for even bigger lenders to get bigger, like ANZ’s $4.5bn acquisition of Suncorp Bank to help spread the costs.

But smaller banks feel the pinch more acutely as they are in the fight for the same customers and need to match the brute spending of the big banks. Smaller banks also face the same regulatory pressures as big banks despite a smaller balance sheet weighing down their capital. And their funding costs are usually higher, making it harder to compete on pricing alone.

Allaway’s single-minded focus now is on profitable growth. To do this he is prepared to sacrifice growth in mortgages. Indeed, he already has: BOQ’s home lending fell 1 per cent in the past six months.

Bank of Queensland’s interim profit fell 33 per cent to $172m. Picture: NCA NewsWire /Jono Searle

Even as interest rates have climbed, intense competition on both sides of the loan ¬- be it pricing to surging funding costs – mean some of the newer mortgages BOQ has written are barely profitable.

For Allaway there’s three responses. Driving costs down further by moving the bank onto a single digital platform whiling continue the $200m cost-out program. There’s also changing the lending mix by directing more into business loans. Allaway’s other focus is on growing “capital light, third party revenue” in his retail bank.

This strategy involves credit cards (BOQ through Virgin Money provides the financing for a number of branded cards in the market) other areas including insurance and superannuation.

Beyond this Allaway has also put on the agenda exiting some existing business lines through possible asset sales. He declined to be drawn on what would be involved.

Still, to show what a tough road the bank has ahead of it, BOQ is targeting return on equity of 9.25 per cent and a cost-to-income ratio of 50 per cent within the next two years. On the first half numbers BOQ’s return on equity fell to 5.8 per cent and the bank’s cost to income around 69 per cent. Both numbers are long way from home.

Allaway’s digital fightback is real, with the launch of its first fully digital mortgage later this year under the Virgin money brand, to be rolled out more broadly next year. The other big job is moving the 500,000-plus ME Bank customers onto BOQ’s new cloud-based technology platform. These efforts and others will go a long way to cutting costs, but require heavy investment.

With the mantra of profit not growth, Allaway acknowledges BOQ could be an even smaller bank in two years.

“From my perspective, this is not about balance sheet growth,” he says. “It’s about being really disciplined about what we put on our balance sheet and how we allocate capital, it’s really important that we focus on our business mix. And if we can significantly uplift our return on equity, we will get a much higher share multiple.”

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