Bank of Queensland chief George Frazis does the deal of his life

Bank of Queensland chairman Patrick Allaway (left) and CEO George Frazis. Picture: Adam Yip

This time two years ago neither the chairman, nor the chief executive officer of Bank of Queensland had even joined the bank.

In under two years these two outsiders, Patrick Allaway and George Frazis and a refreshed team have taken on a poorly performing Queensland bank, convinced the market to stump up $340m to bolster its balance sheet, they now have mortgage lending growing at 1.2 times system with improving margins and accelerating.

Now they are taking over ME Bank and raising another $1.325 billion from the market to do it and shoring up the share register with new institutional investors.

And all through COVID.

Going forward, Allaway and Frazis have to prove their worth again to deliver the promised $70-$80m in pre-tax savings from the ME Bank merger. This is not without execution risk.

ME Banks looks a perfect match.

There is only 12 per cent of customer overlap in the three brands of BoQ, ME Bank and Virgin Money Australia which targets Millennials. ME Bank also brings new customers from Victoria and NSW.

The two have just come out of an all-day board meeting. “We’ve got a very ambitious vision” says Allaway, the BoQ chair.

“From a customer perspective we want to be different: a multichannel approach, that personal touch that is so important, but also we want a digital bank and with Virgin Money we’re going to be the largest neo-bank in this marketplace.”

Ever since chief executive George Frazis took a new strategy for BoQ to the market twelve months ago, a takeover was always back of mind; but before that, both he and his chairman knew that they had to prove they could run BoQ.

“We weren’t ready” said Patrick Allaway. “While regional consolidation would accelerate our growth, give us a much stronger platform for growth, our organisation needed to be fixed first. There was a lot of work to do and we needed to put the building blocks in place to make sure that we were in a position to do a transaction like we just announced.”

One of those building blocks was a fully capable management.

“We had significant gaps in the leadership team” says Frazis. ‘Today, we’ve got one of the strongest teams in this market.”

Another block, says the chair was being able to prove that the team could execute. “There were certainly doubts in the marketplace about our execution capability within BoQ. We had overpromised and underdelivered. We also had not invested in the tech capabilities that we needed.”

Allaway made a condition of his appointment as chair in September 2019 that he would have a material say in a new CEO.

“It was highly unusual to have chair and CEO succession from the outside at the same time. But I think recognition from the existing board that they wanted change” he says.

Frazis came across from Westpac having earlier run St George. “One of the first thing Patrick said when I started was, we have to fix the retail bank.”

“That why we hired you George” Allaway quips.

Frazis set about simplifying the bank and early on introduced new global banking software platform, Temenos to create a new digital bank with Virgin Money. At board level, Allaway pushed for a capital raising to support the digital investment and in late 2019, just before Covid hit they completed the deal. It gave the bank a crucial buffer. “It was a big call for us” Allaway remembers. “We hadn’t proved ourselves and had not presented our strategy to the marketplace. It helped us enormously.”

Frazis’ trading update this month reveals just how successful the strategy has been. First half net profit growth is expected to be 60 per cent to 65 per cent in April with a cash net profit between 8 per cent and 10 per cent.

BoQ was no shoo-in to take on ME Bank. “We came in quite late, just before Christmas, after a tumultuous year for our team” explains the chairman. He and Frazis had heard that the Melbourne-based retail direct bank owned by industry funds was up for sale. “We felt very confident about the strategic fit and the commercial rational about it and so I called Jim Evans the chair. We had a good chat, and they asked us to provide a non-binding indicative proposal.”

ME Bank allowed BoQ into the data room for due diligence, but the bank had already opened the kimono to ANZ and its chief financial officer was known to be close to the ME Bank chair. It may be a coincidence, but on 23 December, chief financial officer Michelle Jablko announced her resignation from ANZ.

There were also competition questions around a big four bank acquisition and BoQ moved early to reach ACCC clearance. In the end, Allaway says it was the cultural fit that delivered the green light for BoQ. “Both our organisations have aspirations to provide a meaningful alternative to Australians in their banking. We don’t want to be a big bank. We are never going to be a big bank, but we want to provide that alternative that resonates with Australians. We felt that fit was very strong.”

Fortuitously, ME Bank was also using the Temenos platform, although an older version. The plan is for all three brands to migrate to one cloud based Temenos platform.

“Effectively what you’ve got is a neo bank with scale with three loved brands and a heritage of 145 years plus on the BoQ side – very compelling” says Frazis.

Looking ahead the synergies seem obvious, but so they did when CBA took over Bank West and Westpac took over St George. Yet the execution risk came back to bite those two bigger banks.

Some analysts have raised concerns that ME Bank will muddy BoQ’s recent performance gains but Frazis is confident that he now has the right management team in place to handle any execution risk on the deal.

“Three things also reduce our execution risk” he explains: “A business we understand; a common Temenos system, so they have the same executional data; and the third thing is we have a bank that is operational, so we do not have to pull it out of somewhere. We are not driven by someone else’s timeline. We can sensibly determine when we integrate what. Things that are customer facing we will do last.”

It is a fair bet that the ME Bank merger would not be happening had the 2020 strategy announced a year ago under delivered.

One part of that strategy, which no doubt will be expanded to ME Bank was about the people: a shift to a performance based culture which allowed BoQ to grow its mortgage book and slim line the approvals process.

“18 months ago we were going backwards in mortgages” says George Frazis. “We have just reported 1.2-times system growth this last half, with the same workforce, by reducing the time to ‘Yes’ for customers.”

For ME Bank, Frazis sees a need to address the time to ‘Yes’, but also the ability to scale-up operations to service the increase in customer loans. “Otherwise you lose service quality and then your brokers stop using you, customers go elsewhere. We have been able to do those things well, so all that learning will be shared across the three brands.”

Both Allaway and Frazis stress the 12-month commitment to continuing employment for all below senior management at both ME Bank and BoQ, which they see as an important message to for stability.

The ME Board will go but Allaway is weighing up how ME heritage or at least a Victorian presence could change the BoQ board. The board is to be skills based and heavily performance driven. Allaway has recently brought in Mickie Rosen as a director, who he overlapped with on the Nine Board when she led the Fairfax digital transformation. “She is very strategic,” he says “connected in to the PE and start up new technology on the west coast of the US. She has also worked on the consumer side of some very large companies and brings a consumer lens on the board that we haven’t had either.”

The latest endorsement for Patrick Allaway and George Frazis is how investors have received the $1.325bn capital raising to fund the ME Bank deal. Here. Allaway sees an opportunity to strengthen the register. “We have had many institutions on the sidelines watching at roadshows that George and the team have been running but they have wanted to see execution and performance before they come on. This transaction has attracted a number of new shareholders onto the register.”

“We were in a very fortunate position with our institutional offer that we were so oversubscribed that we could hand pick those institutions that we felt would be long term shareholders that would support our ambitions.”

All existing shareholders have been able to take up their rights under the rights issue and further shares in the placement to ensure they are not diluted. The retail offer opens shortly.