Australia | Feb 23 2021
This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ
Bank of Queensland is scaling up, setting its sights on a more diverse base as it merges with ME Bank
-Customer base will increase by 60%
-Strategically significant because of scale benefits
-Less emphasis on Queensland
By Eva Brocklehurst
Ord Minnett asserts this a major strategic step, as the new shares equate to 40% of the current share base and the customer base will increase by 60%. While not without risk, Credit Suisse finds the financial outcomes will be compelling. Bank of Queensland will acquire ME Bank for $1.33bn and is undertaking a $1.35bn equity raising.
ME Bank, despite being a mono-line mortgage lender and having 1.4% share, has a similar low return on equity at 8%, which reflects high funding costs, although there is potential to improve in Ord Minnett's view. ME Bank's loan growth slowed in FY20 and is not expected to grow meaningfully in FY21.
The broker also assesses the purchase is going to require careful execution as Bank of Queensland already has a full agenda for its ongoing transformation, warning that integrating bank acquisitions is always difficult and time will tell whether too much has been taken on.
Morgan Stanley considers a combination of better operating trends and the financial implications of the acquisition are a positive development. The merger makes sound strategic sense because of the scale benefits, diversifying the geography and complementing the Bank of Queensland business model.
Underpinning Goldman Sachs' view is Bank of Queensland's overweight position in housing and its strong capital position, which will be put to work to improve the growth outlook. Importantly, the portfolio will diversify from Queensland.
UBS notes pro forma Queensland gross loans are expected to reduce to 31% from 42% of the portfolio, with NSW and Victoria increasing to 29% and 21%, respectively. Integration risks are expected to be lower, as both banks currently use a common Temanos core banking platform.
With complementary technology execution risk appears less to Credit Suisse and the acquisition should be a means to increase scale and lower risk. Goldman Sachs also believes the common use of this platform for retail banking should pave the way to a single, multi-brand digital platform.
Bank of Queensland has indicated the first phase of the Virgin Money digital path has been delivered and the second phase is now underway, which will form the basis for the cloud-based platform for both Bank of Queensland and ME Bank.
The acquisition appears relatively fully priced to Ord Minnett, before allowing for synergies, but is significantly accretive when including synergies.
Morgan Stanley is not convinced that including ME Bank in a multi-brand strategy will materially improve growth prospects. On the other hand, implications are positive for synergies. Bank of Queensland expects pre-tax synergies of $70-80m by the end of year three while integration costs are expected to be around $130-140m.
Targeted cost synergies represent 26% of ME Bank's cost base, which Goldman Sachs points out is not unusually high for intra-market bank acquisitions, although it may seem high in light of the lack of an ME Bank branch network.
Beyond targeted synergies management has also signalled upside from wholesale funding costs and reduced investment expenditure. Goldman Sachs envisages scope for the liability costs of ME Bank to scale back.
The broker also highlights potential for further deposit repricing and, while it may be challenging to narrow the difference with the major banks in the short term, Bank of Queensland could continue to reduce rates towards where Bendigo & Adelaide Bank ((BEN)) is currently pricing.
Lending growth has improved and margins are resilient. Macquarie expects margins will be reduced as competition persists, while the low interest rate environment will weigh on low-cost deposits. Still deposit pricing provides a key margin offset in the short term as "savers become saviours".
As part of the capital raising announcement, Bank of Queensland has provided new guidance, amid higher margins, signalling first half cash earnings growth of 8-10%. Management expects the balance sheet will remain strong with a pro forma CET1 ratio of 9.8%.
Guidance has highlighted a turnaround in the retail banking franchise and traction in the transformation strategy. Housing loans grew at 5% annualised and the margin was up three basis points. Capital and provisioning both look strong to Morgan Stanley.
The acquisition is not in Morgan Stanley's modelling, nor the capital raising, because the transaction is yet to receive regulatory approval. Nevertheless, the broker estimates it will result in EPS accretion of 3% in FY22 and 8% in FY23.
Goldman Sachs, too, does not include ME Bank until the deal is complete, which Bank of Queensland anticipates will occur before the end of FY21. The broker revises estimates higher for FY21-23 to reflect the trading update that revealed better net interest margins, fees and bad debts albeit offset by higher expenses.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, reiterates a Buy rating with a $9.63 target. The database has two Buy ratings and four Hold. The consensus target is $8.65, signalling -5.6% downside to the last share price. The dividend yield on FY21 and FY22 forecasts is 3.8% and 4.6%, respectively.
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