Bank Of Queensland Scaling Up

Australia | Feb 23 2021

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

Bank of Queensland ((BOQ)) will become a much bigger bank, propelled to the sixth-largest in Australia behind the majors and Macquarie Group ((MQG))as it merges with ME Bank.

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 assessesthe purchase is going to require careful execution as Bank of Queensland already has a full agenda for its ongoing transformation, warningthat 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.

Less Queensland

Underpinning Goldman Sachs' view is Bank of Queensland'soverweight 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.

Synergies

The acquisition appears relatively fully priced to Ord Minnett, before allowing for synergies, but is significantly accretive when including synergies.


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