By Tim O’Shannassy

Acknowledgement

Introduction

Bank of Queensland Limited (BOQ) is one of the leading regional banks in Australia with over 160 owner-manager run branches, A$56.5 billion in customer deposits and A$75.7 billion in gross loans and advances (Bank of Queensland, 2021a). The banking industry in Australia is particularly strong with big rivals including Sydney-based Commonwealth Bank of Australia and Westpac Banking Corporation, and Melbourne-based National Australia Bank and ANZ Banking Group Limited having a strong weighting of approximately 25 per cent on the Australian Stock Exchange (ASX) (Neiron, 2017).

A unique point of differentiation for BOQ is the staff in the local branches taking time to get to know their customers and identifying the services they need – building partnerships with customers.  BOQ offers a range of products and services to its 1.5 million retail and business customers and are noted in the market for their straight-forward banking products.

There are four key BOQ brands – BOQ, ME Bank, BOQ Finance, Virgin Money Australia, BOQ Business, BOQ Specialist (Bank of Queensland, 2021a). BOQ with 163 branches of which 103 are owner-managed is the retail banking arm the Group. ME Bank provides a range of banking products using direct channels, mobile bankers and brokers – this business acquired in July 2021 is branchless. BOQ Business looks after small and medium size enterprises (SMEs), and corporate banking for industries including property, healthcare and retirement, property finance, hospitality and leisure. BOQ Business also supports the owner-manager branch network. BOQ Finance operates in Australia and New Zealand specialising in leasing solutions and asset finance. BOQ Specialist is a provider of banking services to professionals in select industries including veterinary, medical and dental; this business was acquired from Investec Bank (Australia) Limited (Bank of Queensland, 2021a).

BOQ has evidenced an appetite for merger and acquisition (M & A) activity in recent years and in 2021 delivered A$369 million (2020 A$115 million) in statutory profit or A$412 million (2020 A$225 million) in cash earnings. Cash earnings per ordinary share was 74.7 cents (2020 49.6 cents) and dividends per ordinary share 39 cents (2020 12 cents) (Bank of Queensland, 2021a). There are highly competitive industry conditions in banking and finance with regional banks including Bendigo & Adelaide Bank, Regional Australia Bank, Suncorp Bank, Huma Bank and more.

BOQ have had a pleasing set of results in 2021, but faces several challenges looking to the future (Bank of Queensland, 2021b). The “big four” banks dominate the Australian business scene, competition for the business banking and retail customer is intense, and interest rates are likely to rise following the Covid-19 pandemic supply chain challenges and now the war in Ukraine.

Dramatic Shifts in the External Environment

The invasion of Ukraine by Russia has been a big political and economic game changer for all countries with potentially big geopolitical, commodity and economic impacts. This is on top of the effects of the Covid-19 pandemic from 2020, 2021 and now into 2022 with the Omicron variants.

European Union countries are seriously considering their disposition to defence of their own borders (Williams, 2022). Countries including Germany, long a country with a low defence budget, has now committed to significant increases in defence spending.

The invasion of Ukraine by Russia has impacted key commodity markets with price increases seen across a range of key raw materials including coal, liquid natural gas (LNG) and oil. These price increases have not been seen since the oil price shocks of 1974 (Williams, 2022). This trend plus inflationary pressures already brought on by Covid-19’s impact on supply chains, housing, manufacturing and food production creates a whole scenario where there is a risk of a period of higher inflationary pressure with implications for interest rate settings by central banks. higher interest rate settings which can be a handbrake on economic growth (Gunnion & Samadder, 2021). S & P Global expects inflation in Australia to be 3.9 per cent in 2022 – an upgrade of 1.1 per cent on their previous forecast for this year and 0.75 per cent higher than the Reserve Bank of Australia (RBA) is forecasting (Wright, 2022). Higher interest rate settings can be a handbrake on economic growth (Gunnion & Samadder, 2021). According to S & P Global Australian GDP is forecast to be 3.6 per cent in 2022 and then 2.6 per cent in 2023 and 2.2 per cent in 2024 (Wright, 2022).

This background is contributing to a strong trend of refinancing of home loans in the Australian mortgage market in a bid by householders to get the best interest rate on their home loan now (Gluyas, 2022). Home loan borrowers are looking not just at their interest rate – with variable rates as low as 2.2 per cent compared with fixed rates now at 3.5 per cent – but also at their relationship with their lender, including if they have the right lender (Gluyas, 2022).

Millennials and youthful customers expect their experience with service providers in industries such as banking and finance as well as education to match their consumer experience on social media (Yeates, 2021). Millennial and youthful customers consumer behaviour is also different to their more loyal parents – they are prepared shop around for a better deal and change their banking and finance service providers.

Covid-19 has also pushed along the embrace of digital banking; this has put at risk the financial viability of bank branches in regional locations such as those serviced by BOQ (Lynch, 2021).

The technology scene continues to evolve and this is having an effect on the banking and finance industry. Cyber-attacks are occurring more frequently on financial institutions. Well designed and implemented online platforms and technology systems can give an edge in relation to the customer experience as well as internal control and audit (Yeates, 2021).

The “big four” banks have a strong influence on the ASX and within the Australian and New Zealand economies, however the “four pillars policy” is a formal policy preference of politicians and not regulation (Ellis, 2016). There remains a viable role for capable regional players such as BOQ and Bendigo & Adelaide Bank.

The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) oversee the Australian financial scene, M & A activity and the ASX. Trade Practices are overseen by the Australian Competition and Consumer Commission. The Australian company tax rate is comparatively high at 30 per cent – the United States is at 21 per cent.

Corporate social responsibility, carbon emissions and climate change challenges are an increasing priority for Australian corporations (Gluyas, 2020). The Morrison Government committed Australia to a target of net zero carbon emissions by 2050 at the 2021 Glasgow Summit (Chambers & Brown, 2022).

Banking Industry Conditions

The banking and finance industry recipe for success is asset growth in loans and deposits, cost control, credit quality, better technology and better margins than rivals. Technology including the customer experience with technology is important to particular market segments (e.g. millennials); effective and efficient facilitation of customer service by employees at the customer interface can also assist cost control, credit quality and margins.

Suppliers to the banking and finance industry include systems engineers, software developers, real estate valuers, brand valuers, human resource contractors, management consultants, providers of accounting services and providers of legal services. The “big four” due to their scale have an advantage in negotiating access and pricing to the best providers of these products and/or services.

Different market segments (e.g. institutional banking, business banking, retail) and segments within these market segments (e.g. mining, agribusiness, property) have differing buyer power. Generation Z and millennial customers are more prepared to scan the marketplace and change their bank – including their home mortgage – compared to their parent’s generation who were more brand loyal. Younger customers have bigger expectations of their online experience compared with their parent’s generation and institutions such as Commonwealth Bank of Australia and National Australia Bank are investing heavily in this area to deliver on this expectation (Yeates, 2021).

Innovative philosophies on banking and finance are having an impact; this is the area of the Australian neobanks such as Douugh, Revolut, Volt and others; the threat of new innovative entrants is real.

Blockchain technology is in the early stages of its development (Pollock, 2019). Bitcoin is another area to watch with the United States Government and Australian Government taking a broad and keen interest in the future of payments. Senior RBA researchers have observed that central bank digital currencies, stablecoins and cryptocurrencies are all evolving at present and are a high priority for more policy work at the RBA (Richards, 2021). The “buy now pay later” (BNPL) trend is another area of the banking and finance industry to watch; Afterpay has had a real consumer impact and achieved significant stock market valuation.

The banking and finance industry is characterised by strong rivalry with the “big four” banks alone comprising 25 per cent of the market capitalisation of the ASX Top 200 (Neiron, 2017).  There are also capable regional players including AMP, BOQ, Bendigo & Adelaide Bank, Suncorp Bank and others servicing the Australian market.  Regional players like BOQ cannot hope to match the breadth of branch network of a “big four” bank operating in Australia and New Zealand – for example National Australia Bank has over 850 branches allowing significant economies of scale over a smaller regional bank such as BOQ (National Australia Bank, 2020).

Bank of Queensland Strategic Situation

BOQ has a 147 year history. BOQ state their purpose as: “to create prosperity for our customers, shareholders and people through their empathy, integrity and by making a difference” (Bank of Queensland, 2021a: 12). The emphasis of empathy is  listening to customers, crafting solutions, listening to feedback and building trust. Integrity requires BOQ to maintain high standards and take pride in performance. Making a difference requires boldness, risk-taking and an emphasis on delivery (Bank of Queensland, 2021a).

BOQ articulates five strategic priorities looking to future sustainability:

1. An empathetic culture
2. Distinct brands servicing niche market segments
3. Personalised digital banking
4. Simple business with strong delivery capability
5. Strength in financial and risk management (Bank of Queensland, 2021b)

Chairperson Patrick Allaway has been in his current role since October 2019 in an independent non-executive director capacity – he places much emphasis on the customer experience and the importance of the strategic transformation program in progress at BOQ (Bank of Queensland, 2020). Chief Executive Officer (CEO) George Frazis has been in the role since September 2019 and in 2021 has led a significant boost in balance sheet size and earnings (Bank of Queensland, 2021a).

Improving the customer experience is a big part of the BOQ story. In the past financial year BOQ through its subsidiary Virgin Money Australia enhanced the digital financial services offering with transaction and saving account access. A digital platform was used for this work that will also be used by the BOQ retail business, enhancing the digital experience for all BOQ Group customers. BOQ will continue to support customers impacted adversely by the Covid-19 pandemic in 2022 (Bank of Queensland, 2021a).

BOQ like to place experienced lenders in the heart of the community to enhance community financial wellbeing and outcomes (Bank of Queensland, 2021b).

Sustainability of the business is top priority for BOQ, with the delivery of stable returns to shareholders a key objective (Bank of Queensland, 2021b). As seen in Table 1 below BOQ delivered an exceptional financial result in 2021 of cash earnings after tax of A$412 million. BOQ has been able to turn around the weak performance in cash earnings after tax of 2019 A$320 million and 2020 A$225 million; this compares with strong result years in 2017 with cash earnings after tax of A$378 million and 2018 A$372 million (Bank of Queensland, 2021a).

The ME Bank acquisition was completed in July 2021 and was funded by an A$1.35 billion capital raising (Bank of Queensland, 2021a). There were some glitches with the Australia post mail out to shareholders for the capital raising with some shareholders missing out on participation, nonetheless the capital raising was an overall success (Bank of Queensland, 2021a).

A concern for BOQ has been the deterioration in the cost-to-income ratio over the period 2017 to 2020 from 47.3 per cent to 54.9 per cent. The cost-to-income ratio remains high in 2021 results (Bank of Queensland, 2021a).

Table 1: Bank of Queensland Limited, Financial Highlights Years 2020 and 2021 (BOQ, 2020, 2021)

People and culture is an important element of the strategic transformation in progress at BOQ. BOQ recognises that strong leadership, embracing diversity and a quality workforce are important drivers of capability to deliver on the agreed strategy (Bank of Queensland,

2021a). BOQ has achieved 39 per cent representation of woman in senior roles (Bank of Queensland, 2021b)

A performance driven culture, reliability, sound workplace conduct and trust are encouraged. BOQ employees are held to account for their achievement of work plan goals and objectives as they contribute to the BOQ Group result (Bank of Queensland, 2021a). The BOQ employee engagement score in 2021 was 64 per cent (Bank of Queensland, 2021b).

Ensuring BOQ employees are well informed and safe has been a priority during the Covid-19 pandemic. This is especially important for branch employees who are customer facing and BOQ have been able to keep branches open to service and support customers. Where possible employees have been allowed to work from home with a return to the office encouraged subject to health directions (Bank of Queensland, 2021a).

Digital transformation is a priority looking to the future for Australian financial institutions. BOQ takes its responsibilities to stakeholders and the environment seriously and as such is committed to building a sustainable business. BOQ gained carbon neutral certification in the 2021 financial year (Bank of Queensland, 2021b). Transparency and trust are core values for BOQ and internal audit processes are an important and rigorous part of BOQ operations (Bank of Queensland, 2021a).

The Future for Bank of Queensland

BOQ has been pursuing a renewal and improvement of its board of directors since 2019, seeking to increase diversity, skills and intellectual curiosity. The board has been reduced from 11 to eight directors. Mickie Rosen and Deborah Kiers have been appointed to assist in the areas of ME Bank heritage, digital transformation, the consumer experience, human resources and organisation design (Bank of Queensland, 2021a).

BOQ is eighteen months into a corporate transformation. Significant change to the board of directors is complete. Integration of ME Bank acquired in July 2021 is proceeding (Bank of Queensland, 2021b). There is more to do. Is the strategic transformation for BOQ working? Is the trajectory of the strategic transformation at BOQ right? What synergies can be achieved through the ME Bank acquisition and merger? Where is the future source(s) of organic growth? When will BOQ be ready for another round of merger and acquisition? What could be the attributes of a suitable merger and acquisition target? What more can BOQ do to strengthen business sustainability? What can be done to improve the cost-to-income ratio? Is balance sheet and capital management at BOQ prudent, and right?

References

Bank of Queensland, 2020, Annual Report, Brisbane, Australia.

Bank of Queensland Limited, 2021a, Annual Report, Brisbane, Australia.

Bank of Queensland, 2021b, Sustainability Report, Brisbane, Australia.

Chambers, G. & Brown, G. 2022, No taxes to hit net zero, The Australian, 2 February, p. 1.

Ellis, L. 2016. Booms, busts, cycles and risk appetite, Financial Risk Day Conference, 18 March, https://www.rba.gov.au/speeches/2016/sp-so-2016-03-18.html, downloaded 11 February 2021.

Gluyas, R. 2020. ‘Call to end 10-year war over climate’, The Weekend Australian, June 27-28, p. 22.

Gluyas, R. 2022, Refinancing race driven by rate fears, The Weekend Australian, March 5-6, p. 23, p. 27.

Gunnion, L. and Samadder, M. 2021, “Transitory” inflation? When dizzying demand meets stifled supply, Deloitte Insights, November, https://www2.deloitte.com/xe/en/insights/economy/spotlight/inflationary-pressuresexpectations.html, viewed 10 March 2022.

Lynch, J. 2021. NAB axes branches in rural exodus, The Weekend Australian, 6 February, p.22.

National Australia Bank, 2020, Annual Financial Report, Melbourne, Australia.

Neiron, A. 2017. Bank levy highlights S&P/ASX 200 concentration risk, VanEck Australia Pty Ltd, 15 May, https://www.vaneck.com.au/bank-levy-highlights-concentration-risk, downloaded 11 February 2021.

Pollock, D. 2019. The future of banking: Is it all bitcoin and blockchain? Forbes, 25 July, https://www.forbes.com/sites/darrynpollock/2019/07/25/the-future-of-banking-is-itall-bitcoin-and-blockchain/?sh=3318a7431eb9, downloaded 12 February 2021.

Richards, T. 2021, The future of payments: Cryptocurrencies, stablecoins or central bank digital currencies? Address to the Australian Corporate Treasury Association, Reserve Bank of Australia, 18 November, https://www.rba.gov.au/speeches/2021/sp-so-202111-18.html, viewed 11 March 2022.

Williams, P. 2022, Coal and LNG scramble sends prices soaring, The Weekend Australian, March 5-6, p. 23, p. 27.

Wright, S. 2022, Ukraine war to push up inflation, The Age, 3 March, p. 23.

Yeates, C. 2021. NAB chases younger clients in 86 400 buyout, The Age Business, 30 January, p. 2.