In April, Bank of Queensland reported reporting negative mortgage growth of $248 million, down from positive growth of $11 million in 1H18, with its portfolio dropping to $24.7 billion.
The fall was driven by a $717 million contraction in settlements through BOQ’s retail bank, offset by a $469 million rise in home loan volumes through its subsidiary, Virgin Money Home Loans.
The regional lender is well aware of the challenges within its retail bank, which is effectively franchised with branches being run by ‘owner-managers’. Given the negative press generated by the royal commission, attracting new owner managers has been difficult for BOQ.
Prior to the appointment of George Frazis as CEO on 6 June, interim chief executive Anthony Rose delivered an 8 per cent drop in cash earnings in the first half of FY19.
“Across the industry, as you are well aware, there have been significant changes in the banking landscape which has created revenue headwinds for the sector. In addition, the outcome from the royal commission is lifting expectations of the regulators. Adjusting to the new regulatory environment will come with a higher cost profile, absent any mitigating actions which we are of course exploring,” Mr Rose said in April.
“BOQ also has challenges that are specific to our business, particularly in the retail bank. Our digital customer offering, lending processes and the inability to attract new owner-managers with the overlay of regulatory uncertainty, has hampered customer acquisition and returns.”
Mr Rose, BOQ’s chief operating officer, will remain as interim CEO until Mr Frazis takes over in September. Rose took charge following the resignation of John Sutton in December 2018.
Morningstar analyst David Ellis praised the appointment of Mr Frazis, an experienced banker with 17 years in the industry, most recently as CEO of Westpac’s consumer bank and CEO at St George Bank.
“While Frazis has strong credentials and deeply understands the dynamics of Australia’s consumer banking industry, he will be taking control of a regional player with a small geographic distribution footprint, higher funding and operational costs, a lower credit rating and tougher regulatory capital burden,” Mr Ellis said.
The Morningstar analyst believes the challenge for Mr Frazis is to assume a bigger role in a smaller organisation that lacks market share, brand awareness, distribution capabilities and funding advantages that major banks enjoy.
“Bank of Queensland’s lending growth has been subdued for several years,” Mr Ellis said. “Based on APRA banking statistics for April 2019, the bank’s 12-month growth in home loans sit at just 0.3 per cent in April, compared to 1.7 per cent a year ago and 11.8 per cent three years prior.”
Bank system home loan growth is 3.3 per cent for the year to April 2019.
With the RBA cutting rates this month, BOQ has lowered its fixed rates in an effort to remain competitive in a mortgage market dominated by the big four. However, with more cash rate cuts expected, Morningstar is concerned whether BOQ can sustain its course of passing on the reductions.
“The bank lacks access to lower-cost funding options and has a much lower return on equity than the major banks,” Mr Ellis said.
Under Mr Frazis’ leadership, Westpac’s consumer bank attracted more than a million new customers in the past four years. Digital channels now account for a third of sales.
“Frazis will have to do the same at Bank of Queensland,” Mr Ellis said.