Australia’s cosy banking system will undergo the biggest change in many years with the announcement that Bank of Queensland (ASX: BOQ) is buying ME Bank for $1.325 billion.
That deal will effectively double the size of BOQ’s retail bank and leave it knocking on the door of the big four banks, having leapfrogged past Bendigo and Adelaide Bank (ASX: BEN).
The deal to buy ME from its industry super fund owners will be all cash with BOQ set to raise $1.325 billion through an underwritten equity raising.
BOQ chairman Patrick Allaway said the deal was “transformative” and would allow the entity to become the leading “customer-centric” alternative to the big four banks – Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ Bank (ASX: ANZ).
He said the two banks were “highly complementary” and would “bring together two organisations with a shared purpose and values generating greater value for customers, employees and shareholders.”
Handy exit for big industry super funds
The deal is seen to be a handy exit for the 26 industry super funds that founded ME in the 1990s with the pricing of the deal at 1.05 times ME’s book value and 11.9 times ME’s underlying profits seen as reasonable.
Having a share market listing and a more unified shareholder base could also be a big advantage.
ME was established to provide banking services for the industry funds members but always struggled to grow nearly as quickly as its masters, which now have a virtual lock on the large end of the superannuation industry.
ME Bank has been controversial
While ME portrays itself as an alternative to the traditional banks, its main revenue source is home loans, which are sold through mortgage brokers.
ME was heavily criticised last year after it made controversial changes to customers’ redraw and offset accounts without properly informing them.
ME chairman James Evans said increasing the bank’s scale would benefit customers and staff and help the combined bank to better compete with rivals.
BOQ has 900,000 customers compared to ME Bank’s 450,000.
Two banks seen as a ‘natural fit’
“Today’s decision represents a permanent shift for the better in the Australian banking landscape. This agreement brings together two culturally aligned organisations to form what will be an enhanced and influential banking alternative for customers,” Mr Evans said.
He said the to banks were a “natural fit” and the combination would have total assets of $88 billion and total deposits of $56 billion.
The acquisition will also increase the geographic diversification of BOQ, with ME having bias to the Melbourne market while both banks are working towards a common technology platform.
BOQ chief executive officer George Frazis said synergy benefits should reach $70 million to $80 million within three years while return on equity would increase in the first year.
Bank of Queensland increases profit guidance
BOQ has also increased its cash profit guidance by 8-10% in the first half, due largely to a growing home loan market share and improved profit margins.
Mr Frazis said the deal would double the bank’s retail footprint and increase retail earnings from 36% to 50%.
“The increase in customer numbers means BOQ Group can now provide a genuine banking alternative to approximately 1.45 million people,” he said.
Meanwhile, ME’s Mr Evans said the deal would keep ME competitive and allow it to enjoy greater scale.
“It will give ME access to additional capital, funding, and expertise to support and invest in the delivery of improved products and services for ME’s customers.”
The deal is expected to be finalised by August and is already well down the path to regulatory approval.
BOQ shares have been in a trading halt since last week as it assembled the funding package for the acquisition.