Struggles of a regional Aussie bank

Hey Superheroes,

It’s almost like the week-long market crash earlier this month never happened. The ASX 200 is now back over 8,000 and the S&P 500 nearly at all-time highs. 

Earnings season in both the ASX and Wall Street continues on with the Bank of Queensland, Domino’s Pizza and Iress among those reporting locally. 

Let’s get on to this week’s stories.

Regional Aussie banks changing business models to survive

Last week, we put Australia’s largest bank in the Spotlight thanks to its ability to pay out a massive 79% of cash profits to shareholders. That was pretty newsworthy, considering the fact that the S&P 500 only averaged a payout ratio of 35% last month.

But this week’s earnings reports show that, perhaps, not all Aussie banks can give its investors the same level of good news.

Bank of Queensland (BoQ) posted half-year earnings with a glaring headline: it’s sacking one in 12 employees in order to survive.

👀 Unsustainable business model

Contrary to other banks, BoQ had partly been operating on a franchise model since 2002. This means that certain BoQ branches are managed externally from BoQ’s corporate network. 

While this was profitable in the 2000’s, tighter competition, higher technology costs and lower margins led to the franchise network no longer being rewarding. In addition to this, customers had begun shifting to digital banking, also lowering the overall need for physical branches.

In order to survive, BoQ’s CEO Patrick Allaway had made the decision to reacquire all 114 franchisee branches by March next year.

🤔 Consequences of the decision 

The decision is expected to cost BoQ up to $125 million in reacquisition costs and nearly $35 million in redundancy/restructuring expenses, as up to 400 full-time staff may lose their jobs. 

On the bright side, the bank believes that the decision would lead to savings of $50 million a year by FY 2026.

BoQ shares fell over 7% on the day the news was released. It’s currently down ~2.50% for the week.

🤝 Small banks are merging

BoQ is not the only regional bank making moves. Tassie’s MyState Bank (ASX:MYS) and Queensland’s Auswide (ASX:ABA) also announced their merger agreement earlier this week in order to increase efficiency and lower costs. 

The consolidation of the two banks is expected to result in savings of up to $20-$25 million per year.

The proposed deal would see MyState fully acquire Auswide, with a share ownership split of ⅔ to MyState shareholders and ⅓ to Auswide investors. 

The combined entity is set to become the 11th biggest publicly-listed bank in Australia.

🔦  Some other things we’re shining the Spotlight on:

• WESTPAC’S FRESH HIGH: Westpac shares went over $30 this week to hit a new six-year high, following its Q3 earnings report showing an improved net interest margin of 1.82% and better cost control.
• SUPER RETAILING: Super Retail Group, owner of Rebel Sport, Supercheap Auto and Macpac, saw shares jump over 6% following the release of FY 2024 earnings. The company posted record annual sales and announced a special dividend. However, it comes with lower overall net profits from the previous year.
• ASX BIGGEST SOFTWARE COMPANY: WiseTech Global shares are now up over 29% for the week, following its report showcasing year-on-year revenue and earnings growth of 38% and 23% respectively.

U.S. quarterly earnings season and ASX full year earnings season are still continuing on to next week. The latest Aussie inflation data is also set to be released on Wednesday.

Keep up to date on the markets by following us on Instagram, @superheroau!