The objective of this paper is to try and understand the Bank of Queensland (BOQ) operations in Australia and its successes or failures in the last 5 years as it devises various strategies to take an even bigger slice in the banking industry in Australia. We shall critically analyze each strategy and understand how it has helped or hampered the banks operations. We shall also try and understand strategies followed by other banks and accordingly try and devise future strategies for Bank of Queensland to follow to help aid their growth in the industry. Till a few years back, Bank of Queensland remained an almost unknown entity outside of Queensland, but over the last few years, through its unique Owner Managed Branches (OMB) strategy, they have expanded their growth across Australia at a rapid pace. They have also merged or acquired companies along the way in order to help strengthen their base. As of now, the Bank sits outside of the Big 4 banks present in Australia, but it hopes that in the future they would be able to be amongst the biggest players in the Australian Banking Industry. In order to be amongst the biggest players in the Australian Banking Industry, the bank needs to expand its network further through more OMB networks and try and buy out financial institutions that are up for sale which would be assets to the organization in the long run.
Bank of Queensland (BOQ)A is aA 136-year old organization and one of Australia’s top 100 companies (BOQ, 2010). The Bank was established in 1874 as The Brisbane Permanent Benefit Building and Investment Society, the first permanent building society formed in Queensland. In 1887, the society converted to a bank. Then in 1942, following mergers with other Queensland-based financial institutions it became a trading bank. The name Bank of Queensland was adopted in 1970, just asA the Bank’sA operations were computerized. A year later the Bank became a publicly traded company listed on the Australian Stock Exchange. The Bank’s first regional branches – Cairns and Townsville – were opened in 1985. Between 2001 and 2004, an accelerated branch opening program sawA it open 55 new branches throughout metropolitan, regional and rural Queensland, the perfect springboard from which to launch it’s national expansion under the Owner Managed Branch strategy, a first in the banking industry (BOQ, 2010) which has seen the company open up branches across Australia in a very short span of time. It currently has 266 branches and 3,598 ATM’s across Australia (BOQ, 2010). The Bank offers a range of personal banking services catering to the individual banking needs in the country. Its services includes everyday banking accounts, credit cards, debit cards, home loans, wealth management, savings and investments, personal loans, insurance, travel money services and margin lending. In addition, the bank also provides private banking services primarily to high net worth customers. Its services includes cheque accounts, at-call and term deposits, credit cards, mortgage and line of credit finance, home and investment loans, and equipment finance. The Bank offers an array of business banking services which include business transaction accounts, equipment finance, business cards, business investment accounts, statutory trust accounts, cash-flow finance, business loans and merchant services. The Bank also offers international services to its business banking customers which includes foreign exchange payment options, trade finance and services, foreign exchange hedging services, foreign currency accounts and deposits, and traveler cheques. The Bank also offers online banking services to its clients through both internet and on phone. The Bank’s majority shareholders includes HSBC Custody Nominees (Australia), Share Investment No2, National Nominees, J P Morgan Nominees Australia, Milton Corporation and ANZ Nominees among others (BOQ, 2010).
AUSTRALIAN BANKING INDUSTRY
The Global financial crisis didn’t affect Australia as much as the rest of the world due to the rather strong Banking regulations in place (Abott, 2010). In fact, Australia has a long history of stable and safe banks.A One indicator is the fact that virtually no Australian has lost their deposit in an Australian bank in the last 100 years. The last failure where depositors’ money was lost occurred in 1931 when depositors in the Primary Producers Bank of Australia lost a negligible amount of their deposits. Not a single dollar of taxpayers’ money has been demanded or required to reimburse bank depositors in over one hundred years (Australian Bankers Association, 2004). While there are many banks present in the Australian Banking Industry making it rather competitive, there are only 4 Banks which command a substantial market share namely, Commonwealth, WestPac, NAB and ANZ who together have a little more than 80% of the housing loan segment (BOQ, 2009). The other banks are generally small or regional players such as Bank of Queensland. Bank of Queensland currently has a market share of 2.2% (BOQ, 2009). The acquiring of BankWest by Commonwealth Bank (The Australian, 2008) and a similar merging of St George with WestPac (ABC, 2008) has left BOQ a vacant 5th position for it to move into and then slowly grow from there (BOQ, 2009). The recent takeovers of BankWest and St. George by major banks have left a void in real alternatives for small business finance in Australia (BOQ, 2009). (Source: Full Year Results 2009)
BANK OF QUEENSLAND – PERFORMANCE EVALUATION 2005 – 2009
Despite the Global Financial Crisis, Bank of Queensland didn’t suffer any loss during the period despite facing more expenses to secure their funding (BOQ, 2008). In fact, the profits of the bank went up by a staggering 46% despite the downturn to settle at $ 155.4 million (BOQ, 2008). Let us critically analyze each aspect of the Banks business over the last 5 years. Below is a snapshot of the Banks Finances over the last 5 years.
(Source: BOQ Annual Report, 2009)
As can be seen from the table above, the bank has maintained a steady growth in its profits as well as its assets and despite the strain put on it by the Global Financial Crisis; it managed to withstand it and grow by a very healthy 46% during that period. The total assets under Management have also grown 150% times from $ 14,388 million to $34,545 million between the years 2005 to 2009. Total Loans under Management has also seen an increase from just $12,381 million in 2005 to $28,866 million in 2009, an increase of 130%. Retail Deposits also saw a gigantic increase from just around $5,843 million in 2005 to 16,248 million in 2009, an increase of around 200%. The reason for such a steady growth in profits can be mainly attributed to 3 factors namely: The Growth in Owner Managed Branches (OMB) Mergers and Acquisitions Reduction in Cost to Income Ratio These 3 Factors have formed the backbone of BOQ expansion strategy and have greatly helped the bank as can be seen below:
(Source: BOQ Annual Reports, 2009, p 43)
EVALUATION OF CURRENT GROWTH STRATEGIES
Let us now analyze each of these strategies individually and understand how they have benefitted the company.
BOQ’s Owner-Managed model is unique to the Banking industry as no other bank in the world follows this model (BOQ, 2010). Under this model, People can apply for a franchisee of Bank of Queensland, and provided they meet the stringent conditions of the bank, they are allowed to open one and operate them with the Bank of Queensland providing them full support. The contracts are renewable every 5 years. The Owners pay for the day to day expenses in the running of the bank including staff salaries and in return they get a percentage of profit that the bank makes. With local people being the Owners of branches, the bank is trying to give each bank a local feeling. Also, with the Owners also being Branch Managers of the bank, they would be more inclined to work harder to pursue the banks interests as it would lead to more profits for them. It combines the benefits of a motivated sales culture with a compliance focused culture. The OMB model has worked very well for the bank and has helped the bank expand its base to other parts of Australia thus giving it a much more national presence. From the Bank’s perspective it is a low cost expansion strategy. It is a variable model that rewards performance. Since 2001, the Bank has expanded from 93 branches to now having 283 retail sites in each state of Australia. Such has been the success of OMB that 22 corporate branches were converted to OMB, and the average monthly settlements in these 22 branches rose by 62% (JP Morgan Conferences, 2008). Below; one can see a more accurate representation of the performance of OMB’s. (Source: JP Morgan Conference, 2008)
MERGER’S AND ACQUISITIONS
Besides the huge role played by OMB’s in expanding the business operations of BOQ, Mergers and Acquisitions of already established businesses have also helped BOQ expand its geographical presence all over Australia. In 2003, the Bank made two key acquisitions. BOQ purchased convenience ATM provider ATM Solutions Australasia, which it subsequently doubled in value and sold for a net profit of $15 million. The Bank still maintains one of the most widespread ATM networks in Australia, with 3,599A ATMs till date (BOQ, 2010).
BOQ also purchased equipment finance company UFJ Finance Australia, givingA it their first significant interstate presence and positioningA themselves as a major player in the $20 billion equipment finance industry. In 2005, BOQ acquired the $78 million debtor finance division of ORIX Australia, further strengtheningA their position in the debtor finance industry (BOQ, 2010).
InA August 2007,A Bank of Queensland made a successful bid for the Mackay-based Pioneer Permanent Building Society, providing the Bank with strong market synergies in the booming Central and North Queensland economies (BOQ, 2010).
In November 2007,A members of Home Building SocietyA in Western Australia overwhelmingly endorsed a$592 million merger proposal.A This merger with Home delivered an additional 35 branches,A access to the strongA growth economy in Western Australia andA further increased BOQ’s national footprint making it a truly national company (BOQ, 2010). In early 2010, BOQ finalized a deal to purchase St. Andrews Australia Insurance Business from Commonwealth bank for $60 Million with the hope of expanding into life and credit insurance besides diversifying its business and improving its returns (SMH, 2010). In recent news, BOQ announced its intention to buy CIT Group’s Australia and New Zealand’s vendor finance business for a deal reportedly around A$500 million (Reuters, 2010). CIT group is said to hold assets of around $A66.2 Billion in various banks (NineNews, 2010). This acquisition would prove a shot in the arm for BOQ’s $100 Million vendor finance business (NineNews, 2010).
REDUCTION IN COST TO INCOME RATIO
In order to increase profits, BOQ embarked on an ambitious cost reduction plan with an aim to bring down their cost to income ratio to as low as 45% by 2011. The program has seen tremendous success as the banks Cost to Income ratio has come plummeting down from as high 64.5% in 2006 to 49% in 2009, a drop of 15.5% in just 3 years (BOQ, 2009) or a $50 million saving annually (UBS, 2009) as can be seen in the illustration below: (Source: UBS Financial Services Conference 2009, pg 16) Below is an illustration on the areas of operation where BOQ managed to get a reduction in costs: (Source: BOQ Full Year Results 2009, pg 15)
CORE COMPETENCIES OF BANK OF QUEENSLAND
Being a small regional bank, it’s but obvious that the resources available to Bank of Queensland were rather negligible. However, they managed to overcome this shortcoming by coming up with a very unique OMB model which saw the rapid expansion of bank to become a Pan Australian company in a short span of time, with little or no investment done by themselves (Liddy, 2002). The bank’s main competency lies in its ability to streamline its costs, but at the same time offering its customers a good quality of service. As Liddy (2002) rightly put it, “Across the organization, I see us as the Virgin Blue of banking, utilizing revenue and sales incentives to motivate employees to strive for excellence in customer service and creating shareholder wealth in the process.” It is pertinent to note here that according to a survey conducted by TNS Business Finance Monitor (2009), Bank of Queensland emerged with the highest customer satisfaction levels of 90.9%. Another main competency of the banks remains in their proper identification of companies to merge with as they have picked up good companies to acquire which have helped them consolidate their business manifold (Refer Mergers and Acquisitions above in this paper for more details).
LOOKING FORWARDA¢â‚¬A¦MOVING FORWARD – SUGGESTED DIRECTION FOR THE FUTURE
CONTINUE OMB EXPANSION
The OMB model of expansion has been a big success to the bank as it has helped the bank expand at a rapid space with minimal investment (Liddy, 2002). Given its success, it would be wise to carry on with this expansion model. A few alterations could be made to the model by reducing terms and conditions of setting up franchises in rural segments so as to enable a better rural penetration. However, the company must continue to ensure total care with whomsoever it franchises with to ensure no misrepresentation of the company takes place.
LOW COST TO INCOME RATIOS
The low cost to income ratio has seen the bank save around $50 million annually (UBS, 2009). The bank should continue in this same vein and look at further streamlining their business. They should however ensure that this cost cutting does not have an adverse effect on customer service and efficiency or else it would have a negative effect in the long run.
MERGERS AND ACQUISITIONS
Past mergers and acquisitions have been very beneficial in helping the company move forward and expanding its reach across Australia. Given the current Global Financial scenario, where many businesses are up for sale due to lack of credit, Bank of Queensland should look to capitalize on this and try and acquire these companies, many of which are still feasible ventures such as CIT who BOQ are trying to purchase. BOQ should also not limit itself to only companies that operate within Australia and look towards expanding their reach in developing nations such as India, China where profits are also very good. Other overseas markets should also be looked at to enable BOQ to have a more global reach. I would recommend the setting up of a complete department or workforce that would search for feasible companies for BOQ to merge with that would help BOQ strengthen its Global reach.
ADDRESSING THE MARKET VOID
The Global Financial crisis has seen a major change in the market with many companies being forced to sell off or shut down entirely due to lack of credit (UBS, 2009). Some examples of these are the acquiring of BankWest by Commonwealth bank and St. George by WestPac, RAMS by WestPac just to name a few (UBS, 2009). The Global financial crisis also effectively shut down the RMBS market which Australia’s smaller non-bank lenders were highly relying on (UBS, 2009). To add to the situation, many foreign banks such as GE Money Motor Solutions and GMAC have informed the Australian treasury that they can give no guarantee of being able to provide funds for Australian borrowers (UBS, 2009). While this may seem all bad for the industry, this could well be good news for BOQ considering the global financial crisis didn’t seem to affect them too much. There is a void present in the market now and BOQ should set themselves up to be in a position to fill that void. With the departure of BankWest and St. George, BOQ are in a position to move themselves up to either the 5th or 6th largest bank in Australia and slowly move upwards from there. There should also look at buying out smaller non-bank money lenders to further diversify their product offerings and their reach to the different segments of the Australian market. It is important to note here that there has not been an RMBS default till date and mortgage arrears have just been 1.58% (IBT, 2009).
CALL CENTRE IMPROVEMENT
According to a survey conducted by Canstar Cannex (2009), most of the Bank of Queensland customers complained about the poor quality of customer service offered by the call centre. The Bank should look towards addressing this issue and ensure that they can meet customer satisfaction.
DIVERSIFIED PRODUCT RANGE
The bank could work on its product range being offered in the market and add more products to ensure that it has the ability to cater to a wide range of clients. Each person’s needs are different, so the bank must ensure that it meets the needs of as many customers possible and therefore must ensure that it has a wide array of customer products ready.
LIMIT LENDING TO RETAIL BORROWERS
The Bank’s strategy has been to concentrate more on Home Loan borrowers and less on Retail Borrowers. The bank must pursue this strategy in order to ensure that bad debts are kept to the minimum. Retail Borrowings come at a higher risk of future bad debts, and the bank must do its best to keep this to the minimum.
To conclude, it is safe to assume that BOQ is following the proper strategy to success. This statement can be supported by the rapid expansion of the bank and its increase in profits despite a Global Financial crisis. Despite being a relatively small bank in the Australian Banking Scenario; Bank of Queensland has got their strategies right and are surely moving forward into the right direction. Their expansion at a breath taking space surely will go a long way into helping the bank strengthen its credentials. Though the bank is on the right part to success, they can certainly increase their growth rate a little further by implementing some of the above mentioned suggestions such as a diversified product range.