CEO George Frazis sees pressure on margins easing, but apps spark grumbling

The drop was linked in part to an increase in the number of customers taking out fixed-rate home loans, in anticipation of the Reserve Bank of Australia’s official interest rate hike. These loans had lower margins for BoQ than its variable offer.

“Clients have basically understood that this [was] close to the low point of interest rates. And I have to say they got it all figured out,” BoQ chief executive George Frazis said. The Australian Financial Review.

The change of loan

Almost 47 percent of flows were for fixed rate loans over the six months.

This meant that the BoQ’s net interest margin (NIM), measuring the profitability of raising funds and lending them to borrowers, was reduced by 12 basis points from six months earlier.

Banks have since raised fixed rates, in part because of their rising funding costs, and demands in recent weeks have been around 18% for fixed rate loans. Mr Frazis said this indicated a return to normal levels.

He expected the headwinds on the sidelines to lessen now. “There is no doubt that the pressures from NIM in the second half and in the long term are diminishing,” Mr. Frazis said.

Overall cash profits for BoQ, a 148-year-old entity with 1.5 million customers, rose 14% to $268 million.

These results were enhanced by the fact that the bank received a rare boost from previous bad debt write-offs, adding another $15 million to net income in the past half year.

This was because a collective provision – essentially when a lender sets up a provision pending problem loans – was reversed “due to a more favorable economic outlook and a strong housing market”.

In the prior corresponding period, the BoQ recorded a bad debt charge of $26 million.

Dividends fell from 17¢ to 22¢, marking a payout ratio of only 53% of cash income. It comes after the bank raised $1.35 billion last year to take over ME Bank, saying the target payout ratio after the sale would be between 60% and 75%.

Mr Frazis argued that the dividend was still an “attractive yield” compared to other banks. If the reversal of provisions for bad debts was removed, the dividend was in the ratio, he added.

Loan growth ‘high point’

BoQ and its subsidiary Virgin Money continued to gain housing market share – rising 1.8x industry rates – and ME Bank home loans returned to net growth, a- he declared. Business loans grew faster than market levels.

Gross loans increased from $74.23 billion to $78.95 billion.

Citigroup analyst Brendan Sproules, in a note to clients, said loan growth “was the highlight of the bottom line.”

“Newly acquired ME Bank held back volumes, but [under] BoQ demonstrated rapid improvement,” he said.

Mr. Frazis maintained that the cost savings resulting from the ME acquisition were accelerating.

BoQ fell in net promoter scores, which measure customers’ willingness to recommend or reprimand their bank. In the previous corresponding period, BoQ highlighted that its NPS had risen to 4th in the industry.

This time, the bank fell to 10th place. “Client defense was impacted during the six months with consumer NPS … impacted by the poor legacy digital banking offering and changing client expectations,” he said.

“Worst banking experience”

The decline “mostly occurred in the 26-35 age group due to poor legacy mobile app [for the BoQ brand]”, it said.

BoQ has been focused on improving its digital offerings, with investors at last year’s annual general meeting pointing to the problem of “outdated” technology.

Its latest Virgin Money app won an award and Mr Frazis said it had attracted a slew of new customers, with nearly $1 billion in transactions and savings accounts.

But it recently got poor ratings in Apple’s App Store. Complaints included the app being slow or crashing, and one reviewer described it as the “worst banking experience I’ve ever had anywhere in the world.”

Still, BoQ’s latest app, released in March, is getting high praise from customers on the Apple Store review line, which Mr. Frazis pointed out.

He said the bank had invested more than $150 million in the past six months, up from nearly $40 million a year before it launched in 2019, and it would help drive “digital transformation”.

The results follow significant turnover in BoQ’s senior ranks, with chief financial officer and chief operating officer Ewen Stafford the latest to announce he will be leaving after less than three years at the bank.

The departure was the latest in a series of personnel changes since Mr Frazis took office in 2019, with many members of the executive committee having been replaced on several occasions. Still, culture surveys showed that internal culture and engagement ratings increased between 2020 and last year.

BoQ Chairman Patrick Allaway, while recently praising Mr Frazis, also took the rare step of publicly voicing his concerns about issues he believes “George can improve on, such as the perceived extravagance expenses, especially for off-site management meetings”.

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