Bank of Queensland Limited (BOQ) Earnings Call Transcript & Summary

Good day, and welcome to the BOQ market announcement. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Ms. Jessica Smith, General Manager of Investor Relations and Corporate Affairs. Please go ahead.

Good morning, and thank you for joining BOQ's market update. My name is Jessica Smith, and I'm the General Manager for Investor Relations and Corporate Affairs at BOQ. I would firstly like to acknowledge the Traditional Custodians of the land on which we meet today, the Gadigal people of the Eora Nation. I pay my respects to Elders past and present. Our CEO, Patrick Allaway, will discuss on the call today the strategic announcements we have made to the ASX this morning. Also in the room is our CFO, Racheal Kellaway; Group Executive Retail Banking, Greg Boyle; and Group Executive Business Bank, Chris Screen. Following Patrick's address, there will be time for questions. Given the proximity to our financial results, we will limit questions and discussion today to those topics in the release only, and we will not discuss our upcoming financial results. I ask that you please consider this in your questions. I'll now hand over to Patrick.

Thank you, Jess, and good morning, everyone. Thank you for taking the time to join us today. Today, BOQ has announced some key strategic decisions, which will progress our transformation to a simpler, specialist, higher-returning bank. These changes represent a decisive step towards addressing our challenges in a bold, proactive way and will put BOQ on a sustainable path. As you know, recent market shifts to increasingly commoditized and lower returning retail banking have been more exacerbated for BOQ. At our half year results, I said, would be seeking to address margin compression and cost inflation through considering additional pathways to enhance shareholder returns. We've announced 3 initiatives today to fundamentally change the way we operate, reduce our cost to serve and optimize return on capital. Firstly, we're converting our owner manager branch network to corporate branches and ceasing the franchise model. Secondly, we're shifting our portfolio mix, recycling capital to higher returning segments and leveraging our existing competitive advantage in Business Banking through accelerating the growth of our specialist Business Bank and finance company. Finally, we've commenced execution this week of additional productivity initiatives to increase our previously announced $200 million simplification program to $250 million. The strong progress we've made against our strategic pillars to strengthen, simplify, digitize and optimize have enabled these announcements today. These initiatives will enhance returns with less reliance on margin recovery, allow scale at a lower cost and uplift our customers' experience. I will go through each of them now in more detail. Firstly, changes to our branch operating structure. We recognize that our heritage retail banking operating model, that has served us well in the past, is no longer sustainable in its current state in a lower returning environment. The significant progress made in BOQ's digital transformation is enabling BOQ to now simplify our retail distribution channels. Converting our 114 owner-manager branches to corporate branches is a material change in the structure of our business and a further step towards transitioning to a simple, low-cost to serve digital retail bank. This was a difficult decision, and we acknowledge with immense gratitude, the important contribution of the owner-manager network to BOQ. We will be working closely with our owner-managers to support them through this process and ensure a seamless customer experience as branches convert, which we expect to complete by March 2025. Through this conversion, there will be employment opportunities for owner-managers and their staff. The conversion of our branch network going forward will provide greater flexibility in how we distribute our products, aligning our footprint with our digital and relationship banking model, allowing for potential consolidation as customer preferences continue to shift to digital channels. It will reduce origination, compliance and head office support costs and provide the opportunity for any future margin optimization initiatives. Finally, even labeled group investment through the branch network, adding business bankers and growth corridors for our target specialist segments. We expect the cost of conversion will be in the range of $115 million to $125 million, which will be incurred in the second half of FY '25. The capital impact on the group is expected to be approximately 30 basis points with the conversion costs being amortized over 4 years, commencing in the second half of FY '25. We're expecting an annual net cash profit after tax benefit of $20 million from FY '26 with further opportunity to optimize this performance going forward. This is the right decision in transforming BOQ to a lower-cost, agile, digitally focused retail bank. With the decision to convert our branches, we can continue to leverage the growth of our digital bank and simplify our operating model. Satisfaction with BOQ's digital bank continues to increase as more customers embrace the enhanced experience on the digital platform. App Store ratings recorded further improvement with 4.5 for myBOQ, 4.5 for ME Go and 4.3 for Virgin Money Australia. We now have over 260,000 customers on the new digital banking platform and $6.9 billion in deposits. 25% of retail customers are now served on BOQ's digital bank. Migration of ME customers to the digital bank has commenced with full migration to be completed through FY '25 as planned. We're also in the process of finalizing the migration pathway for BOQ customers, which will materially improve customer experience and provide significant cost saving to the group. The rollout of digital mortgages remains on track and will include a digital direct approach to the market in the second half of FY '25. Moving now to the Business Bank. We're pivoting our revenue mix towards leveraging the strength of our higher-returning Business Bank and finance company. We've recently brought on 10 new bankers and will make a material investment in additional bankers over the next 2 years to drive growth in specialist segments, where we have an existing competitive advantage and strong relationships. These bankers will be focused on target industry sectors, including health, professional services, hospitality and agriculture, supported by our unique finance company, offering across equipment finance, insurance premium funding, dealer finance and novated leasing. The investment will be directed to growth corridors across the country, particularly focused on leveraging our 150-year heritage and competitive advantage in supporting Queensland businesses. We placed a number of our bankers in our newly converted regional centers across these growth corridors. This shift and investment will expand the group's service capabilities and customer reach, recycle capital from low-returning assets to specialist high-end value market segments. We note the competition in Business Banking is increasing. We're of the view that more defensive business relationship banking, combined with our specialist sector competitive strengths and finance company capability will support sustainable margins. Thirdly, on simplification. We have progressed our productivity program throughout the half. We've identified that there is more we can do in simplifying our operating model and management structure. We know that customers are increasingly engaging with us through our digital channels, and we have had some large digitization projects coming to a close, which has enabled this reduction. We're continuing to identify additional cost-saving opportunities to deliver more sustainable returns ensuring that BOQ can continue to provide a viable and valuable banking alternative to Australians. We've made the difficult decisions to commence the reduction of 400 roles. These changes are separate to the branch conversion. We're working closely with the team members that have been impacted, providing the appropriate support through this process. A restructuring charge of $25 million to $35 million will be reflected in the FY '24 financial statements. This will deliver an additional $50 million in annual benefits to our existing $200 million simplification program by FY '26. Finally, I will close with some comments on our FY '26 targets. I have been transparent with the market about BOQ's challenges and the significant industry margin erosion since these targets were set. The management team are acutely aware that our legacy complexity and relative higher cost of funding in the increased interest rate environment has exacerbated industry headwinds for BOQ, and our recent return on equity and cost-to-income levels are not sustainable. The assumptions, which underpin the targets, which were set in 2022, have materially changed. The industry has experienced significant margin compression and elevated inflation, which has impacted returns. Today, we're announcing that we are restating our FY '26 targets to an ROE of 8% and a CTI of 56% in FY '26. Our announcement today is evidence of management's commitment to making the decisions that are needed to improve shareholder returns. By repositioning BOQ to compete at a lower cost to serve in a more commoditized market and leverage our competitive strengths. We have not taken these decisions lightly. They are the right decisions to support the sustainability of the bank for our customers, people and shareholders. We will continue to focus on controlling what we can control. We have a strong, well-secured portfolio, robust financial resilience and are well progressed on delivering an end-to-end retail digital bank and growing our specialist Business Bank with a compelling customer proposition. I will now hand to Jess for questions. Thank you.

Thank you, Patrick. We will now be taking questions. [Operator Instructions] And I kindly remind you that we will not be answering questions regarding our FY '24 financial result today. Operator, can we please have the first question?

Our first question comes from John Storey with UBS.

Patrick, congratulations on the announcement this morning in terms of simplifying the group. I think first question I would have, just on the cost targets. I think certainly we're getting a lot of incoming questions on this. If you go and have a look at the OMB's operated cost-to-income ratio in terms of the data that you provided at 85%. 56% FY '26 in terms of the pro formas where you're at, at the moment, 70% with the investment that you've outlined in terms of Business Banking, maybe if you could just give us a little bit more color and help us to try and bridge from the circa 70 where you are at the moment to the 56% and the time line that you've given. That would be my first question. And then the second question I would have is really just around some of your initiatives with regards to deposit funding within the Business Banking division. Obviously, you're doubling down in terms of your efforts there. But one of the deficiencies I think that you yourselves have called out is really just deposit funding within the division. Maybe if you could just give us some of your thoughts and what yourself and the Board have thought about trying to close that relative funding gap within Business Banking.

Yes. So thanks for your question, John. I think firstly, on the CTI, obviously, there's 2 drivers of that. What we have said today is that we're investing significantly in our Business Bank, and we will accelerate the revenue growth being driven from the Business Bank and higher returns in that segment. In addition to that, we are taking further productivity initiatives in addition to the $200 million we announced at the end of FY '23. When you look at our cost base, we had previously said that FY '26 costs would be flat on FY '23 following and including amortization expense, PropX and inflation, you should expect that, that cost base will now come down based on the announcement that we've said today. So we're not going to give you a forecast, obviously, and a road map to get to our CTI targets. But what we're saying to you today is that we are simplifying and digitizing our retail bank, which is lowering our cost to serve. The initiatives that we've announced today with respect to the OMB conversion as well will provide us with further opportunity to reduce our costs and drive margin. And we are aggressing -- we are accelerating the growth in our Business Bank where we have a competitive advantage in specialized sectors. On the deposit funding, we think that's a really big opportunity for us. Clearly, a payments platform for the Business Bank is a key initiative as we think about investment for the Business Bank going forward. And we're working through that, but we see that as a large opportunity to continue to fund the growth of the bank.

Our next question comes from Jonathan Mott with Barrenjoey.

I've got a question on closing the owner-managed branches, and it's quite disappointing in a way given the 25 years has really been a point of differentiation for BOQ. So for many people, it's a tough day. You're saying this is going to be done by 2025. And I just wanted to get a feel for the process because it is going to have an impact on many people and many customers. If we look at it, I assume that there's a clause in the contract that allows you to buy back the R&Ds. But the economics don't look fantastic. It looks like it's around $1 million per branch. And then I wanted to get a feel for if there's a noncompete clause because I'm sure a lot of the small business owners who run these owner-managed branches are going to be disappointed. You have to presume many of them are going to go and become mortgage brokers and compete directly against you. So is there a noncompete clause to stop the OMB owners just going off and becoming brokers? And finally, what are your assumptions to customer attrition? Because a lot of customers have been loyal to the local owner-manager for many, many years, and you'd have to assume some of them are going to be disappointed. So what are your assumptions around customer attrition for both mortgages and deposits in the OMB network?

Thanks for your question, Jon. There's lots of questions, and then I'll try and cover them all. If I don't, maybe you can just give me a little prompt at the end. Look, I first wanted to start by saying this is a really difficult decision and a big decision for the bank. The owner managers have served us very well since 2002, and this has been a unique proposition for BOQ. Markets have shifted on us and that shift has accelerated. And the 2 big drivers for that is our customers are choosing to move to digital channels, and we're seeing that as a major consumer trend across the industry. But also we've seen significant margin compression. And so the sustainability of the model, if margins don't recover, is very questionable in the current environment. But the owner-managed channel is one of our more expensive origination channels. And as we look at driving margin, we recognize that the returns that we're getting through that channel are not sustainable. So we are making very difficult decisions in the days of rivers are gold when margins were higher. It was a very sustainable channel for us. But markets have shifted on us very quickly. So I think that's one just comment I'd like to make. In terms of the economics of the model, there are many reasons as to why we're doing this. It's not just the economics. But the model is driving a $20 million net profit after tax in FY '26. We do believe that we will be able to optimize that over time. So we will be taking on the cost base of the owner-manager model. We see an opportunity to run that more efficiently. And that would be an important opportunity for us to optimize returns. In addition to that, on the revenue line, as you will see in the pro forma, we pay out about $125 million in FY '24 going forward. So this will be margin accretive for us as those revenues come back on to -- [ on energized ] line as well. So the economics are strong. And from a compliance and control perspective, as the regulatory environment changes, we're unable to pass those costs on to the owner-manager network. This will enable us to manage our compliance obligations going forward as well. So there are many strategic reasons to do this. We have said consistently that we are moving our retail bank to a lower cost to serve digital bank and then in a highly commoditized lower-margin retail market. Unfortunately, the current operating model and structure is not sustainable for us. In terms of no compete, we are offering employment opportunities to our owner-managers and to employees within that group. We do believe that many will convert to join BOQ. But clearly, we have strong customer relationships. The customer service levels will remain seamless as we transform this network over the next 6 months to BOQ.

And just a final part on that was in your own assumptions to get to the 8% return on equity, what customer attrition assumptions have you assumed or you assume that the customer -- the business continues to grow just in an E&A corporate structure?

So Jon, I'm not going to go into that today. But what I can tell you is we have assumed some runoff of our deposit books and mortgage books across that network. We've taken a fairly conservative approach in relation to that. But I think what I would also say to you, we are putting more bankers into key growth corridors to grow in sectors where we can compete and win and in sectors where we're getting higher margins, particularly in Queensland. So we're going to be making a significant investment in Queensland. We see that as a material offset to the change and improving our return on equity as well as we recycle capital into higher returning sectors.

Our next question comes from Matt Dunger with Bank of America.

Patrick, on the OMB profitability, is it fair to assume there's a distribution of profitability across the branches? And what will the new footprint look like? How long is the tail of unprofitable branches? Is it 20%, 30%?

Matt, thanks for your question. I'm not going to comment on that. I don't think it's appropriate to talk about specific branches. Really, what we're saying to you today is this is a material shift in the way we operate to address structural changes in the marketplace, and this will drive improved returns for BOQ.

And just a follow-up, if I could. On the amortization period of 4 years, are you able to give us a sense as to what determines that?

So look, that's based on assumptions that we've made today. That might change a little bit, but I don't think there'll be material changes to that. So it is an accounting treatment as to how we're going to allocate the amortization of the cost.

Our next question comes from Brian Johnson with MST.

Patrick, well done on kind of addressing the elephant in the room, which I think must be very hard for a CEO to do. I had a few questions, if I may. The first one is 8%. You're doing about 5% at the moment, and there's kind of risk to get there. But I just wanted to flag to how you respond to the fact that 8% probably doesn't equal your cost of capital. So at the moment, we've got bonds kind of sitting sub-4%, [ kind of 5% ] equity risk premium kind of think about some kind of beta. You don't come to 8%. Do you think 8% is good enough? Or ultimately, does this still suggest that you need some dramatic actions over and above this?

So Brian, this is a '26 target that was set in 2022. We will be driving the transformation of the bank going forward. We are very ambitious about what we'd like to achieve in our return on equity. And so 8% is a starting point for us in FY '26. What we have said in the past is, in time, we will decommission our whole heritage bank. That will drive a material productivity uplift for the organization. We're also looking to really leverage the strength of our Business Bank and finance company and to grow that -- accelerate the growth of that entity. So FY '26 is not far away now. The initiatives that we've announced today support the delivery of those numbers based on the assumptions that we've made today and what we know about the market today. But we are very ambitious to continue to grow those returns and achieve higher returns for our shareholders.

The second one, Patrick, is kind of like a weird accounting question. So below the line, you take this big expense, okay? So it's expense below the line in the March '25 period. And then you're talking about amortizing it, but you've already expensed it. Can I just clarify that you're taking it below the line? It hits the capital then. By amortizing, you're talking about when you're physically paying out the cash. Could you just explain that?

Yes. So the capital charge is upfront -- the capital charge is upfront, and that's -- we're seeing approximately 30 basis points. That cost will be amortized over a 4-year period on the balance sheet. So from an earnings profile perspective, you should expect the below-the-line adjustment amortized over 4 years.

So sorry, you can't -- that's saying that you're booking it twice. You're saying that you're expensing it upfront, and yet you're amortizing it over the time. Once you -- you don't need to expense it twice, surely.

Yes. So Brian, with respect, we're not expensing it upfront. We're taking the capital charge upfront that will be released over the 4-year period. From an expense perspective and a P&L perspective, which is different to the capital charge, you will see the statutory profits impacted on an amortized basis over the 4-year period.

Our next question comes from Ed Henning with CLSA.

I've got a couple of questions. Firstly, just on -- in the near term, you think about the owner-managed branches and just talk about the revenue risk going through this transition period and the actual growth in your credit. What's going to drive them to continue to push loans if they're not going to get the full economic benefit until this transition kind of goes through? And then -- that one is the first one. I'll go on to the second one after.

Thanks for that, Ed. So the current agreement -- franchise agreement which we have with the owner-managers very much aligns them with us over the next 6 months. So the performance of that network over the next 6 months will be important in determining their final payout as we go to March '25. So they are very aligned with our interest from that perspective. Once we take control over the network, we will be able to control revenues going forward from there and how we deal with customers and what we do. But in addition to that, we will be employing many of them into the network to support the network going forward. I also just wanted to say that part of this is a growth story that we are investing very heavily in part of that network in business growth corridors across the country, but particularly in Queensland. So we see a very large revenue growth opportunity for us across our business bank and finance company in growth corridors, and we will be investing bankers into those centers, which we're currently unable to do at present.

Sorry, do they currently get any trial commissions, obviously, on their book and stuff? Or that's what you're just going to pay out essentially at the end of the value of their book?

Yes. So look, we have a pre-prescribed formula as part of this conversion. And that is determined by the size of their book and other factors that will be finalized at the end of the first half of the financial year in FY '25.

And with the staff that they employ, you don't have to give redundancy or anything to them. That would be then on the owner-managed branches themselves?

That is correct.

Okay. And then last one, just on the growth side. And can you just talk a little bit about there, obviously, pushing more business bankers in there. Can you talk about your risk tolerance? And are you happy to potentially increase that a little bit to try and grow that book even further to kind of stimulate growth?

Yes. So at the half year, we did discuss some changes that we've made in our credit risk appetite in the first half of FY '24. That is enabling the growth of our business bank going forward. We continue to review our risk settings and our appetite. As you know, most of this book is secured, but we will continue to review risk-adjusted returns and we'll make appropriate decisions as we continue the growth.

Our next question comes from Brendan Sproules with Citi.

I just have a question around the business bank and the initiatives that you've described in this release as being material. I do know you've hired 10 bankers. I was wondering if you can give an indication as to how material is 10 bankers to the current operations? And then secondly, how quickly can this process really deliver revenue and earnings growth, noting the last sort of 2 or 3 periods, you've seen declining revenue and flat lending growth up until at least the end of the first half.

Yes. So look, Brendan, I'll give an update of the business bank performance at the full year results. I don't think it's appropriate for me to comment on the second half at this stage or the outlook. But we are highly confident that the addition of the bankers that we have bought on are driving strong pipelines. And we are confident that we can grow in the specialist segments where we actually can differentiate, compete and win, but particularly leveraging our Queensland advantage. So we will be allocating more capital in Queensland. We will be investing people in Queensland, and we're very excited about the growth opportunity that gives us.

Our next question comes from Andrew Triggs with JPMorgan.

My first question just on the change in the OMB strategy. I mean for a long time, you've been deemphasizing the corporate channel and priority of the OMB network and the argument there has been at the corporate channel far less productive than the OMBs. What's changed there? Because to me, this looks like a cost decision rather than a franchise and revenue decision.

Yes. So Andrew, I don't think we've deemphasized the corporate channel going forward. What we have said is that our core model, and it has been since 2002, was an owner-manager model, and we were very committed to that model. We have said that our customers are increasingly shifting to digital channels. We have also said that the model in terms of margin compression that we've seen through more commoditized retailer markets is requiring us to move to a low cost to serve and the model is expensive for us going forward. And in addition to that, we've got increased compliance costs. So there are material changes that basically have been persistent over the last 18 months or so. We've taken the view that the margin compression is not recovering, and a model that served us very well in the past is not sustainable for us going forward.

Sorry, Patrick, I meant that in recent years, you've deemphasized corporate in favor of OMB branches. You can see the mix has shifted quite dramatically over the last 3 years. My question is really what has changed on your confidence of productivity within the corporate branches? Because clearly, that was behind the decision to shrink the corporate branch network over the last 3 to 5 years.

That's correct. So look, I think that strategy was commenced about 3 years ago in a very different margin environment from where it was today. So we've seen a significant shift in margins. And in a low returning market, this is a high cost to serve channel for us. So I think that's a significant change. I think the other important aspect of this is, as we think about our portfolio and where we're getting returns in our portfolio across our balance sheet, we are shifting our portfolio mix to emphasize the strength of our business bank and leveraging the strength of our business bank and finance company and a corporate model enables us to invest in those channels in growth corridors and regions where we do see big opportunities. So that's a material shift as well because we have recognized over the last couple of years that return on equity is not sustainable. And so we are making decisions today, one, to fundamentally change the way we operate to lower our cost to serve; but two, to shift our portfolio to higher returning assets and segments where we have a competitive advantage and can compete and win.

And just on the size of the network. So we'll -- as the OMBs are converted to corporate branches, will the overall size of the network continues to decline, do you think?

Look, customers are increasingly choosing to interact digitally with us. So you should expect future consolidation of the network. We will evaluate that over time.

And just maybe a second question around the FTE reductions flagged. There's very little detail provided on where they'll be coming from. Could you give us a bit more context? They are very large numbers. So where are they coming from? And what's the net impact? Because the previous 250-odd heads that you took out didn't really drop through to the bottom line given addition of staff in or heads in other areas.

Yes. So thanks for that question, Andrew. Look, I just wanted to start by saying these are very difficult decisions for our people. We recognize that, and we don't make these decisions lightly. And we will support our people through this process. But it's important that we structure organization to ensure the sustainability of the bank for our customers, people and shareholders. So I just wanted to emphasize that point. But we are considering the impact on our people, and these are very difficult decisions that we're making. In terms of where they're coming from, as I said earlier, many of our big technology projects are now past the peak investment stage, and many have been delivered. So there are people coming out of technology from that perspective. But as we continue to digitize and simplify our retail bank operations. You are seeing people come out of retail banking, but also that digitization and efficiency and automation that's driving people out of operations as well. So those are the sort of 3 key areas in the bank. I think what I would like to emphasize, though, is whilst there are people coming out from those sectors, we are investing in the business as well -- in the business bank. We are also shaping the skills and capability of our people to ensure that we are future fit for our future state operating model. So you would have seen in the first half, which we called out, but at the end of last year, there were about 220 roles that came out. We have reinvested in parts of our business, in particular, our contact center as we continue to digitize the business and provide customer support from the contact center. We've invested in some of our projects, which I said these are now starting to come off. And we've invested in the business bank as well. But there will be a net reduction in people in FY '25 as a result of these decisions.

Our next question comes from Azib Khan with E&P.

Patrick, if I go back to the FY '26 targets you laid out in April as part of the interim results. You had mentioned back then that you were targeting FTE reduction greater than 400 by FY '26. Today, you've announced 400. But if I reconcile that with what we said in April, does that mean there's more to come? Or has there been a revision in plan today?

So look, as we've said, we've added to our productivity initiative, Azib, so thank you for the question. We, earlier, at the end of FY '23, announced a $200 million productivity program, which included an additional greater than 400 people, which we have previously announced, to come up by FY '26. As we continue to decommission our heritage legacy systems, you would expect that we can drive more efficiency through the organization. So as part of, one, our digitization program but also our simplification program, you would expect that we will continue to drive efficiency through our operating model to ensure that we're future fit. So the announcements that we've made today are in addition to the $200 million productivity program that we made and the comments that we made at the half of this year.

Sorry, just to be clear on that, Patrick, so the 400 announced today is in addition to the greater than 400 announced previously?

It's an additional productivity initiative, reflecting the environment we're currently operating in. As we continue to migrate customers off our legacy platforms and deliver digital mortgages, we expect that there will be more efficiencies through FY '25 into '26.

Okay. And just another question, if I may. You've mentioned you'll be looking to recycle capital away from lower returning segments to the higher-returning business banking segment. Does that comment specifically applied to just within the business bank, a reallocation of capital within the business bank? Or does that also refer to allocating capital away from home lending to business lending?

So look, you would have seen over the last results that we have had runoff in our mortgage book. And we've said we have no interest in running business below our cost of capital. And so we are seeing the opportunity to recycle that capital into growth segments that are giving us appropriate returns and higher returns in segments where we can compete and win. The announcement we've made today is accelerating the growth of our business bank and finance company. So we will continue to look for opportunities to recycle low returning capital on our balance sheet to higher returning segments whilst ensuring that we still have the appropriate balance within our risk appetite on the balance sheet.

Our next question comes from Richard Wiles with Morgan Stanley.

A couple of questions. Firstly, on the owner-manager conversion, you've outlined that you won't have to pay the commissions going forward. And you've also outlined that your -- that the OMBs are lower -- are higher cost network. I'm wondering if you could tell us about the gross revenues of the OMBs. Are they higher? Or is it a more productive network than your corporate branches from a revenue -- from a gross revenue perspective?

So Richard, you would have seen in our recent results that our retail bank has been in decline, and that's across the channels we did call out at the half year that the only part of the retail bank that was growing was ME Bank through our broker channel and ME because that was a lower cost to serve. So this channel has been in decline. We see an opportunity to optimize the channel to return it to growth in key sectors through the addition of business bankers into key growth corridors. And so this gives us the opportunity to take direct control over where we want to grow, how we want to allocate our capital, and segments where we're not getting appropriate returns on our capital. This will be NIM accretive to us. This is an important focus for us in ensuring that we can drive margin improvement in a very, very difficult operating environment.

And my second question relates to the current trends. I understand you want to limit questions to today's announcement. So I won't ask you about specific trends, but it is 5 months into the current half. It's 4 months since you've spoken publicly to the market. You've chosen the timing of today's announcement and I think if you don't comment on the current trading performance, then investors would quite rightly assume that your cash profit is tracking towards the consensus estimate, that's about $325 million for the full year. So is it right for investors to assume that since you're not commenting on it that you are comfortable with consensus?

Richard, I won't speculate on what investors are assuming. But what I will say is that we're not going to give an update on FY '24 guidance today. If we did have anything to disclose, we would disclose it. Obviously, we've got continuous disclosure obligations. But I will leave that to you in relation to your assumptions.

The last question today comes from Matthew Wilson with Jefferies.

Why are you choosing to characterize the transaction as noncash? Presumably, you're going to pay a check out to each of these entrepreneurs that have run the owner-manager branches. And will there be a dispute process with respect to valuation? I also have a second question.

So thanks, Matthew. We're not saying it's noncash. There will be a cash outflow. What we're saying is this is an acquisition. So we are treating the acquisition cost below the line. It's not part of our cash earnings that we basically reflect our underlying earnings. So that's the only difference. It does impact cash, but it's a one-off below-the-line cost treated as an acquisition. Sorry, what was your second question, Matthew?

Will there be a dispute process with respect to valuation? I imagine some of the entrepreneurs will have a different view of valuation than you do as is customer and market practice.

We've got a very clear formula in our franchise agreements. So we don't anticipate any disputes in relation to that, but we will be complying with our contractual obligations and operating appropriately to support our owner-managers through this difficult process for them.

Okay. And then secondly, you talked about your business bank and pivoting towards it. Could you give the market color on what do you think your competitive advantages are in the business bank? You mentioned the word competitive advantage a couple of times in the release. What actually are they?

So look, there's a couple. First of all, we have a very unique finance company. Many of our peers do not have a finance company. So that enables us to cross-sell the capability of that finance company into the businesses that we're serving. Those margins are higher in the finance company as well. And so we think that's a strong differentiation for us that we will continue to grow. In terms of our business bank itself, as you know, we specialize in sectors. And we've got outstanding bankers who provide significant value in the sectors that we specialize in. Our bankers are not generous. They are industry experts, and we're adding significant value to our customers in those segments. And in many of those segments, we dominate. And for a small bank, that's quite unique. So that's important. I think the third one, just to call out, is our Queensland heritage. We celebrate 150-year anniversary this year in Queensland. We have a very strong competitive strength in Queensland with long-standing Queensland customers, and we intend to leverage that and take advantage of that.

Just a follow-up on the finance company. You don't have any real competitors because they've all closed down their finance companies for various reasons. Why do you think your view of the economics of a finance company differs to that of the major bank peers, Macquarie and others?

Look, there were not scale opportunities for those other banks. We're a small bank. The finance company is a material contributor to our profits and earnings. And it's a very important part of our customer service proposition. And it also provides us with an opportunity to compete against many who have a higher cost of capital than us, which is quite unique. And so we see it as a very important part of our customer proposition.

And if I could try my luck just finally on one more. You talked about the acquisition in pretax terms. Can you talk about the taxation implications of the corporatization, I would have thought it's a capital transaction, not an expense.

Yes, there's a capital transaction, but I'm not going to go into tax details. But you can basically assume tax rates that would be appropriate for BOQ.

But it shouldn't be tax deductible, no?

I'm going to pass to Racheal on that question.

So the capital outlay upfront is the cash payment to our owner managers from there -- and that's the 30 basis points of capital that we've called out. That's not the accounting treatment, that's the capital treatment. From an accounting perspective, as Patrick has called out, this is an acquisition, so it creates an intangible asset as that acquisition unwinds and amortizes through the P&L. The normal corporate tax rate is applied to that. And so there is a tax effect as it unwinds.

Thank you. At this time, I'd like to turn the call back over to Jessica Smith for closing remarks.

Thank you, and thank you, Patrick. Thanks to everybody on the call and for your questions. That brings us to the end of today's briefing, and we thank you again for joining us this morning.