Bank of Queensland Ltd Strategy Update Presentation
Nov 17, 2015 AM EST
BOQ.AX - Bank of Queensland Ltd
Bank of Queensland Ltd Strategy Update Presentation
Nov 17, 2015 / 11:30PM GMT
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Corporate Participants
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* Jon Sutton
Bank of Queensland Limited - Managing Director and CEO
* Brendan White
Bank of Queensland Limited - Group Executive Business Banking
* Matt Baxby
Bank of Queensland Limited - Group Executive Retail Banking
* Peter Deans
Bank of Queensland Limited - Chief Risk Officer
* Donna Vinci
Bank of Queensland Limited - Group Executive Enterprise Solutions
* Vimpi Juneja
Bank of Queensland Limited - Group Executive Product and Strategy
* Anthony Rose
Bank of Queensland Limited - CFO
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Conference Call Participants
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* Brian Johnson
CLSA - Analyst
* Andrew Triggs
Deutsche Bank - Analyst
* Jonathan Mott
UBS - Analyst
* James Ellis
Credit Suisse - Analyst
* Matt Dunger
Morgan Stanley - Analyst
* Phil Parker
Altair Asset Management - Analyst
* Victor German
Macquarie Bank - Analyst
* Ed Henning
CLSA - Analyst
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Presentation
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [1]
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Well good morning everybody. It's 10:30 so we'll make a start. I want to thank you all for taking the time to come today to listen to myself and the executive team. It's been a while since we've done a strategy update. It's timely that we provide you with where we're taking the bank over the next few years. Hopefully you'll find that very interesting.
In terms of our presentation today we've set aside two hours to put across a formal presentation, Q&A period with the full executive team and afterwards we'd like to invite you to join us for an informal lunch.
In terms of our presentation structure today, I'll top and tail the presentation. The leadership team will talk through in detail our specific strategies.
Turning to slide 4, there are four really big key messages that I'd like you to take away today. I'd like to spend a few moments just talking about that and also setting the scene for where our strategic priorities lay for the next few years.
The first thing that I'd like all of you to concentrate on is that our business foundations are substantially stronger than where they were a few years ago. We've done an awful lot to set up the foundations so that we can be much more forward looking in terms of our growth agenda over the next few years both from a financial sense, balance sheet, strength, capital strength and also from our risk metrics going forward.
The other thing is that you could have the best strategy in the world but as Drucker would say, culture will eat strategy any day of the week. Also from our perspective we've got to have the right cultural settings within the organisation. I'll talk some more about that. Also for us it's all about having great execution skills. It's a good segue; over the last few years with a lot of the things that we have been doing we are building our track record particularly around organic execution and inorganic execution.
A couple of examples of that is what we've achieved with the brokers over the last few years. If you go back three years ago, four years ago, we weren't even in the broker channel. The team has done a great job in getting us back to where we need to be there.
Inorganic execution -- I did talk a lot last month about the financial performance of BOQ Specialist, that acquisition. Again that shows what can be achieved in terms of an acquisition that was bang on strategy for us and in terms of what it's delivered back to shareholders.
The third point I'd like to talk about is a credible challenger bank strategy. A lot of us have all worked in big four banks. In our core DNA, our core belief, we absolutely believe that there is plenty of white space for a challenger bank to participate in this heavily concentrated financial services market in Australia. In doing so through specialisation being able to play in those markets and be much more nimble, which will get us closer to those customers with a strong value proposition, but also get us some superior returns.
Finally I know all of you in this audience love your numbers. You love targets. You love to talk about those things. But what we are targeting for the bank going forward is our performance on an EPS against the industry as a whole, and TSR. I'll talk some more about that later in the presentation.
I think it's really important if we move to slide 5 that we talk a little bit about the team. You can't get to those sorts of returns that we're aspiring to without having the best possible team to execute on our priorities going forward. I'd like to take a few moments to introduce the team. In the last 12 months since becoming CEO I've spent a lot of time in bringing this team together. There are some familiar faces. There are some new faces.
Obviously Anthony Rose is well known to everybody. Anthony is our CFO.
Donna Vinci -- Donna Vinci is our new group executive for enterprise solutions. Donna brings with her a rich, deep experience particularly in the IT field and more recently some very, very strong digital capabilities. Donna will talk some more about where we're at and our digital journey going forward.
Peter Deans -- where is Peter -- Peter our newly minted, crowned CRO of the year two years running. I've worked with Peter for a good number of years through my financial services career. He's our chief risk officer.
Matt Baxby -- Matt is well known to you. He's our group executive for retail and brings with him depth of experience of working with the Virgin group and with Virgin Money. When we get to the refreshments you can ask Matt why Richard Branson continues to tip water on his head as a standard party joke.
Brendan White -- I've worked with Brendan for a considerable period of years -- 22 years of experience in banking and financial markets, and is our group executive for the business bank.
Not here today but will be starting in the new year is Belinda Jefferys who has a lot of experience in financial services around people and culture. You'll hear a lot more about where we want to take the bank's culture. Belinda has given notice at Elders. She'll be joining us in the new year.
Our newly minted, brand new, group executive for product and strategy, Vimpi Juneja, who will talk later in the presentation.
One of the things I'd like to say about this team -- brings a really broad, deep financial services experience across a number of financial institutions. There is one commonality that we all share and one belief that we all share, is that we've all spent a great deal of time at these places. Wonderful training grounds but a sense of frustration about the level of bureaucracy that you actually find in very large financial institutions that can sometimes stand in the way to actually getting the outcomes that you want in execution and strategies. Working in a smaller bank -- small is beautiful -- allows us to be more nimble. This team is very, very attracted to that nimbleness that we can bring to BOQ.
If we turn to slide 6 this is basically just a summary of our financial results that we released last month. They were a solid set of results that allow us to be more forward looking and build the foundation for our growth strategies going forward. We were very pleased with those results. Today I won't be making any further comments on the financials beyond what we discussed at our results presentation. So I would ask that you respect that in your questions today as we go forward.
This graphic sets the scene. The last time that we spoke was probably in November 2013. It actually shows the foundations that we've built. The graphic shows a set of numbers pre-capital raising in 2012 where we raised a substantial amount of capital. These are some of the metrics that we look at internally to measure how we're performing as a bank. As you can see, most things are in the green area. I would say not everything has gone to plan. As I say to my executive team it's a race that never ends -- so there's a continual strive for performance. We're pleased at the progress that we have made but there is more that we do want to do. I don't intend to spend a lot more time on this particular slide but it just sets the scene from where we were to where we are now and to where we want to get to into the future.
If I turn to slide 8 you will notice that the strategic pillars haven't changed. What I've always said since becoming CEO that in terms of our strategy that it would be an evolution of the journey that we've been on over the last few years rather than a complete revolution. Our strategic priorities have not changed so it's customer in charge, grow the right way, there's always a better way, loved like no other.
We've had a good hard honest look at how we've performed against our strategic pillars and have to say that we're relatively pleased with where we are at the moment. However there is always more work to do. The areas where we have more work to do is obviously in our network. I did speak about that at the results presentation. Obviously there is a significant opportunity for us in cross-sell given the nature of the various businesses that we have in our portfolio.
Obviously, something that's always dear to my heart and all of the analysts and investor community, is the never ending search for improving our cost base going forward. Matt, Brendan and Donna will talk about those aspects going forward.
It's also important that we set the scene in terms of the operating environment that we're working in at the moment. I'd have to say in the 20 years of my experience in financial services this would have to be the most interesting time to be running a bank. It's probably one of the most challenging times. You've got very, very low interest rates which makes it challenging to run a bank. You've got a global financial backdrop, an economic backdrop where low rates are probably the genre for a long period of time going forward. The markets are prone to a big bounce of volatility. There are all sorts of risks that are out there in the horizon. The transmission of those risks -- you're never sure where it's really going to play out.
So one of the things I think is important, and a message that I'll continuously repeat, is that we want to ensure that our risk settings across the bank are capable of withstanding the inevitable cycles that you actually see go through the Australian economy and also allow us to be relatively shock-proof as well.
The other part for us is changing customer needs. The customers and clients have much greater access to information. They talk a lot. They use different digital channels. If banks or financial services are ignoring the voice of the customer, quite simply you're going to fail. It's a good segue into the value chain of disruption. We continually see a lot of disruptors out in the market. Obviously whether some are successful or not successful will be seen. But over time one thing you can say with absolute clarity is that disruption will continue and the various models of how they play out whether they're successful or not.
So we need to be adaptive to what goes on with the disruptors whether you join, whether you do all sorts of different things. There are many different ways to play this but you can't ignore what's happening in the disruptive settings.
The final point I'd like to make about the settings is we all know that we are in a very evolving, fast changing, regulatory environment. All the global regulators are being much more interventionist. Anthony has spoken at the last results and through a lot of meetings about what's happening with BASEL IV, what's happening with capital. We're also seeing much more interventionist regulators whether it's ASIC, whether it's AUSTRAC and whether it's some of the international agencies. This is here to stay. This is not going to change. We need to be very mindful of how the regulatory framework plays out.
The one thing I will say about this is when I think about it I don't necessarily think in the negative. I actually think that there is always opportunity that comes about through change. We need to be adaptive to those changes going forward.
The next slide -- on slide 10 it's really interesting. It appears that a big bank chairman has already stolen my thunder about -- talking about the essential role of trust in financial services. I reflected on some of the comments that were made yesterday how trust could be a competitive advantage for one institution and not another. I think that you've got to turn that thinking on your head. All financial institutions have got to build the trust quotient back. If you look at what's happened globally around the world, the various scandals that have beset different institutions, trust is at the lowest ebb ever for financial services companies.
This is something that we think about day in and day out at BOQ. The graphic on the right hand side shows one measure of trust. That is our net promoter score which is in striking distance of the highest net promoter score of any financial services organisation. That's just one element. One of the other elements that I look deeply at going forward, and we continuously work at, is culture. A few years ago our culture scores were probably in the bottom quartile. Then over the last three years we've built our culture and engagement scores almost to the top quartile. We'll continue to work on that. So those things go hand in hand. Without trust financial services organisations -- we will not achieve the goals that we set ourselves.
The next slide is something that's a little different. You probably haven't seen this. I want to spend a few moments on this because this does set the scene for where we're going to take the bank strategically over the next few years. On the left hand side is a wheel. When I was thinking about what I would bring to the bank as the CEO I thought a lot about the positioning of the bank and how people think about regional banks. Often when people look at regional banks they think in terms of maybe a smaller deposit base, geographic concentration or a smaller customer base. Sometimes that comes with a lot of preconceptions about that bank and the opportunities that that bank may have.
Here at BOQ the leadership team and the broader BOQ family absolutely want to turn that thinking 360 degrees around. We actually see significant opportunity in being a smaller and more nimble bank. There are lots of examples of smaller banks that have very high customer advocacy levels and that also deliver superior returns in the marketplace. They tend to be lumped in three models. You've got your direct lower cost model. On the right hand side of this graphic we've listed a number of well-known banks that are actually achieving that.
The second model is the more high touch, high margin model. Again there are a number of banks that you see there that are in highly developed and highly concentrated financial services sectors that are doing really well.
The third model, no surprise, is the nuance that we're taking the bank forward to, is a specialised high return model. There are two very good examples already in operation within BOQ. That's BOQ Specialist and BOQ Finance. Brendan will talk some more about the opportunities that we see in specialisation particularly across in the business bank. Matt will talk about what we're going to be doing in the retail bank.
If you turn to slide 12 I want to just concentrate on where our strategic beliefs are which is really important, which underpins the various strategies that the group executives will talk about. I spent a lot of time talking about trust. We've also spent a lot of time thinking about the strategic choices that we have to make as a smaller challenger brand like BOQ. But the choices we make need to be very informed and taken with care. We want to make sure that the bank is building these foundations so that we can continue with our sustainable growth that we have achieved over the last three or four years, particularly with the size of our balance sheet.
The page really summarises how we've brought those realities together with both the external and internal environment to frame our belief. I've spoken about trust. Culture for us is the ultimate competitive advantage. I think Drucker said -- he was a guy that said culture will eat strategy any day of the week. It's a firm belief of all of ours. You could have the most unique or the best strategy in the world but if you can't execute on it and you don't have the cultural underpinnings, you will fail. As CEO I spend a lot of time on the cultural aspects and the execution aspects going forward.
Our other core belief is that specialisation rather than scale will deliver us higher growth, customer satisfaction and returns. We cannot be all things to all people. We cannot be a mini-me big four bank. We do not intend to be that. We believe that sometimes what you see in the bigger banks is that they are vulnerable to reputational risks and diseconomies of scale. By diseconomies of scale you're probably wondering -- some sort of consultant has dreamed up those words. But having worked in a larger bank you can often find that there are competing needs across banks.
For example if you want to try and start a franchise business in the business bank at a big four -- if you wanted to start something else -- you will find that maybe the risk people are not behind you. You may find that there might be competing interests in a big four bank, in the business bank versus the institutional bank. Therefore those sorts of things don't happen. Here at BOQ we can marshal the resources and we can get the risk expertise that we need to allow us to forensically focus on those particular aspects of the market.
There is no doubt that digital is the new industrial revolution. We've got some way to go. There is no doubt that we have quite a way to catch up. Donna will talk some more today about that. For us it's not about doing everything in-house. It is absolutely about leveraging some of the global partnerships that we have and that we are forging that can bring and help us to digitise our front, middle and back office going forward. Donna will talk more to that.
If I go to slide 13, this is obviously strategy on a page. Our vision still remains the same. It is to create Australia's most loved bank. Again I draw you back to the fact that this is an evolution rather than a revolution. Our strategy over the last three years has really served us well. We've rebuilt the risk and financial foundations of the bank. Looking forward the vision remains the same. I've got to say this is something that the whole of the BOQ family are getting right behind. It's in the lexicon of everybody as they speak to our customers and as they talk within the organisation.
The four strategic pillars remain the same. But what has changed is that we've gotten much sharper about articulating our target niche customer segments, our customer value propositions, and how we need to rebalance our investment priorities towards driving growth. The ExCo will talk about where we see those growth opportunities. There will be no surprises in what we talk about today but we fundamentally believe that there is plenty of white space to execute on the priorities that we see and to drive our growth agenda.
Now I'm going to turn it over to Brendan who will talk to you in more detail about our target business segment markets. Thanks Brendan.
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Brendan White, Bank of Queensland Limited - Group Executive Business Banking [2]
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Thanks Jon. Good morning everyone and thanks very much for coming. As Jon said Brendan White is my name. I lead BOQ business. What that entails is the business bank, BOQ Specialist, BOQ Finance and also our financial markets area.
Two years ago when we were here giving an update we outlined our strategic mandate. At the time it was, reinvigorate the business banking operating model, establish an agribusiness footprint and build financial markets capability to provide risk management solutions to our clients. We also talked about our competitive advantage, that being that we wanted to focus on being a relationship bank, not a transaction bank. That meant we focused on being nimble, responsive and reliable.
At that same time two years ago, if you look at our commercial loan book 82% of our commercial loans resided in Queensland. Two thirds of those loans were business loans originated through our branch network. Since then we have embarked on a strategy of diversification; diversification by geography, by industry sector and also by asset class. We focused on profitable growth through improved cross-sell, stronger margin management, improved credit quality, better pricing for risk and achieving minimum return hurdles.
So two years on if I look at business banking now -- we now have capability in Perth, in Melbourne and in Sydney. We've got five agribusiness centres. We've also upskilled our Brisbane teams to align with our strategy. At the same time we've built out our financial markets offering in product development and capability. But also we've targeted specialists in the sector to provide the technical expertise we need to provide those solutions to our customers.
As you are also aware Jon touched on -- we acquired the professional services business which we call BOQ Specialist and BOQ Finance, our asset finance and leasing business, is now part of the business bank, so BOQ Business. Collectively when you bring all businesses together when we talk about diversification, 44% of our commercial loans now reside in Queensland; so 56% outside. So to us that really supports, I think, the diversification strategy, and highlights that it has been a successful implementation over the past two years.
I think on page 15, if you look at what our future growth strategy is- and Jon spoke about specialisation. We've really used the experiences that we've had in BOQ Specialist, and also in BOQ Finance to help identify niche profitable specialist sectors for investment, particularly those where we already may have an alignment of risk, relationship capability, and also product. We've looked at industry sectors, we've looked at profit pools.
We've looked at global case studies to help us identify. What we have decided is that we're committed to the strategy that we have at the moment. We're committed to looking at sectors with deep profit pools, strong industry outlooks, and excellent potential for cross-sell so we can enhance our overall profitability. So we will continue to invest in those existing businesses that we have, particularly those specialist businesses and the hubs that we've already created.
So property finance, agribusiness, professional services, asset finance in leasing will remain very important critical sectors of investment and focus for us. But what we have done, as you see in the slide, we've identified other sectors where we believe that we have that alignment of capability and we believe a line to the specialist strategy.
That's health, aged care and retirement, hospitality and tourism, and also franchising. If you think about health, aged care, and retirement, that is an area already of existing capability within the organisation. But what it also does, particularly with the acquisition of BOQ Specialist, it really complements that business. Hospitality and tourism is an area of focus, particularly with the lower Aussie dollar. But also, geographically, both those sectors align with where we have a very strong footprint and presence in Queensland and also New South Wales. Then if you look at franchising. Again, it's an existing area of expertise, and we think with the knowledge, we can leverage the knowledge and the capability that we've developed through the understanding of our own franchise network which will enable us to be successful in that sector.
So if you look at these sectors along with our existing specialist businesses, we think they provide an excellent opportunity for growth, for cross-sell and for generating strong returns and improve our overall profitability. On page 16, if you look at our specialist businesses, the existing one that Matt will talk about, Virgin Money in his presentation. But the existing specialist businesses are performing well. If you look at BOQ Finance, it continues to be a leading player in middle market asset financing across five diverse business lines, which include equipment finance, vendor financing, debtor finance and floor plan finance.
These are high-return businesses, and we're very fortunate to have some of the world's leading IT companies and providers as major clients. BOQ Specialist is performing well, and it's been very well documented by Jon and Anthony in our annual results. But it continues to show good growth momentum. The business enjoys 20% market share, and implements what we call a whole-of-professional life strategy, or in BOQS terms, cradle-to-grave. What that means is very high product cross-sell ratios in terms of the products that are provided. Home loans, overdrafts, tools of trade finance, practice loans, loans for commercial premises, credit cards, car loans, and transaction banking services.
Both these are very good businesses that continue to show very good momentum for us in line with strategy. We really think it's our experience and success with BOQ Finance and with BOQ Specialist that that's what gives us the confidence to really believe we have the people, the capability and the knowledge to deliver on the niche specialist-sector strategy that Jon and I have outlined today.
Finally, before I pass to Matt, if we now think of the whole of BOQ business, there are over 100,000 customers, clients, relationship points of contact. There's over 75,000 relationships and points of contact in BOQ Finance. There's nearly 20,000 relationships and clients in BOQ Specialist. Then we have the business bank and financial markets.
So the exciting thing for us and particularly for me is if we can get these businesses talking to each other about each other, we can really maximise the potential, and unlock the opportunity for cross-sell throughout the organisation. If we can take advantage of the customer advocacy we already have in the marketplace, and then build internal advocacy and internal referral for these businesses, I'm very confident we can continue to achieve great growth momentum. So thanks for listening. I'll pass over to Matt now. He'll give you an update on the retail strategy.
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Matt Baxby, Bank of Queensland Limited - Group Executive Retail Banking [3]
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Thanks very much, Brendan. I'm Matt Baxby, group exec for BOQ's retail business. I joined BOQ three and a half years ago having spent 10 years with the Virgin Group, including three years running Virgin Money. I wanted to begin by focusing on the consumer segments we're targeting, and how they fit with the brands in our armory. The shape of our retail business is quite different to what it was three years ago. Historically, BOQ operated a single brand, monoline distribution model, with less than 2% of flows coming from channels outside branch, and geographically quite concentrated in Queensland.
We're now in a position where we have greater flexibility, diversity and optionality, and perhaps most importantly, have continued to evolve our offering to align with the needs and preferences of our target segments. The strategies behind the two retail brands, BOQ and Virgin Money, are quite complementary. For BOQ, we know there's a large and valuable segment of the Australian population that value a more intimate, personal banking relationship. These are customers more likely to deal with someone that they trust for life-changing events like buying a home. They highly value the continuity of single point of contact for those moments of truth.
Whilst more likely to walk into a branch or a broker, they do expect their experience to be delivered efficiently and professionally, and in this sense, digital plays a key enabling role. BOQ is already over-indexed in that middle Australian segment, with an emphasis in Queensland based on our network placement. We believe this is a strength to be built on through broker and other low-fix cost channels. Compare this to Virgin Money, a true challenger brand with national appeal. It's rapidly built a customer base through digital and direct channels. Just a couple of data points on that. Second fastest growing credit card receivables book in the market, 215,000 customers very rapidly acquired across lighter-touch consumer products.
That provides a very fertile base to continue to develop Virgin Money through core banking products. The brand is skewed towards some really valuable segments. So it over-indexes in 25 to 49 year olds based in metro and urban areas, particularly in Melbourne and Sydney. These are customers unlikely to ever walk into a branch. They expect a digitally-oriented experience, and most importantly, are open to a relationship with an alternative outside the majors. So as you can see, quite complementary strategies between the two brands in terms of the segments they're targeting. As I mentioned earlier, next slide, we do believe there's a large and valuable segment of the population that continue to value a more personal banking relationship.
BOQ's proposition is all built around what sets us apart. A cornerstone of that strategy has been our owner manager network, and that's been supplemented in recent years by additional channels of growth. Just on our owner managers, there's probably three features that do set them apart. The first is their tenure. So typically six to eight years time in the business, and that compares quite favourably to what you typically see in a major bank. Who probably from your own personal experience will tend to change after six to twelve months, particularly if they're any good. That continuity is highly-valued by customers. They're invested in their business. They're passionate about what they do.
A good example is our owner manager at Victoria Point in Queensland. He'll regularly write business on a Saturday afternoon or a Sunday evening. If that's what the customer wants, that's what he'll do. Finally, the network is pretty effective in papering over the cracks of process failings, or technology shortfalls. We'll continue to deliver a great experience despite that. I guess other features of BOQ, we're smaller and I think more nimble. In reality, what that means is an ability to get feedback from teller to CEO more rapidly. If that means adjusting pricing more quickly, convening an executive credit committee, or indeed swarming around a complaint, that's exactly what happens.
But no customers expect all of that to be packaged up professionally and digitally and efficiently, and that's where digitisation plays a key role here, ensuring customers can move between those moments of personal interaction with their manager efficiently. How do we know we're getting this right? I think whilst there's still a huge amount to do, we have seen the single largest improvement in MPS across any financial services provider in the market from bottom of the pack to within striking distance of the best, and significantly better than the majors. This is a great starting point as we continue to evolve our offering.
So that's segments, and a bit on the BOQ proposition. Myself, Peter, Donna and Vimpi will now cover the four pillars of our strategy in a bit more detail. The first pillar is putting customers in charge, and as Jon mentioned, consumer preferences for how people want to deal with their bank are fundamentally changing. A key part of our strategy is ensuring we continue to evolve with this. We have three clear priorities. The first is continuing to scale up our broker channel. The broker market in Australia has continued to forge ahead. I think I read the latest Roy Morgan stats for last month that put broker flows at more than 52%. That's up from 35% a few years ago, and as I mentioned earlier, BOQ's been one of the few market participants that hasn't leveraged third party distribution heavily.
As a result of that, every dollar in the door for us, from the broker channel, represents incremental growth. A question I often get is why would brokers give us their next dollar beyond just product and commission, and I think there's two parts to that answer. One is of the brokers I talk to, they highly value the diversification of dealing with an alternative lender. They'd like less concentration from the majors. The second is our local service proposition. So we've deliberately structured our BDM team, our broker support unit to be as close to the broker as possible. If that means simple things like answering the phone, giving status of where deals are up to, giving them certainty for their customers as to where things are at, that's exactly what we do.
We'll continue to build out our coverage of our brokers. We've prided ourselves on measured growth underpinned by a strong service proposition. We exited 2015 with broker flows north of 20% of total flows in the bank. In 2016, we've set ourselves a target of accrediting 4000 brokers, which should see continued momentum. The second priority for this pillar, around putting the customer in charge, is re-igniting growth in our network. As I mentioned, our branch network remains the cornerstone of our service-based proposition. It also plays, obviously, a key role in gathering retail deposits to fund our growth. We have a very focused strategy to continue to evolve our network to stay relevant to consumers, and there's three parts to this strategy.
The first is optimisation, and I think at the half year we talked about the activity that we'd taken to continue to shape the placement and format of our network. We know our owner-manager model, which is typically a hunter model, less dependent on micro-location. Works best when a manager can own their local community. With corporate branches, on the other hand, more reliant on footfall, and have been progressively repositioned at more strategic locations over time. A good example, 12 months ago or so, we relocated our North Ryde branch to the Macquarie Centre. Implemented our icon format which is a smaller, more effective branch format.
Made some changes to the operating model, introduced some new technology with tellerless cash recyclers. The results have been very pleasing, 2.5 times performance uplift versus peer branches.
So over the last 12 months we've made in excess of 30 changes to our network, a net production of about 18 branches, I think we disclosed at the half year. And this was driven by a variety of things: retirement of owner managers. We had a number of them come to us and say we want to create a partnership with the economies of scale of the larger branch, take that forward, as well as some exits and closures.
And our expectation is we'll see about the same again in the next 12 to 18 months. But, really, at the heart of it, these changes are designed to ensure our network remains relevant to consumers, that we can underpin sustained performance across the network.
The second aspect of our network strategy is capability and productivity, and there are probably a couple of parts to this. Twelve months ago we launched our (Fitter for Biz Program), which is a coaching program across our owner managers, designed to turn them from good technical bankers to great business owners, and it's obviously a neat connect part of our model.
We found that small format -- think sort of mini MBA -- to be an effective change vehicle. And the cohorts of 88 owner managers who participated or opted in to the course have seen about a 16% lift in their scorecard performance as a result.
The other part is really -- goes to the heart of productivity. And Jon's mentioned before clearing the clogged arteries in the Bank, and the Bank's leading position as shufflers of paper. The reality is our network's right at the pointy end of this. We're already seeing very positive signs in terms of a productivity lift as a result of the retail lending program which is rolling out, and Donna will cover in a bit more detail later.
Finally, for our network alignment is the other element. So from February we began rolling out our new franchise agreement. And right at the heart of this is realigning our owner managers' economic structure from being all about the next lend to a more holistic view of their business.
So combined with the Mallet scorecard, the new O&B agreement rewards our owner managers not only for achieving those lending targets, but all the other things that are critical for running a good bank; so achieving cross sales, driving deposits, hitting the compliance measures, ensuring they're efficient, ensuring they're leading their team the right way.
That scorecard's dynamic. It can be adjusted on a quarterly basis, which enables us to pull levers depending on what the order of the day requires and, probably, as I said, most importantly, ensures that the interests of the Bank and their owner managers are tied as closely together as possible.
An illustration of the impact -- you'll see on that chart we've seen a 21% lift in cross cell points under the balance scorecard year-on-year, particularly for the cohort of branches that have moved on to the new commission model. That plays through in things like the strike rates of MPI that -- the St Andrew's product that we run. And that translates through to an economic lift for the Bank.
We'll continue to roll out the new agreement as our franchise agreements come up for renewal, or selectively, as required. But across each of those three elements we have seen some positive signs of productivity lift in our network. I think we disclosed at the half year 1% absolute lift in settlements. And the chart there shows an index view on a settlements per branch basis, which, again, sees the step change in FY15.
The final part, the pillar of customer in charge, is really leveraging the Virgin brand in financial services. And this is something -- having spent a great degree of time with Virgin -- that I'm particularly passionate about and excited about. As I said, that strategy's quite complementary to BOQ in terms of the segments it will attract.
We remain on track to launch a Virgin mortgage in the first quarter of 2016, and this is really the first step in developing a deeper relationship with customers open to an alternative. And the conditions are in place for that to go well, I think: 215,000 existing customers, a very strong relationship with the airline and its Frequent Flyer Program, an opportunity to penetrate further into the broker market, which will be its go to market strategy, and then direct to consumers as that market develops.
It's a relatively small part of the market today, but this is great optionality for us, going forward, and this provides a platform for further products over time. As I said, personally, very positive about this. I saw the power of the brand both in Australia, but also Virgin Money UK, and that business continues to outstrip system in the United Kingdom.
So I think, in summary, I think BOQ's pretty uniquely placed to pursue some avenues of growth that are unique to us: driving penetration through the broker market, leveraging the Virgin brand in financial services and continuing to harvest productivity gains across our network.
So now I'll hand to Peter to talk about the second pillar of our strategy, grow in the right way.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [4]
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Thanks, Matt. As Jon introduced, I'm the Chief Risk Officer, and I think many of you know I've been here since early 2012. I think, just a general comment, it's been fantastic to see the progress with all the business strategies over that three and a half year period and, concurrently, as we've talked quite a bit, made really, really good strides in building strong risk foundations.
The initiatives that Brendan and Matt have talked about this morning, they'll continue to be matched by really strong risk teams and a healthy risk culture. I think we've got really sound structures and frameworks now embedded across the organisation, and I think they give us a good platform to manage what will be new challenges in some of the business areas.
We've spent probably the last 18 months progressively rolling out modern fit for purpose three lines of defence models across the Bank. And I think, as most of you are aware, all stakeholders -- not just regulators now -- are seeing the value in having something which is embedded and functioning properly.
We do see some real tangible benefits from having something that works. And it's not just a tick the box compliance activity. I think we're really looking to see us lower the risk profile from an operational risk perspective and deliver bottom line savings in terms of actual operational risk losses that are avoided.
Focus is also taking place on ensuring we've got the right front line credit skills to originate and manage exposures, particularly in the business base, where we're moving into some new sectors and increasing our exposure to existing sectors.
I think there's always a lot of investment that's going into credit models and analytical tools, and there's a lot of desk talk around data analytics in the risk space, but when it comes to relationship management, relationship managed exposures, it's really important to have skilled and experienced personnel.
Financial analysis and expert judgement for both front line relationship personnel and credit personnel can't actually be replaced, and it's important we make sure we've got the right people embedded in BOQ business to exercise that judgement.
I mean the smaller SME side of business banking -- we see opportunities to improve our customer service proposition through things like increased automation and credit scoring. Today we had very limited automation in the business space. What we do have is in BOQ Finance, the small ticket equipment finance transactions. That's pretty well the extent of auto scoring and decisioning we have.
We do see there's some upside in introducing a few things in the coming years around improving (time TS), improving the customer experience and lowering the cost of some of these transactions, because, as Matt touched on, we are still fundamentally manual and paper based across a number of these lines of business.
I mean retail banking, as Matt touched on, the near term focus is really leveraging off the investment we've made in the lending program. The acquisition of BOQ Specialist and the forthcoming launch of Virgin Mortgages next year will give us even further scale in the retail portfolio.
There are a number of initiatives we will roll out and, again, touching on moving from somewhat manual in some of our home loan portfolios -- and BOQ Specialist is a good example. Every home loan it originates is manually touched by a credit manager, and that's for all types of variations, increases for existing exposures.
We've got auto decisioning and auto valuation tools in place with BOQ Retail. It's a relatively simple exercise for us to roll that across BOQ Specialist. And that, again, will actually improve response times and reduce the cost of some of those smaller credit decisions.
Briefly touching, I guess, on the regulatory focus in the last 12 months on residential mortgages, I think, as Jon and Anthony talked about at the full year results, we're actually quite well placed to cope with what's both increased regulatory scrutiny and some of the restrictions around investment lending.
The resources in investment we've put in to retail credit around portfolio management since about mid-2014 has actually really paid off, and we've got a very clear line of sight, and have had for virtually all of this calendar year, of what's happening in the portfolio, which has enabled us to have very good quality conversations with the regulators about where our flows are and where risk appetite sits.
Just on risk appetite -- and BOQ Specialist will continue to see us originate a relatively higher proportion of high LVR loans relative to peers, but these are well within our risk appetite, are very good quality medical and finance professionals and, importantly, it's a business that's well understood by the regulators.
The experience we've had since acquisition in August 2014 has confirmed our initial view that it's a very low risk customer segment offering superior risk and return equation.
Finally -- and Brendan touched on this -- a reminder that our overarching strategy continues to be one of diversifying our portfolios, both geographically and by industry. We're into, effectively, our fourth year now of diversification away from Queensland.
If I look at the portfolios, we remain comfortable with our overall level of commercial real estate exposure but, importantly, need to continue to drive into other segments to make sure that the balance is maintained and we continue to have new clients and exposures in the non-property segments.
If I look at BOQ Finance and BOQ Specialist, I mean that's given us a very, very strong starting point in non-commercial real estate exposures, and the future growth we have --will come through those segments as much as the business banking itself.
Jon touched on that. Look, we'll inevitably have cyclical movements such as the one we've seen, probably, since mid-2014 in the equipment finance portfolio. It has been impacted in WA and Queensland with the downturn in the mining sector. The main mitigant for that, from a strategic perspective, is a larger and more diversified balance sheet and revenue streams, because there will continue to be cyclical downturns in one or many sectors in the coming years.
Just moving on to the next slide, slide 21, and just -- I briefly want to just talk about, I guess, our longer term road map for risk management with the BOQ Group. As we've talked about, probably, the last three reporting periods, BOQ doesn't have a formal Basel II advanced accreditation program.
We've been mindful of the uncertain regulatory landscape for many years now. The lack of certainty about whether or not an investment will actually pay off -- and as I think most people -- where it's a significant expense to go through a full Basel II advance accreditation program over many years.
The outcomes of the financial system inquiry -- which we all now know -- and Basel IV -- or everything they colloquially call Basel IV -- which is not yet known -- it's really reinforced in our mind that this has been the right strategy to not mobilise a large program and a large investment.
I think if you look at what's come out in the last couple of weeks -- where the Basel committee's flagged that it's considering scrapping the need for detailed capital modelling for operational risk -- I mean a lot of the spending the industry's made is, effectively, redundant, and they almost become stranded assets. So we're pleased, again, that we haven't put unnecessary resource and expense into something that is, ultimately, probably not going to be needed.
We're hopeful, however, that there might be a shorter either staged or partial accreditation path for smaller banks such as ourselves. We will continue to have discussions with APRA through 2016 on whether there is an easier path to BASEL II advanced accreditation.
It's highlighted on the slide on the left hand side. We did touch on this at the full year results. We are nonetheless continuing to invest in risk management for both business and regulatory reasons. Much of this investment will hold us in good stead should we make a decision to reactivate a BASEL II program in some form or other.
With that I'll finish and I'll hand over to Donna.
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Donna Vinci, Bank of Queensland Limited - Group Executive Enterprise Solutions [5]
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Thank you Peter. Good morning. My name is Donna Vinci. I joined the bank in July as the group executive for enterprise solutions responsible for the operations, the technology, the investment program office and a remit to drive the digital disruption innovation. I bring with me to the bank over 30 years of financial services diverse experience and holding senior executive roles such as the head of digital, the global head of risk management, chief operations and technology officer and several regional and global CIO roles; all of these with global tier 1 organisations such as Citi, Warburgs, NatWest and more recently at Westpac and IAG.
Throughout these roles I've had an extensive track record in delivering transformational change for these large organisations. I am looking forward and absolutely delighted to be able to leverage my experience at BOQ and a strategy that I'm very passionate about.
I've only been here for four months, so it's early days. But I wanted to share with you some of my initial observations. Clearly BOQ has been on a journey of business growth and investing on that strategy. I've been very pleased with a number of things that have struck me already that create considerable opportunities. I've been impressed with the talent of the organisation to deliver; our depth and breadth of our strategic partnerships and how they are maturing and getting stronger. I've also been really excited about the business' desire to improve and adapt.
As Jon and Anthony have been pointing out for some time the historic obstacles that we've had to deal with is the high level of our manual processes, our complexity in our bank's IT architecture and our lack of innovation over the last few years where we've lost some of our innovation edge.
A big part of my remit is to unblock the value chain and in Jon's words, clear the arteries of the bank and to reignite our innovation agenda. Key to achieving this is by us finding better ways. Firstly, importantly a priority for us is improving our customer engagement by driving our customer service culture and platforms that wins business. Embedding our data and analytics capability to focus our decisions and anticipate our customer needs as they go through their life events; and digitising our bank end to end and connecting to a greater ecosystem.
Secondly an area that I have immense experience in is reducing the complexity of the technology landscape. Finally increasing our productivity across the value chain by simplifying and automating our processes and to drive smart cost reductions and to help achieve our cost income target.
Within a small bank I recognise that the best approach is not to build an IT empire but to build a strong core and to create a network of strong partnerships with key domain leaders in IT, digital and process and build this out as a key competency for the bank. This gives us a much wider reach, lower costs and faster access to Fintec to assist us with the digital disruption that's happening for our customers up and down their value chain. This leverage is absolutely key for any company to be competitive in a modern era and will allow us to be extremely nimble in the future.
At BOQ we are already focused on this. We have some very promising results. In my experience delivered well, this model will culminate in a great customer experience, is in line with our strategy and will help enable Matt's and Brendan's businesses and their priorities.
So let me give you three examples of projects delivered or under way in the last four months which encapsulate these sorts of concepts. We are really excited with the launch of our retail lending origination platform in October, the RLO program. This is a marked step in our journey towards automation. RLO simply put is the digitisation of our lending process reducing our time to yes from days to minutes, and on average circa about 58 minutes and in some cases even faster, in 19 minutes. With our first release the new system is already showing the early signs of benefits in the time efficiencies that we've gained from our one stop shop of all our calculators and tools and in how we're enhancing our customer conversation with the aid of the digital capture platform for our brokers and our branch lenders.
The real time validation and the work flow is improving our data quality, reducing our errors and our turnaround time. The outcome is a great customer experience, higher conversion rates and lower costs to process our loans. We'll be building on this momentum in our future releases.
Another example is our management customer reporting dashboard. What was the management reporting process for customer insights and sentiments used to take us a month for an internal team to pull together. It was clearly unsatisfactory in the terms of the manual and lengthy nature of the process but also in the outcome. The information was already out of date by the time it was delivered making this very unfit for purpose and responding to our customer insights in a timely way.
Working with one of our strategic innovation partners we were able to develop a real time reporting tool and dashboard, incredibly, in three weeks. We now have access to this dashboard on any device, our notebooks, our tablets, our mobile phones. This is allowing us to be responsive based on real time data any time and anywhere. We're now extending this capability to solve other blockages.
The third example is in our mobile space. Mobility is a key focus for us going forward demonstrating our move to mobile first and over time mobile only. We already have a mobile banking experience which lets our customers securely bank from the convenience of their mobile device. Shortly we'll be launching our next generation of our mobile banking app which will further improve our ease of use and convenience for our customers and with our latest version providing many more personalised features.
Our mobile banking app evolution we have trialed changing our delivery model and leveraging our partners. The result is that we will be able to deliver updates in three month windows rather than the nine months that we original forecast.
Increasing self-service through digital as my colleagues talked about is going to be a great, important pillar for us in improving the customer experience while reducing our operating costs going forward. So the innovation delivery model to create this new speed is a big milestone for us.
What is really exciting is the momentum that we're now building. Three common themes run through these examples that underpin the recipe for success. Firstly our access and leverage of our strategic partners, learning from others and helping us to catch up quickly. This is allowing us to punch above our weight.
Secondly, striving for delivery excellence. It's also been a real key in maximising our investments and reducing our window to market. Most importantly our relentless focus on our customers and making it easier to do business with them.
Just to wrap up before I hand on to Vimpi, all of us here at BOQ know that we still have a lot more to do. However we are confident that we are on the right path now. We're improving our execution capabilities and our ability to keep up with the market and our competitors by being smart in how we use technology and how we deliver our technology and services to our customers. We're committed on delivering our roadmap and to ensure that we get the best possible return on our investment.
I'd like to hand over to Vimpi now who will talk through our final pillar, loved like no other.
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Vimpi Juneja, Bank of Queensland Limited - Group Executive Product and Strategy [6]
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Thank you Donna. Good morning. My name is Vimpi Juneja. I lead the newly formed product and strategy division at BOQ. Earlier in the presentation, Jon and Matt shared with you the significant strides we've made in improving our net promoter score and lifting our internal cultural settings. At BOQ we believe that investing in intangibles like customer service, like diversity, like talent, like leadership and like culture have the real potential to deliver meaningful shareholder outcomes if properly harnessed.
Our market leading net promoter score is a great asset. But as you can see in this chart we have not yet converted this into superior cross-selling outcomes. Put another way our service advantage is not showing up in a sales advantage. While our customers tell us they would like to bank more with us we haven't had the product range up to this point to meet their needs. As Jon stated at the start of the presentation much of the focus over the last three years for the organisation has been on remediating the foundations of the business. So quite naturally it's made a lot of sense for product development to take a back seat in that period.
Looking forward we are committed to sensibly broadening our product range to close key gaps in financial markets and business credit card as Brendan has already spoken to you about; as well as to explore how can we take the market leading products that Matt has highlighted in the Virgin portfolio around our credit card, insurance offerings, superannuation, to a broader retail base. The other point I want to make about cross-sell is, while all of us as banks talk about it you know and we know that making it happen is incredibly difficult.
In my previous role at a big four bank my role was to design and enable a new sales team model to drive cross-sell across 4000 business bankers and product specialists. There we had the products. There we had primary relationships with many of the leading customers in Australia. We had analytical capability to understand where leads were. We also ended up aligning the incentives. Yet still the cross-sell rates didn't change. That's because in my experience at the heart of cross-selling is where we started this conversation. It's in the intangibles. It's in changing the behaviour of the front line staff to feel motivated but especially to feel confident that they can approach a customer and have a conversation with them about meeting another need that they have.
It's essentially a change management exercise. I have to say compared to the execution challenge of trying to line up 4000 bankers to execute, here at BOQ with 230 branch managers and one hundred odd bankers across business banking and BOQ Specialist, I feel a lot more confident in our ability to line that up and see execution drive through to the point that we can see a sustained uplift in our non-interest income line.
With that I'll turn it back to Jon to provide some concluding comments. Thank you.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [7]
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Thanks very much Vimpi. There's one thing that I left out in my opening remarks. We also have another group executive. She couldn't be here today. That's Michelle Thomsen who is our new chief legal counsel and company secretary. Michelle brings a really rich depth of experience both working in very large legal firms in Australia and overseas, and also more recently company secretarial experience for a major listed financial services company.
I'll quickly summarise because now doubt you'll have a lot of questions. But if we turn to slide 26 -- go back to my opening remarks. I think it is really a mug's game for us to try and create ourselves as a mini-me of a big four and to try and get those scale advantages. What you have seen today and heard today from the group executive is a very laser-like forensic focus on what we're actually going to do in the markets we choose to play in and the piece around this is the absolute execution in those markets that we choose to play in, and not trying to be all things to all people.
It is quite clearly a very pragmatic set of strategies and we have going forward. I fundamentally believe that this executive team and the broader BOQ team, we're in a good place to be able to execute on that.
To summarise the key points of differentiation of our strategy, if you look at the graphic we absolutely believe being focused and specialised into customer segments and products will bring a superior outcome for the bank. Being smaller is fundamentally beautiful for us. We've got a great owner manager model. Time and time again our very, very good owner managers outperform and out-achieve -- if you look at what they can achieve in other banks as branch managers.
As Donna outlined on the digital perspective our customers are looking for a more personalised experience. It's not about us building that in-house. It is absolutely about us leveraging what we can do with our global partners. We have partners with HP, but a great tangible example of that is what we've actually achieved in our lending program. We said that we would drop the first stage of our lending program in October. We've made some really pleasing progress. The fact that we've gone from days and shuffling paper to telling a customer when they would have their home loan approved to a day or hours is a significant improvement for us. We did that by utilising a mid-tier firm out of India. I have to say they have pulled out all stops to assist us to get us to where we need to be rather than build that ourselves.
I think finally for us it's all about culture. I'd have to say that the large banks are very impressive institutions. I'd have to say my time at a large bank -- a great place to learn your craft; a great place to have many different experiences. But again when we think about what we can achieve at BOQ we don't have the layers of bureaucracy. We can get closer to customers. We can bring to bear an executive credit committee to make a decision for one of Brendan's customers literally in days as opposed to weeks.
If we turn to the final slide the graphic shows the four boxes. It shows the opportunities for us against our strategic pillars which is really, really important. I think you've heard quite a lot today from the group executives about where those opportunities are, where we'll be focusing and where we'll be lining up our resources and our investment dollars.
The overarching goal for us is to out-perform on EPS growth over the longer term while balancing the other key metrics such as our margin, our jaws and our ROE. We'll have a range of those metrics internally which we will actually hold ourselves accountable to.
Finally I would like to thank you for coming to listen to us today. It has been some time since we've given a strategy update. We look forward to now taking your questions which we've allowed plenty of time for, and then enjoying some light refreshments afterwards. So once again thank you very much.
Brian you've got your hand up already. You're first cab off the rank.
+++ q and a
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Brian Johnson, CLSA - Analyst [8]
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Brian Johnson, CLSA. Looking at the slides today you're doing a 14.7% return on tangible equity. There's no really dancing around the issue Jon is, you're having trouble originating. We've got NAB with Ubank that's pricing their home loans at 3.99% versus NAB at 5.6% something or other. What is the strategy with Virgin with this new mortgage product? Because I suspect the correct term in describing housing profitability in Australia is probably egregious. Shouldn't you be launching that with a lower price perhaps even than NAB?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [9]
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Thanks for your question Brian. Look, I'm not going to go into the specifics of how we're going to price the Virgin mortgage. We're not going to telegraph that to our competitors. But I've got to say this is one of the most exciting opportunities that the bank has. If you think about it Virgin is a world class brand. I had the opportunity to sit down with Richard Branson to explain where we're going with our strategy and as Matt eloquently put today, really complements where we are with BOQ.
You probably don't have to be a rocket scientist to draw out that it may have something to do with an alignment with the airline and points. But we believe that Virgin will be a true differentiator for us. As I said at the last results presentation we will look to do incremental things with that brand; build out the deposit capability; build out the digital capability. I might just get Matt to add a few more remarks onto that. But we're very excited about Virgin.
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Matt Baxby, Bank of Queensland Limited - Group Executive Retail Banking [10]
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Yes, I think there are probably a few points. My experience has been (1) the power of the brand is obviously evident. It doesn't always need to be a price play. Consumers go looking for the value proposition and really importantly that the service proposition stacks up. So all of those elements need to be in place. Jon said it's not -- I don't think we're in a position to telegraph exactly the shape of that. But we know there's a segment of the population that the brand appeals to. It's large. The airline moves 18 million people each year, have seven million people in their loyalty base as well as the 200,000 odd customers that Virgin Money have themselves. So a fertile ground to continue to grow the Virgin base out.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [11]
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Yes look we're going to work very closely with the Virgin family. We're very aligned so we're generally excited about the progress.
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Andrew Triggs, Deutsche Bank - Analyst [12]
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It's Andrew Triggs from Deutsche Bank. Just a follow-on from Brian's question -- on that 3.99% clear path discounted product for larger loans effectively is the cheapest 100% offset account of any major financial institution whereas a lot of the discussion today was about effectively building competitive advantage where it doesn't require competition on price. So perhaps how you could sort of justify that heavily discounted rate given what you've said today.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [13]
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Look, the way I think about it -- this institution has been around for 140 years. So we've been fighting the good fight on competition for a long period of time, and there is no doubt that we are probably in the most competitive market environment that we've seen for a long period of time.
Obviously, banks move prices around, and just to give you an example of what nimbleness can bring for us, we saw an opportunity some time ago in the fixed-rate space. We were able to go to the treasury, we were able to go to pre-hedge and we were able to go to market very quickly with a very, very good, sharp, fixed-rate price that gave us a very, very good return.
Now, I know the experience at another big institution, the ability to do that takes weeks, takes weeks. You've got to go to the treasury committee, you've got to do this, you've got to do that, and by the time you get there the swap rate has moved.
But again, we remain committed to being competitive in the marketplace, and I think the challenge for us is to continue to build on what we see as significant upside around the cross-sell as well. And I'm not going to go into what our competitive strategies are, but we actually have to be in the marketplace, we do have to be competitive to get our growth agenda.
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Anthony Rose, Bank of Queensland Limited - CFO [14]
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Look, I might just add to that. I think the -- I think we need to acknowledge that we are an organisation that in particular the existing branch base network has been a period of internal focus and internal remediation across changing risk appetite, a re-optimisation of the network, and we've talked about another 12 months of that activity still to go.
At various times you do need to be in and out of the market to have momentum in your business and make sure that it still remains viable. I think our future aspirations would be that going forward there's no reason why on the asset side of the balance sheet we should need to play the price lever with all of those various levers of growth and the different brands that we'll be bringing to market, through Virgin for example, that will be available to us.
But where that network is at the present time, from time to time we have been in there with some sharp offers, which is a reflection of where we are. We do think we're on that cusp of being much more future-focused about the longer-term growth and momentum and looking forward to the benefits in productivity that we expect to really come through 2017 as we've unclogged those arteries and we continue to deliver on the removal of the paper.
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Unidentified Participant [15]
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(Inaudible) from Citi. I've just got a question on the net promoter score. How do analysts see that manifest itself in your financial performance?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [16]
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That's a question -- that's a really good question to ask. We can sit here probably days on end and say -- to come up with a number or a justification by that. I'd rather be much on the positive side of a net promoter score, but if you look at banks traditionally -- if you look at some banks that have a very, very low net promoter score or where they are heading -- or that net promoter score is continuing to go down, over time the financial performance is going to deteriorate.
It's the same with culture or cultural underpinnings; if you're an organisation that has very, very poor cultural outcomes or very poor ethical outcomes, there's only one way where the share price will go. And so for us, for us at BOQ it is making sure that we maintain those high standards so that we actually continue to aspire to get a higher net promoter score.
I'll concede that being a smaller institution, the smaller institutions tend to have a higher net promoter score, but our ambition is to have the highest and is actually to maintain it. And some of the stuff that Donna talked about today, having that immediacy around looking at a dashboard to see where customer complaints are or where the resolution of disputes are or where we are with the Ombudsman and FOS are things that are really important to us going forward.
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Victor German, Macquarie Bank - Analyst [17]
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It's Victor German from Macquarie Bank.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [18]
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Sorry, Victor. Just a sec.
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Victor German, Macquarie Bank - Analyst [19]
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I was just hoping maybe if you Jon, or Anthony, could elaborate a little bit on your aspirations to grow your EPS growth above peers? I appreciate, and I certainly don't want to take anything away from this management team, you've obviously done a great job over the last couple of years, but part of the superior EPS growth has been fixing the bank, addressing credit quality issues and that's been done well.
Now that that's embedded, going forward how do you actually see that transpiring to ongoing EPS uplift relative to peers? Do you see that as a regulatory environment should be supportive for the regional banks, and that's part of the driver, or do you actually think excluding all the benefits that you might get from that regulatory side you should still get stronger growth than your peers? And then just a follow-up question.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [20]
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I might just make some high-level remarks and get Anthony to talk to that. If any of you come to the AGM, which will be later in this week, you'll actually see that we have two measures for our long-term incentive. One is outperformance on TSR, which is for 80%, and a new measure which will be EPS growth at 20%.
And I've got to say that the leadership team is right behind the measure where we want to hold ourselves accountable for outperformance on EPS. I'm sure -- there's often a lot of debate about the two measures but that's where we've actually landed. And I think it's incumbent upon us to set ourselves some aspirational, lofty goals in terms of what we want to achieve for our shareholders and for our customers. So those two measures are really, really important for us.
The question you're asking is are we getting a free kick with the change in the regulatory environment, and I don't necessarily think so. What you've seen in front of you here today is some very clear strategic direction and lines of business that we want to actually take the bank -- which we believe will deliver us the performance to allow us to actually hit those EPS goals. Anthony?
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Anthony Rose, Bank of Queensland Limited - CFO [21]
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Look, I'd probably break it up into two components. I think we absolutely have set ourselves a task of outperforming on a fundamental basis to the rest of the industry. That goes to the being simple, being nimble, having the levers now that we think has put us in good place to actually outperform, when we take advantage of what we see in front of us. It's not going to be easy, it's going to come with challenges.
There is certainly another element over and above that, that we do believe is likely to provide a tailwind for us around outperformance driven by the regulatory changes and what may play out in that regard. What I can assure you though is to Jon's comment around the LTI structure, the Board is not blind to that situation and in effect for full vesting of that element of the LTI you'd be looking at peer-leading performance in absolute terms.
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Victor German, Macquarie Bank - Analyst [22]
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So following on that, if you take a step down below EPS terms, where do you see your best opportunity to outperform? Is it going to be volume growth-driven, margins-driven, expenses-driven?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [23]
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Well, I actually think it's a combination of all of those. We're not -- when you sit here in a leadership position you're looking at all of the levers, but you're also looking at about what's in front of you too in the operating environment and the landscape. I think this team has demonstrated over the last three years that we don't just sit there and think about volume as opposed to risk as opposed to the other side of the balance sheet in terms of deposits.
So we're not going to sit here and say it's one lever that we're going to pull really hard; I think there are great examples of many institutions that have pulled one lever really hard to the detriment of their financial performance. So it's about having a pan-wide bank view of the various aspects that we can control, and also having a very watchful eye in the operating environment.
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Ed Henning, CLSA - Analyst [24]
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It's Ed Henning from CLSA. Lots of talk today about digital IT, infrastructure and investment. Can you run through the technology -- technology costs money -- can you run through what you're doing here and the outlook for spending, and also the capability going forward?
And to date you haven't really upped your spending a lot on technology, talking about partnering and things like that. And if you don't spend more -- do you feel you're going to fall further behind and if not, why not?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [25]
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Look, at the last results we gave quite extensive guidance on where we see our cost growth over the next 12 months and it was 4% to 5%. Over the last three years what we have done is spent quite a bit of money on remediation, stabilisation across the Group in technology.
We have made a significant investment spend in our RLO program and really, for us it's about -- our technology spend is about enhancing ourselves and getting back to market and getting close to our customers and giving the yes. I've talked about it repeatedly; we are world champions in moving paper.
We are probably the best customer for Ahmed Fahour; we are probably Toll's best customer. You've got no idea how much paper we move. But the ability now that we've actually dropped in October that basically says you can walk into a branch, or the broker can actually put a simple home loan in, press a button and we can do all of our checks and validity checks, credit underwriting scoring and get an answer that says unconditional or conditional approval.
It takes us from many, many days to literally hours, and we're going to roll that out for the rest of the products over the next 12 months. That's where the focus of our spend has been, and again, we've got some things that we're doing particularly around our mobile banking applications that actually get us back to market. But I'd draw you back to the cost guidance that we actually provided and the envelope that we actually have around our depreciation. Anthony?
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Anthony Rose, Bank of Queensland Limited - CFO [26]
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Look, I think we have substantially lifted the amount of investment that we've been putting into the business over the last couple of years, so our capitalised software spend at the low point was AUD55 million to AUD60 million range and we've more than double that now; we're sitting at AUD135 million.
That -- we've talked about a doubling of our amortisation charge over the next couple of years which would see us at a charge of AUD35 million. We're probably spending a little bit more than that at the moment with this existing pipeline that we've got at play. Whether we maintain that level or it reverts back down to the AUD35 million level will really depend upon the opportunities we see in front of us at the time.
But I think affordable with the revenue profile that we've talked about and guided. And that type of volume of activity to be honest is probably, certainly as we see for the next couple of years, as much as we're capable of biting off. I think we need to be cognisant all the time as to the amount of change that you can put through the organisation at any particular point and that to us is -- it feels like the right degree of balance of investment and organisational change.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [27]
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But we've always got to keep one eye on the regulatory environment. I think there was a lot of discussion last week about a GST on financial services, and if you thought about that, those sorts of things are incredibly complex and no doubt would be expensive. I haven't turned my mind to thinking about that yet, but you need to keep one eye on that as well.
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Ed Henning, CLSA - Analyst [28]
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Just a follow-up there, sorry. You said you're going to roll out to other products in the next 12 to 18 months. Does this mean you're going to have straight-through processing for business, for agri, for everything else?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [29]
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No, it's not for business. Where we've started on RLO is for our very simple Clear Path home loan and then what we'll roll it out for is then fixed rate loans, then for multiple parties, split loans, all sorts of different things. So we'll cover off about 90% of the various loan variations for mortgages that you can actually have under our lending program.
We're doing it on a staged basis because this is also a massive cultural change across the organisation as well. We want to be careful about the training that we provide and we're doing it in batches as we also do further development and drops.
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Anthony Rose, Bank of Queensland Limited - CFO [30]
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I think Peter has got a comment.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [31]
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Peter?
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Unidentified Participant [32]
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Just (inaudible) just mentioning Virgin from a digital and banking perspective as well?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [33]
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Yes. Donna, if you want to pick that up?
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Donna Vinci, Bank of Queensland Limited - Group Executive Enterprise Solutions [34]
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Yes. One of the things, which we are focused on, is also how we leverage our investments. So we're certainly looking at the back end of how we process the Virgin mortgages et cetera as we digitise them. One of the things which I would like to add to the other sort of points is that I'm looking at how we maximise our investment dollars so also how do we get more efficient in how we deliver and so within our funding envelopes, how do we actually do more for less. That's already starting to pay some way in some of our early trials so we're really excited about that going forward.
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Jonathan Mott, UBS - Analyst [35]
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Jon Mott from UBS. Just a couple of questions if I could. The first one, you talk a lot about advocacy trust and how it's all going so well but one feel is one that sort of got me by surprise, 29% of your customers hold at-call deposit accounts, which seems very low for a whole bunch of customers that love you. Why so low? There's another question after that.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [36]
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Vimpi, do you want to talk to that?
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Vimpi Juneja, Bank of Queensland Limited - Group Executive Product and Strategy [37]
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I'll handle that, Jon. Because the reality of cross sale's very difficult and the other thing as Matt talked about is that the scorecards in the past have been lending-centric. Then the other point I'd point to is the slide that Jon put up that had the wheel that in transaction deposits in particular as you know are directly correlated to branch footprint and also directly correlated to the number of business bankers that you have.
Naturally, having a smaller footprint leads you down that track as a starting point, as a reality but then when you put on top of that the two previous points I made about a scorecard that didn't prioritise deposits in the past and the training that goes behind what is required in terms of effective cross selling, all leads you to a position of where we're at.
The opportunity that we have through what we've talked about in terms of the annual analytics in terms of really the cultural change of getting our heads around 230 people having conversations with branch managers one-on-one, showing them the data who the customers are in their branch that have a transaction account and don't have a transaction account, how to have that conversation, how to talk to them about the fact that our transaction banking account is superior in the market in terms of absence of fees and flexibility, that is the pathway that we see to grow the transaction deposits.
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Anthony Rose, Bank of Queensland Limited - CFO [38]
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I think too, Jon, a lot of it's historical as well from where the Bank was many, many years ago and the operating model pre-GFC was lend, securitize, lend, securitize but the team's done a wonderful job particularly with the 31 day term deposits. We've actually grown that.
Then I think we announced at the last results the growth in those current accounts.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [39]
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Yes, which I think's a tangible example of the dial being shifted as the balanced scorecard's come into play so 14% lift in transaction account deposits year-on-year and that's a direct result of our network being more lined up to what's important to the Bank.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [40]
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You've got a second question, you have?
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Jonathan Mott, UBS - Analyst [41]
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Second question for Brendan actually. You talked a bit about the specialist segments and the great growth rates and profit pools and all the stuff that you've got there. There's nothing actually - how much money do you make from these segments at the moment? Because it's great to have a 200% CAGR; is that just because we're running off the last of the bad debts over the last couple of years? How much money are you making from these segments so we can get a feel for what the opportunity is to grow from there?
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Brendan White, Bank of Queensland Limited - Group Executive Business Banking [42]
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Anthony won't let me answer that question. In terms of - the way we look at any sector that we participate in, it's all about profitable growth and goes - a little bit of a question there earlier - is that we're not prepared to compromise on our pricing for risk, our return hurdles or our credit quality. Where we are participating they are, without giving numbers they are proving very profitable for us. That's whether it's in the agribusiness as a result of the cross sell and the quality we get in all the way through to the medical and the dental and through to even our property relationships.
The growth rates in those sectors have been very strong and so has the profitability.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [43]
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I'd say, just an example of the medical business is that when we looked to acquire that business we actually put a - Peter put a very, very big team together that literally went file by file, customer by customer on that during the due diligence to actually validate the experience that that team had had in say losses in that particular book. In fact the previous owners had actually - had even done research going back 10 years that actually went and looked at default rates for the medical practitioners and the customers in that subset.
We have validated and even though we've only had it for 12 months the loss experience that we expected and which drives to the heart of your question around profitability, has been met or has been exceeded.
I think we've talked a lot about BOQ Finance as well. There was some history many, many, many years ago where it did have a big spike in losses but what we have done over the last years is really tighten up the underwriting standards, change the nature of the business and where you see the uptick in arrears and/or write-offs which we've talked about a lot, has come through the exposure to the smaller firms in the mining exposed states but it is as we would expect in that particular point of the cycle.
Again the profitability of that specialist business is where we'd expect it to be.
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James Ellis, Credit Suisse - Analyst [44]
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James Ellis from Credit Suisse. Just two questions. Firstly, your identification of BOQ Specialist's and BOQ Finance's Challenger Bank business models within BOQ, does that imply that over time that you incrementally become more of a business and less of an - incrementally less of a consumer orientated bank given that strategic arch which you've got there?
Then secondly in terms of risk management, a big emphasis again today on diversification whether it's across industry, geography, et cetera, as a key tool of risk management. If you look over the fullness of time the thing that really catches regional banks out is single name customer concentration. Can you talk about what you've done in that regard particularly as you've come through the GFC period and what are some of the settings there?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [45]
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I'll make some high level remarks. The first part of your question, no. Retail has a significant underpinning and is the majority of the assets that we actually have in the Bank. Strategically we've sat down and we've made that decision, we are a retail bank with an emphasis on the SME part of the business sector with some subsectors of specialty.
We're not going to be a single name or single industry bank that actually grows a balance sheet a lot quicker than what say the retail does and all of a sudden you're faced with a significant downturn in one sector and you'll end up with lots of losses.
For us there is the broader diversification but the majority of the Bank's assets are in retail and will continue to do so and we're very excited about the prospect of growing the Virgin brand over time and building it out.
Over the last three years, what I will say, there is a lot of experience in Peter and myself and Anthony in the reconstruction of banks that have had not such a great experience through the GFC and our credit underwriting standards that we have within the Bank particularly around single name exposures reflect the deep experience that we actually had during that particular time.
I might ask Peter to some remarks on that.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [46]
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Yes so just specifically 2012 we put in place large exposure framework which goes by risk grade so the stronger the risk grade the larger we will have appetite for and as you go down the risk grades. If you look at property for example single property exposures will generally sit within one or two risk bands. There's a dollar limit for single name for both property and non-property.
We also have a metric which is adding up all of our top 10 largest exposures, can be no more than a certain percentage of the capital base.
With the acquisition of BOQ Specialist last year we raised AUD400 million odd in capital. We made a conscious decision not to actually adjust our large exposure numbers. We did have a discussion about it but I think the general view was it wasn't constraining the business and we needed to be mindful of not so much just the single name but you certainly don't want more than a number of your larger single name exposures getting into difficulty.
We maintain a very strong focus on that. We have concentration limits around property and we also have what we call our development cap. There is a limit on the number of developments adding up to a dollar number at any one point in time and we have obviously triggers and buffers within that. Again it gets - I'll use Jon's word - laser focus at executive credit committee and obviously at Board level to make sure we stay well within that. I think it's holding us in good stead.
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Brendan White, Bank of Queensland Limited - Group Executive Business Banking [47]
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I think you can put all the frameworks in the world around this space but it's critically important to make sure that you've got the right commercial judgement that gets brought to the table. I think it's fair to say, Brendan, that the commercial banking team have evolved over the - to understand what a transaction looks like in the new world.
I think one of the areas that we will absolutely try to over index on in that simplicity and that nimbleness is around making sure that we continue to match risk capability with the sales capability and provide that right degree of support and natural tension that make sure we have a healthy and sustainable institution. If you get either of those things out of whack that's invariably where you get yourself in trouble.
We also have I think a cultural undertone of transparency and openness which is embedded within the culture and it is all about bringing all of those issues and risks to the table and that's transformed a lot from where it was as an organisation when we started. It's those sorts of things that we look to to make sure that we will survive.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [48]
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On any given day I can look at a risk dashboard for the Group and I can look at it on an individual business basis. One of the things you do learn in big banks is the operations of very important forums such as the executive credit committee and the risk committee and I'm pleased with the progress that we've actually made over three years that risk is at the front and centre of what we do.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [49]
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Anything over AUD15 million for new increased exposures comes to me and my senior credit managers and over AUD15 million existing or increased exposure comes to credit committee and you're looking at it.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [50]
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AUD25 million.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [51]
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AUD25 million, yes and you're looking at the credit committee here on stage.
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Matt Dunger, Morgan Stanley - Analyst [52]
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Thanks. Matt Dunger from Morgan Stanley. Just following on from the question on credit quality, you've got a higher specific provision coverage versus peers. What does this reflect? Is it more conservatism or is it more related to the historical legacy assets?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [53]
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You can ask Peter or you ask me but you can go first, Peter.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [54]
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I know you guys do a lot of peer comparisons and the composition of each bank's portfolios, they've got their nuances and differences. I think if your question's on specifics, we've certainly had the guiding principal of we don't want to go back and do top ups on individual loans so the team do provide I think on a realistic, possibly slightly conservative basis file by file but again it's the practical realities of again I don't want to be signing off on five top ups to provisions because either the market's moved or the costs associated with realising an asset.
I think it's just the way we do things.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [55]
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I've been mentally scarred with top ups I can tell you.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [56]
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Yes so that's one aspect. I was expecting you to go down the collective path as well and I think just provisioning more broadly and I think the answer if you're going to go down a collective question is that obviously our loss experience from that GFC period meant that we did probably lose a little bit more than what we would have expected and possibly for like for like commercial real estate exposures than perhaps peers so as a result we probably have a little bit extra guiding principal.
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Anthony Rose, Bank of Queensland Limited - CFO [57]
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Not centralist I think is a fair reflection would be what I would add.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [58]
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Do we have any questions from online? We'll probably finish up shortly. We've got time for one more.
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Phil Parker, Altair Asset Management - Analyst [59]
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Phil Parker from Altair. Just a question I suppose for Donna around the general digital transactions of 60%. You mentioned there on the chart 73% target or 73% of competitors. Is there a target to go towards that? I don't believe that was mentioned. If there is are you looking at the usual metrics for increased leverage in certain areas of the Bank?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [60]
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Donna do you want to take this?
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Donna Vinci, Bank of Queensland Limited - Group Executive Enterprise Solutions [61]
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Matt can talk about the targets.
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Vimpi Juneja, Bank of Queensland Limited - Group Executive Product and Strategy [62]
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Actually I might take this. Invariably, you're right, our existing transactions through digital channels, through digital and mobile are at 60%. The industry according to band and company puts it around 73% plus or minus on different banks.
There's no doubt that if you look forward to 2020 the vast majority of us would prefer to do almost everything digital. If we're looking forward to 2020 what I would say is that if we roll things forward it would be very surprising if the industry wasn't at 90% and so invariably we've got to find our way to catch up with the industry to end up in that space.
On a year-to-year basis there isn't a specific target in place apart from the points that Donna has made around saying the more that we can enable customers to self serve, the better experience for them and the operational efficiencies that will follow on the back of that. We're very, very acutely aware of wanting to help our customers to self serve and to get the information and the ease of service that they can get from digital channels.
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Phil Parker, Altair Asset Management - Analyst [63]
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In Peter's presentation, I think it was on page 20, you've got other commercial loans 26% which is a pretty big chunk. Can we assume it's the usual culprits of mining, agri and additionally with 31% to the property market, should we be concerned about that with where we are in the cycle?
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [64]
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We don't do - I just want to be really clear - we don't finance mining. We don't do project finance. We don't do holes in the ground. I'll hand over to Peter to talk about that.
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Peter Deans, Bank of Queensland Limited - Chief Risk Officer [65]
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Yes, the 31% is actually property and construction. That covers a wide range of asset classes and customers. What really skews it a little bit is BOQ Finance so it provides essentially wheels and trucks, some cranes to the general construction and civil engineering industry. Some of it's mining, some of it is just basically what you see around the metropolitan cities.
We've got a lot lumped in there. If you look at commercial real estate, two big buckets, development exposures and then investment and then investment in turn is split up into shopping centres, not so much office buildings, we don't do a lot of that, some industrial. There is as broad spread. Whilst it looks optically a large number there's a lot of different business customers in there and I think you'd see that would tend to be having a bit more like just a general business banking portfolio. The other literally is - it's just everything else that isn't called out there.
I don't see outside again the medical sector, obviously BOQ Finance and where it's skewed to. There's nothing else we haven't talked about that I'd say is that's where we're overweight industry relative to peers.
There's probably a bit of what we don't do. We don't have a lot of government exposure because we're fundamentally not in that space and obviously the bigger end of town when you look at some of the retailers, the top 20 ASX listed companies, obviously we have limited exposure other than perhaps indirectly through BOQ Finance.
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Jon Sutton, Bank of Queensland Limited - Managing Director and CEO [66]
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We might leave it there and I really thank you for coming along today and I also want to thank my team as well and invite you to join us for a spot of lunch and some light refreshments and we can talk some more. To you analysts out there, just go easy on the executive team and no trying to trick them into financial profit forecast questions.
Thank you very much.
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