Shareholders of ME Bank might be confronted with a vexing risk management dilemma after formal bids to acquire their mid-tier banking asset are submitted to chairman Jim Evans and his board this week.
A double jeopardy problem could emerge for the funds if the widely expected buyout pitches from Bendigo Bank and Bank of Queensland price ME at a discount to a rival bid from a major bank such as ANZ.
ME is owned by 26 industry superannuation funds, led by major shareholders - Australian Super, Cbus, HostPlus and Hesta.
Australian trustee laws dictate the super funds each have an obligation to accept the bid that they believe is in the best interests of their superannuation members.
That should mean the collective decision of the funds would be to sell the bank – estimated to be worth up to A$1.3 billion - to the highest bidder.
However, if ANZ lobs the top bid, it could be argued that many, most or all, of the industry funds would be exposed to reputational damage by moving to offload more than 450,000 customers to a big banking rival.
A large slab of ME’s customer base, especially those who joined in the 1990s when the business traded under the Super Members Home Loans moniker, would probably desert ANZ if such a transaction was consummated.
For many of these customers a sale to ANZ would be viewed as a betrayal of several of the key pillars of ME’s branding, particularly its environmental credentials.
ME has positioned its offer to Australian consumers as a carbon-neutral bank, a proposition that might be imperilled if it was acquired by ANZ or another major bank.
“We don’t invest in fossil fuels, coal mining, coal ports, coal power, gas power, arms trade, tobacco or liquid natural gas plants,” ME tells customers on its website.
“And we won’t in the future.”
That promise might be undeliverable under an ANZ-owned ME business, which is continuing to lend to fossil fuel producers in Australia and overseas.
While ANZ recently pledged to wind down its lending to fossil fuel industries, it has a poor track record of meeting its obligations as a signatory to the Paris Climate Agreement.
ANZ has been the biggest lender to Australian coal miners since 2015 after extending more than $2.4 billion of credit to the industry.
Previous ME boards have contemplated a sale of the bank, most notably in 2008-9 when the global financial crisis froze securitisation markets.
ME’s chairman at the time Bernie Fraser approached his Bendigo Bank counterpart Robert Johanson with a view to merging the two organisations.
Fraser’s board viewed Bendigo as a natural merger partner after commissioning an independent report from LEK Consulting on sale options for the business.
It is not clear whether Evans and the current ME board also see Bendigo as a strategic fit for its customer base.
However, if Bendigo and ANZ submit bids reflecting aligned valuations of the ME business, it is likely Evans would accept the regional bank’s offer given the possibility of the ACCC blocking a major bank buyout.
However, Bendigo is no shoo-in to get a deal done.
ME’s disproportionate exposure to Victorian borrowers and its recent migration to the Temenos T-24 core banking system, probably make it more valuable strategically to the Bank of Queensland than any other retail lender in the country.
Acquiring ME would help to dilute the geographic risk in BoQ’s franchise, which is skewed to the Queensland market.
ME’s customer base is disproportionately Victorian and underweight in Queensland.
ME is also a material technology play for BoQ’s managing director, George Frazis.
Last February Frazis embarked on a $440 million core banking overhaul to the Temenos’ T-24 platform.
It’s possible that Frazis might be able to expedite his bank’s four year transformation program and slash the heavy build costs by migrating BoQ customer data to the existing ME platform.
The ME name also holds potential value for BoQ’s digital banking aspirations.
BoQ’s decision to use the “Virgin” moniker in its digital branding carries with it the risk of collateral damage from the underperformance of other companies using the master brand.
ME, which now promotes itself to customers as “the online bank that’s built for you” offers a ready-made in-market solution to that problem.
The strategic logic for a BoQ buyout of ME is overwhelming and appears likely to induce a premium bid.
If BoQ fails to acquire ME it might be forced to consider a bolt-on digital acquisition to address several of its strategic shortcomings apart from scale and geographic concentration.
Despite its small balance sheet Volt Bank has brand recognition in the local market and could be absorbed smoothly as it also operates on the Temenos platform.
Sources close to the ME sale process told Banking Day that directors were expecting to receive formal bids by the end of this week.
A fascinating aspect of the ME sale will be the participation of AMP Capital senior executive David Atkin, who was appointed to the ME board in early January.
His arrival at ME comes as the AMP board also engages in a process to hive off its operations, including its Australian banking arm.
However, the sale of AMP Bank is proving a challenge despite its relatively consistent earnings record.
AMP Bank’s reliance on its parent’s adviser network for customer origination has stoked conjecture among potential bidders about the real value of the business once it is separated from the group.