BOQ projections were unrealistic, franchisees claim

Bank of Queensland's decision to enter the New South Wales market, in 2003, using a franchised branch business model was based on superficial business analysis, overly optimistic projections, which were never properly tested, and a failure to acknowledge the bank's competitive disadvantages.

This charge forms the basis of a claim of misleading and deceptive conduct brought against the bank by a group of former franchisees. The court hearing, before Justice Michael Bell, commenced in the Supreme Court of New South Wales yesterday.

BOQ's plan was to have 50 of what it calls OMBs (owner-manager branches) in NSW, and 50 in Victoria. It has used the OMB model successfully in Queensland.

In pleadings outlined by the franchisees' barrister, Nigel Cotman, yesterday, the court heard how BOQ sold franchises on the basis that OMBs in metropolitan areas could lend A$4.25 million a month and take deposits of $1.5 million. Stretch targets were for $6 million of loans and $2 million of deposits.

Non-metropolitan OMBs were expected to generate $3 million of loans and $1 million of deposits each month. The stretch targets were $4 million of loans and $1.3 million of deposits.

BOQ's marketing team argued that the projections were unrealistic and that the metropolitan branches would raise about $750,000 in deposits, which proved to be closer to the mark.

There were a number of reasons why these targets were unrealistic. With a BBB credit rating, the bank's funding costs were higher than a number of its competitors, which meant that it could not price aggressively.

The bank assessed that only three of the 10 products the OMBs would sell were sufficiently competitive to establish new customer relationships.

The bank did not have any marketing budget to promote the NSW OMBs. The first draft of the 2004 marketing plan included $50,000 for each NSW branch, but that allocation was dropped from later versions of the plan.

And, when the modelling was done for the OMB business case, some expenses were left out of the calculations.

The franchisees argue that even if they had met their targets they would not have made profits once the extra expenses were factored in.

And they claim that the bank compounded its deception by not disclosing to people who took up their franchises in 2006 and 2007 that the established OMBs were performing poorly.

The OMBs' chances of success were also hurt by slow loan application handling and other processing at BOQ. They claim they lost business because customers became frustrated and went to other providers.

The franchise arrangement involved OMBs renting their business premises from the bank and using bank finance for working capital. As their businesses faltered the bank continued to make money.

Other pleadings in the case include a claim of unconscionable conduct, under section 106 of the Industrial Relations Act, and damages claims for stress-related personal injury.

The hearing continues today.