MyState Limited and Auswide Bank Australia have reached terms for a merger of the two regional banks, one they aim to complete by the end of the year.
Tasmania-based MyState and Bundaberg-based Auswide have both been on the hunt for credible options for inorganic growth for years.
The new bank will have around 270,000 customers and 23 branches – seven in Tasmania and 16 in Queensland.
Difficult trading conditions over the last year for each bank – especially for Auswide – appears to inform the timing of the agreement for this merger, one that the banks explored in depth and deferred in recent years.
MyState yesterday bought forward the release of its FY2024 full-year results, which included an eight per cent fall in net profit to $35.3 million and below system growth in the mortgage book of only two per cent.
Auswide released unaudited results for the full-year and they are a front-runner to be one of the worst this bank reporting season.
Auswide said its net profit slumped 55 per cent to $11.2 million, while its book growth was even more tepid at 0.6 per cent.
The bank’s net interest margin fell 46bps to 142bps, an exceptionally heavy fall by any measure, though not as bad as the 52bps fall in the NIM reported in the first half.
This merger will form a more diversified name in regional banking, with around $15 billion in assets, though with a national market share of only 0.5 per cent, which is less than the market share of the largest mutual banks.
It will reduce the concentration of MyState’s assets in Tasmania from around one third to 20 per cent.
This merger is essentially a takeover by the larger MyState of Auswide. MyState shareholders will own 66 per cent of the combined group.
Brett Morgan, CEO of MyState will continue in that role.
Sandra Birkensleigh, chair of Auswide, will be chair of the holding company and also serve as chair of the bank subsidiary. Four directors of MyState will serve on the board of ‘MergeCo’ alongside three from Auswide.
Brett Morgan said the new group would continue to trade under both the MyState and Auswide brands, pending a decision on the merits of a multi brand versus single brand strategy.
Both brands have resonance in their parochial core markets. Auswide, in particular, has invested heavily in sponsorship over the last five years to drive brand awareness, which has helped drive growth in Brisbane and south-east Queensland, while also supporting the development its private banking arm.
The enlarged bank will have a loan book of $12.5 billion, total deposits of $9.6 billion and net assets of $755 million.
The targeted cost savings, or synergies, are estimated in a range from $20 to $25 million per annum, representing approximately 13 per cent to 16 per cent of the combined cost base.
At the upper end of the range, these savings represent 38 per cent of Auswide’s FY2024 operating costs, and appear ambitious.
The new bank will be counting on staff turnover and redundancies to realise the biggest savings. Not much of any HQ is likely to be left in Bundaberg or Brisbane.
Assuming these savings can be realised, the banks project that the merger “is expected to deliver significant value for shareholders with greater than 20 per cent per cent accretion in earnings per share in FY2025, assuming full run-rate synergies.”
Fitch Ratings said the merger would be neutral for the ratings of both banks, though much further down the track MyState may be looking for an uplift. Fitch has a long term rating of BBB+ on both banks.
“The combined entity would still be a small player in Australia’s banking system, and we do not expect a merger to lead to a significant change in metrics” Fitch said.
Referring to the cost savings Fitch said: “we view this as only supporting MyState’s (the surviving entity) current earnings assessment rather than exerting upward pressure on the credit score.”
Morgan said the bank would seek to consolidate core banking systems over the first 12 to 18 months.
Turning now to the full year results for each bank in more detail, starting with Auswide:
The heavy hit to its net interest margin, rather than expense growth, explains almost all the dive in the Auswide net profit this year.
The much lower NIM dragged net interest income down by 20 per cent, and in turn wrecked the cost to income ratio. In 2024 this ratio was 79.9 per cent versus 65.0 per cent in 2023.
One feature of the Auswide full year result is that Auswide Private Bank barely featured in the presentation and commentary yesterday, whereas in recent years Private has been prominent in the bank’s narrative.
Private Bank was the foremost of the four pillars of the bank’s 2023 corporate plan and, alongside broker originated loans, and was credited last year with “driving growth”, which the 2023 annual report put at 25 per cent for Private.
Private Bank, however, may have a very high cost to serve, given its bespoke lending and deposit solutions to targeted clients; select professional cohorts, elite sportspeople and high net worth individuals.
That Private Bank has a net promoter score of 40 was almost the only insight Auswide shared yesterday.
In a further twist, Auswide announced plans to buy a small niche Sydney-based asset finance house Specialist Equipment Leasing Finance Company (Selfco) for $6.5 million.
Selfco has receivables of $89 million and revenue of $3 million.
Auswide said it was undertaking a $12 million placement and a non-underwritten share purchase plan to raise up to $3 million to fund this purchase, along with supporting growth in the Selfco book, and also “Auswide’s immediate regulatory CET1 capital requirements.”
At MyState, key metrics in FY2024 were pretty much in line with guidance at the half year.
The net interest margin at 1.45 per cent was stable half on half, though the NIM was down 18bps compared with 2023.
Operating costs were down 1.6 per cent to $101.0 million.
CEO Brett Morgan said MyState “managed the balance between growth and margin well in FY2024.”
New home loan volumes slowed in the second and third quarters “a function of margin management.”
Over the second half applications were 29 per cent higher than in the first half, while in the final quarter “settlements were strongest for the
year”, so MyState, unlike Auswide, its finding its mojo.
“We have maintained our focus on growing profitably while delivering on a range of important strategic initiatives including the launch of a new internet and mobile banking experience” Morgan said.
The bank’s customers are buying into the MyState story, with the net promoter score up 23 points to +58.
Investors and the market like this banking combination, at least on the MyState side, with the bank’s shares rallying 9 cents or 2.3 per cent to $4.03 yesterday, and shares were more than 4 per cent higher in early trade
Shares in Auswide Bank remained in a trading halt all day to allow for the bookbuild for the share placement. Trading will resume today.