With footings growth of around 15 per cent RACQ Bank continues to chew through capital, exacerbating the demands on the parent (also a mutual) from a heavy program of investment in renewing and growing the business of the former QT Mutual Bank.
Over the three years since diversifying into banking the operating losses from RACQ Bank keep on coming, testing the strategic resolve and balance sheet strength of the motoring and insurance group.
- FY18 - A$9.2 million loss, pre-tax.
- FY19 - $16.8 million loss.
- FY20 - $12.1 million loss.
This combined pre-tax loss of $38.1 million is equal to 26 per cent of the net assets of QT Mutual Bank as shown in its 2016 and final annual report.
No wonder the parent company wrote off all the $6.6 million goodwill in Members Banking Group; “fully impaired” they said. This follows a partial write-down in goodwill for the bank of $1.2 million in 2019.
“A price to net tangible asset ratio of 1:1.1 was utilised giving consideration to other relevant banks in the environment at the time,” RACQ explain in their annual report.
In 2020, “Members Banking Group Limited continued to provide a core service offering for the Group, however the price to net tangible asset ratio was reduced to 1:1.0 after giving consideration to other relevant banks in the current environment,” directors said.
The recurring losses have depleted retained earnings to $97.9 million, down from $130 million at the time of the QTMB 2016 annual report.
Paid up capital as of June 2020 for RACQ Bank was $65 million following a capital injection of $35 million during the year. This brings the total capital ratio for the bank to 15.8 per cent.
The Club has had to kick in so much capital since the merger in late 2016 this equity now accounts for 35 per cent of the capital base of RACQ Bank.
The Royal Automobile Club of Queensland hired former Suncorp Bank head David Carter as group CEO earlier this year.
The Club is also due to name a new group executive, RACQ Bank, with its CEO of two years Michelle Bagnall (also ex Suncorp) soon to take up a job in Melbourne as CEO of Bank First.
Carter and the bank’s management team are at least building the franchise value in Members Banking Group.
Loan growth was around 13 per cent in FY2020 and deposit growth around 17 per cent.
On the deposit side this is 1.6 times system and on housing loans a whopping 5.5 times system.
Indeed, the bank’s mortgage book of $1.9 billion has grown by 60 per cent under RACQ’s stewardship and the Club has maintained the BBB+ long-term credit rating from Standard & Poor’s and A3 from Moody’s for the bank.
In a ratings report in early July S&P highlighted “strong cross-selling to existing group member base” as a key difference.
“In our view, RACQ Bank continues to buck the trend of Australian financial conglomerates having limited success in cross-selling banking products across group business lines,” S&P said.
“The bank continues to leverage the franchise strength of the wider group in the state of Queensland, targeting the group's 1.8 million customer base to drive balance sheet Growth [and] we forecast growth will remain above system levels over the next 12 to 24 months, though at a lower rate.”
Sharing insights RACQ have not, S&P noted “vehicle finance is likely to become a larger portion of the bank's balance sheet over the next 24 months, providing moderate diversification across the bank's loan portfolio compared with current levels.”
Crucially, S&P “projected the bank's net interest margin will decline by about 20 basis points to 1.85 per cent in fiscal 2020, from 2.06 per cent one year earlier.”