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Brisbane-based Bank of Queensland (ASX: BOQ) has entered a strategic capital partnership with investment manager Challenger Limited (ASX: CGF) involving the sale of its $3.7 billion whole-of-loan sale of equipment finance assets, in a deal the regional lender says will free up capital for shareholder returns and improve its return on equity.
The transaction, announced today, comprises the sale of BOQ's equipment finance loan portfolio to Challenger along with a 12-month forward flow origination arrangement under which BOQ will continue to originate new equipment finance loans for sale to Challenger and its financiers.
BOQ expects the deal to reduce its debt funding requirements by about $3.4 billion and facilitate the return of roughly $300 million to shareholders through a combination of an on-market share buyback and a fully franked special dividend.
The regional bank says it expects the partnership to deliver a cash return on equity uplift of 15 to 25 basis points in FY26, though its first-half statutory accounts will include an estimated $31 million post-tax loss from the transaction.
"This innovative transaction is a win for our shareholders, our customers and our broker partners," says BOQ’s CEO Rod Finch.
"It demonstrates the strength of our balance sheet and our ability to deploy capital efficiently. Our customers and broker partners will continue to benefit from the same great service they have come to expect from BOQ, while our shareholders will benefit from improved returns on equity and a meaningful capital return."
Finch says the partnership allows BOQ to maintain its equipment finance origination capability while transferring the funding task to Challenger will preserve customer and broker relationships.
Under the forward flow arrangement, BOQ will continue originating equipment finance loans using its existing distribution network and credit processes before selling them to Challenger.
The bank notes that the forward flow arrangement is not underwritten and remains subject to Challenger and its financiers' discretion as to funding, meaning the volume of future originations sold may vary.
The final whole-of-loan sale amount is also subject to adjustment, with the bank flagging that swap rate movements driven by current geopolitical volatility could affect the final financial position.
Challenger Group chief investment officer Damian Graham says the transaction represents a significant step in the investment group's expansion into whole loan investing.
"This transaction provides Challenger with access to a high-quality, seasoned and highly diversified loan portfolio, originated by BOQ's specialist equipment finance team," says Graham.
"It reflects Challenger's growing capability and appetite in whole loan investing, and we look forward to building a long-term partnership with BOQ."
BOQ says it will retain servicing of the equipment finance loans post-sale to ensure continuity for borrowers and brokers. The bank's equipment finance division, which primarily serves small and medium-sized businesses across Australia, will continue to operate as a distribution and origination platform.
The $300 million capital return to shareholders is expected to be funded from the reduction in risk-weighted assets following the portfolio sale.
BOQ says the precise mix of buyback and special dividend, along with timing, remains subject to final board and regulatory approval.
Completion of the whole-of-loan sale is expected by the end of May 2026.
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