Bendigo and Adelaide Bank Delivers on Targets, but Margins Will Likely Fall To Protect Market Share

Bendigo and Adelaide Bank BEN reported a solid first-half fiscal 2023, with cash profit of AUD 295 million up 13% on last year. The increase on second-half fiscal 2022, up 23%, highlights the magnitude of the earnings rebound as the bank benefits in a higher cash rate environment. Net interest margin, or NIM, increased 19 basis points to 1.88% over the half, driving profit before bad debts up 29%.

Return on equity, or ROE, improved by 150 basis points to 8.8% and cost/income ratio was down 500 basis points to 54.6%, but we think it is close to as good as it gets for the bank.

Soft home and business lending, in our view, highlights the lack of competitive advantage and our no-moat rating on the bank. Home loan balances ended the half flat and business loans were down 3.5%. Based on APRA data, home loans and business loans increased 2.6% and 4%, respectively, across the market over the half. Balancing volume and margins helped deliver the ROE improvement, but we question if that can be maintained. As Bendigo is competing with larger banks that can price more aggressively given their scale and funding cost advantage, at some point Bendigo will likely need to sacrifice margins, as shrinking means less operating scale to invest for the future. This is especially a risk in the short term as fixed-rate loan customers face a large increase in repayments and shop around for a better deal. Fixed-rate loans maturing over fiscal 2023-24 make up 28% of the home loan book.

NIM ended the half at 2.03%, with our fiscal 2023 forecast increased to 1.95% from 1.90%, implying headwinds from competition for loans and deposits start to outweigh tailwinds from additional rate increases.

Our fiscal 2023 profit dividend forecast increases 10%, but longer-term forecasts are largely unchanged, and we keep our fair value estimate of AUD 10.20.

We expect fully franked full-year dividends of AUD 60 cents per share based on a 60% payout ratio, with an interim dividend of AUD 29 cents declared.