Bendigo & Adelaide Bank 1H25 Earnings Call Highlights

Bendigo & Adelaide Bank (ASX: BEN) shares tumbled 15.2% on Monday after the company reported weaker-than-expected margins and earnings in the first-half of FY25.

Earnings Summary

• Cash earnings after tax down 1.1% to $265.2 million vs. $284.5 million consensus (6.7% miss)

• Net income was impacted by higher funding costs, including both deposits and wholesale funding

• Net interest margin up 5 bps to 1.88% vs. 1.94% consensus

• Interim dividend of 30 cents per share

Earnings Call Highlights

The below topics have been answered by CEO Richard Fennell and CFO Andrew Morgan.

1H25 earnings: "Today's result demonstrates the significantly increased demand for both lending and deposit products, which has led to the strongest balance sheet growth we've experienced in many years. While half-year cash earnings are slightly lower than the prior corresponding period, this reflects increased investment spend and higher funding costs impacting income."

Margin pressures and trends: "However, a change in customer preferences for longer-dated, more expensive term deposits and continued growth in offset accounts has impacted our funding costs and earnings."

Wholesale funding costs and deposit competition: "Annualised deposit growth of 10.8% reflects our investment in online capability for our EasySaver product and the broader strength of our deposit franchise."

Lending & Growth Strategy:

• “We've grown at an accelerated pace following the full rollout of the new lending platform.”

• “In residential lending markets, we've grown at two times system, with almost half of new settlements coming from self-serve and assisted digital mortgages.”

Customer behavior and changes: "Customer numbers were up 4.9% in the half to 2.7 million, supported by a Net Promoter Score that is 31.1 points above the average of the majors."

Risk-adjusted returns: "The return profiles of new loans continue to improve as originations by Bendigo Bank broker and our digital channels are typically lower LVR, reducing our credit risk-weighted asset intensity and improving our marginal ROE."

Arrears: "Fortunately, at this stage in the cycle, signs of credit strain in our key markets are modest. While Victoria is facing some economic challenges and housing arrears are slightly higher there, this is not playing out in higher credit costs."

Rate expectations: "We are expecting interest rates to be reduced to a more neutral level of around 3.5% by the end of this calendar year."

Digital deposits and technology: "Digital deposits were up 27% over the half and 55% over the year, supported by the introduction of digital EasySaver accounts and online term deposits."

Demand for lending trends: "Mortgage growth for the half is running around two times system, supported by the completion of the rollout of the Bendigo lending platform to our broker channel."

Analyst Q&A Highlights

Given margin pressures from rapid loan growth and higher funding costs, will you slow credit growth, and are new loans being written below the cost of capital?

• “With the growth we achieved this last half year, particularly in residential lending at two times system, we’re pleasantly surprised with that demand… we did need to take some wholesale funding in excess of probably what we had expected.”

• “With the capability we are looking to build in our digital channels for deposit gathering, I am hopeful that we can start to bring in more lower-cost deposits over time to support that growth.”

• “The actual marginal returns have improved… the risk weighting of these lower LVR loans that we’re writing has reduced significantly.”

• “If you look at the NIM over that risk weighting, that has improved significantly over the last two halves.”

• “With the advent of the new lending platform, our ability to risk-based price has really gone up a notch.”

Will margin headwinds moderate in the second half of FY25 based on the trends in Slide 21?

• “One of the key considerations there is how competition reacts… we’re not a price maker, we’re a price taker.”

• “Our replicating portfolio yields are continuing to improve.”

• “Customers are overwhelmingly choosing variable rate mortgages, and the front book margins in our variable rate mortgages are above the back book margins on those fixed rate maturities.”

• “Most of our pricing changes came through late second quarter, so we expect there will be some benefit into the next half.”

Given recent wholesale funding activity, will funding cost pressures worsen?

• “Our wholesale funding levels are actually slightly lower than this time last year, but the average cost has increased.”

• “It’s now a function of how well we run our deposit book… we’re putting investment dollars into building up our digital capabilities.”

• “Our balance now is to gather as much in low-cost deposits as we can, which helps us fund lending growth more cost-effectively.”

Staff costs increased by 14%. How much of this was due to volume growth versus investment spending?

• "There’s a 5.5% business-as-usual cost growth, broken down into four components: wage and price inflation (2.3%), increased FTE to build digital capabilities, tech investment, and 0.6% specifically related to volume growth."

Why did NIM deteriorate so quickly, and why wasn’t a trading update provided at the AGM to flag emerging pressures?

• "At the AGM, we don’t traditionally provide a market update. The May update last year was tied to a broader strategy update, which was a one-off investor update."

• "A term deposit was probably the thing that deteriorated early, but we expected it to recover and it didn’t. We made our first price change in August, reducing the 12-month rate, but that didn’t play out as expected."

• "Volume growth was stronger than anticipated in our funding plans, necessitating us picking up wholesale funding in both September and November."

The Business & Agri division’s NIM fell 36 basis points. How much more margin pressure should we expect before transitioning to a growth phase?

• "There is a lot of competition in the SME space, which is impacting pricing."

• "Agri is a little less affected due to its relationship-centric nature and longer-term relationships."

• "I certainly hope we’re not going to continue to see this level of deterioration, but with only 1.4% market share, it’s hard to drive pricing in the market."

This article was generated with the support of AI and reviewed by an editor.