Bendigo Bank profits jump on margin tailwinds: shares jump 7%

Bendigo and Adelaide Bank (ASX: BEN) posted a 22% jump in cash earnings to $245 million for the five months ending 30 November 2022 and expects margin tailwinds to continue into the second half of FY23. The company's shares rallied 7.0% in early trade to a 4-month high.

The positive trading update has inspired the broader financials sector, with the big four banks all up around 1.0%.

A buoyant year-to-date performance

Banks are leveraged to rising interest rates, which has helped offset headwinds such as higher expenses and slower volume growth.

Bendigo Bank said its net interest margin (NIM) post revenue share arrangements stood at 1.85% year-to-date, with an exit NIM of 2.01%. This compares to 1.74% in FY22 and 1.53% in FY21.

Lending balances were beginning to slow, down -0.7% over the last five months but still up 5.2% in the last twelve months. Over the same timeframes, deposit balances rose 2.0% and 8.9% respectively.

Encouragingly, credit quality remains sound with greater than 90 days' residential arrears for the month of November of 41 basis points, down 8 bps compared to 30 June 2022.

Margin tailwinds

"Our NIM has continued to rise as we carefully manage our volume growth and margins, while continuing to prudently manage costs in an inflationary environment," said CEO Marnie Baker.

"Expected further interest rate rises in FY23 to a terminal cash rate of between 3.5% and 4.0%," Bendigo Bank said in a statement.

Of note, ASX 30-day interbank cash rate futures are currently pricing in a peak of 3.635% in August 2023. Cash rates are expected to sit around the 3.5% level through to 2024.

The result wasn't without its shortcomings, with the bank expecting operating expenses to "increase modestly on FY22 levels."

Broker views

Brokers are generally outperform rated on Bendigo Bank shares. The latest updates in the last month include:

• Macquarie: Outperform with a $9.25 target price

• Morgan Stanley: Overweight with a $9.50 target price

• UBS: Buy with a $10.00 target price

Bendigo Bank (Source: TradingView)