Bendigo improves profit: Lending growth underperforms peers

Bendigo and Adelaide Bank (ASX: BEN) was up around 2% going into lunch on the news that the bank had posted an 18.7% increase in cash profit to $260.7m in the first half of financial year, which was a beat against Ord Minnett’s expected cash net profit of $249m.

The country’s fifth-largest retail lender declared a 26.5c per share fully franked dividend to be paid on March 31.

In light of the margin pressure facing other banks, a drop in the overall net interest margin (NIM) by 14 basis points to 2.09% during the first half did not come as any shock to the market.

But like other banks, Bendigo also released provisions for bad debts, due to improving economic conditions locally.

Management cited more customers choosing lower margin fixed rate loans, increasing competition, and changes to banks’ funding structures as the main pressures driving the contraction.

“This result marks the third consecutive half of positive jaws [with growth in income exceeding expenses] and our sixth consecutive half of above system growth in residential lending,” said CEO Marnie Baker.

Overall lending lower

While residential lending grew 4.2%, business lending across the bank reduced 8.3% on an annualised basis. But overall lending growth fell well behind the bank's peers, rising at 4.3% compared with system growth of 8.3%.

Highlights within today’s interim result included:

• Total income rose 2.9% to $873.4m.

• Total residential lending stood at $1.5bn, with lending in the half up 8.4%, representing 1.1 times system growth.

• Customer deposits grew by $3.8bn or 6.6%.

• Total provisions for bad and doubtful debt fell to $388.4m from $445.7m in the second half of 2021.

• Statutory net profit up 31.7% to $321.3m.

• Cash earnings per share (EPS) up 13.5% to 47 cents per share.

The future

Management advised the market the bank had made significant progress with the acquisition of fintech company Ferocia over the half.

As well as disposing of non-core assets and business lines, the bank is also moving applications to the cloud, which is expected to improve efficiency and technology resilience.

While Baker expects residential loan growth to continue to exceed system growth, she also expects challenges in the form of margin compression and non-recurring other income to drive revenue lower in the second half.

The bank earmarked $170m to $180m across investment spending in FY22.

Digital mortgages

Bendigo also plans to offer digital mortgages through its neobank Up, using Tic:Toc technology to assess approvals. Tic:Toc offers mortgages under its brand that sit on Bendigo’s balance sheet.

Bendigo holds a 28% interest in the business and funds all Tic:Toc branded home loans. Last year the digital platform was one of the biggest drivers of the home loan market share gains posted by the bank. 

Last year, Tic:Toc struck a $25bn deal with Bendigo which will provide $300m of funding a month for seven years.

Bendigo is also preparing to introduce digital mortgages via its Up bank later this year. It’s understood Up has accumulated 400,000 customers and $840m in deposits in less than three years.

What brokers think

• Ord Minnett maintains Hold rating and $9.60 target price, (09/02/22).

• Within a 72 pager on Australian banks, Morgan Stanley believes banks, as a group, might well outperform the broader share market in 2022 "against a backdrop of higher rates". The broker is Underweight and has moved the price target to $9.50 from $10.20, (21/01/22).

Consensus on Bendigo is Hold.

Based on Morningstar's fair value of $11.15, Bendigo looks Undervalued.