Bendigo and Adelaide Bank 1H 17 – Pressure Continues

Bendigo and Adelaide Bank released their 1H17 results today. Regional banks continue to feel the pressure of low interest rates, competition for deposit funding, and home loan demand. The overall result, once you look at it, is pretty weak.  It was more to do with cost control and reduced provisioning  than margin growth, even if on higher volumes.

Their cash earnings were up 0.4% from 1H16 to $224.7m, and the statuary net profit was $209m, little changed from 1H16. Return on equity was 8.77%, down from 9.10% in IH16. Return on tangible equity was 12.63% down from 13.15% IH16 and 12.71% 2H16. The dividend was held at 34c, with a payout ratio of 70.8%.

Whist total assets were up by 3.5% on 1H16 to $70.9b, net interest margin dropped 6 basis points to 2.1%. It may be recovering a little now thanks to repricing of loans but volume may be slowing as a result. Home lending was 70.6% of loans. They are close to the 10% investment lending speed limit, so that will also trim growth.

The expenses ratio improved, as shown by the Jaws momentum.

The Keystart loan acquisition meant their mortgage lending book grew 13.9%, but 6.8% excluding the acquisition. Residential loan approvals rose, including via third party channels, but broker loans seem to be slowing post the recent repricing.

There was a 9% growth in offset portfolio loans since December 2015. They say 45% of home loan customers are ahead with their minimum repayments. 29% of customers are 3 or more repayments ahead.  Loan settlements are running at around $1.5m a month.

9% of loans are over 90% LVR.

The Bank benefited from rising property values in its Homesafe portfolio and remains sensitive to future price growth. They added (only) $2.5m of overlay in 1H17 increasing the total overlay to the value of the portfolio to $26.1m. Given the strong price growth in Sydney and Melbourne this seems low!

BDD were controlled, but residential arrears are rising a little. Great Southern is paying down as expected.

Bad debt provisions fell, partly thanks to a specific and large named, but now resolved risk.

Capital remains under pressure, with CET1 down to 7.97%. The move to advanced IRB (timing TBA) might help a bit, possibly.

All in all, they had to squeeze the lemon harder to drive a reasonable outcome, but we question whether the fundamentals are there for long-term sustainable and growing shareholder returns.

Bendigo Bank’s Lifts Variable Home Loan Rate

Bendigo Bank has said it has decided to increase its residential mortgage variable interest rate by 0.10% p.a. to 5.48% p.a. for owner occupied and 5.76% p.a. for investor loans.

Bendigo and Adelaide Bank Managing Director Mike Hirst said the adjustment reflects that recent ultra-competitive mortgage pricing is unsustainable.

“The cost of funding these loans through both retail deposits and wholesale term debt is rising. Global financial markets have been volatile and this is impacting the cost of raising funds domestically as competition for stable deposits increases,” Mr Hirst said.

“Even after this change, the vast majority of our borrowers pay well below the standard residential mortgage variable interest rate, and at rates which are a far cry from the 7.8% percent interest rates seen in November 2010.

“When setting these rates we’ve tried to carefully balance the interests of these mortgage customers, those who earn money through deposits and those who invest in our Bank,” he said.

Customers on a residential owner occupied variable interest rate with a $250,000 loan will see their repayments increase by $15.63 a month (principal and interest home loan over 30 years).

The adjustment is effective 15 December 2016 for new and existing loans.

Bendigo Buys High LVR Loans

Bendigo and Adelaide Bank has agreed to acquire a portfolio of approximately $1.35 billion of standard residential loans based in Western Australia, from the wholly owned Western Australian Government entity Keystart Housing Scheme Trust by equitable assignment. The portfolio is selected from the total loan book of approximately $4 billion.

Bendigo has had net interest margin pressure for some time, and this might be seen as a way to help address the hole. The question however is asset quality and net returns on the transaction over time.Ben-FY16NIM

The bank says they have selected customers in the portfolio have on average five years of repayment track record and no arrears. The portfolio is approximately $1.35 billion residential loans and 6,000 customers. The purchase price at a premium of 0.2% or approximately $2.7 million. The average loan size is approximately $225,000, all variable rate owner occupied loans, no interest only loans. The weighted average seasoning is 64 months and the weighted average LVR is 84%. None are covered by Lender’s Mortgage Insurance. Geographically, 67% are in greater Perth, 33% regional Western Australia. They have limited exposure to mining by geography and occupation, with 0.4% of loans domiciled in Pilbara/Kimberley. Keystart will continue to service the customers on behalf of the Bank. To fund the purchase they also announced an equity raising to be launched in October.

The banks said “The acquisition complements our existing business in Western Australia and improves our geographic diversification by increasing the proportion of our loan book in Western Australia from approximately 11 to 13 percent. We will also have potential to provide 6,000 Keystart customers with a range of complementary products and services”.

Keystart customers are typically first home buyers who do not have sufficient initial savings for a deposit. The Keystart loan is designed to be a transitionary product, with approximately 80 to 90% of Keystart customers refinancing to a mainstream lender over time. They are full documentation owner occupied loans. They have approved loans for approximately 60,000 households for more than 27 years. Their total loan book is approximately $4 billion with approximately 18,000 customers. They have approximately 18% of the first home buyer market in Western Australia, with a “strong and consistent record” of low arrears and loan losses.

Whilst this makes sense in terms of geographic expansion and book growth, the higher LVR nature of the book will require higher risk weights to be applied. A quick estimate suggests it will provide a small lift to earnings, but only if the defaults remain low. Given the rising level of arrears in WA and slowing house prices, this may hit the loan performance later.

Bendigo FY16 Result, Pressures Increase

Bendigo and Adelaide Bank have announced an after tax profit of $415.6m, for the year to 30 June 2016. Cash earnings were $439.3m, up 1.6% on 2015, however,  cash earnings in the second half were down 4% on the first half.

Earnings per share were 95.6 cents, a 0.6% increase on last year. Net interest margin fell 4 basis points compared with FY15, from 2.20% to 2.16%, though increased 1 basis point in the second half, thanks to retail deposits up 8%, to 82%, but against the headwind of fierce mortgage competition.

Return of tangible equity was 12.94%, down 34 basis points on last year, and down 44 basis point 2H16-2H15. Return on equity was also down from 8.94% in FY16 from 9.09% in FY15, a fall of 15 basis points. The dividend, however, per share rose to 68, compared with 66 last year.

The overall results are mixed, and shows the pressure on the bank. On the plus side, mortgage volumes and deposits were up, the asset quality is good – other than perhaps concerns in the rural portfolio, and Great Southern is becoming less of a problem. Finally, expense control is pretty robust, with more headroom, later.

However, the net interest margin is under severe pressure, and the latest competitor moves on home loan rates and deposits will only make this worse. Bendigo only passed on 10 basis points of the RBA cash rate cut. Term deposit competition is rising. Homesafe contains some property price risks, and the bank still has more to do on buttressing its capital base, compared with its peers.  In the current low interest rate for longer scenario, Bendio will remain under some pressure. Whilst advanced IRB when approved, may help, a little, but it is not likely they will get to a 25% rate like the majors.

Overall it will be an uphill struggle. Dividends may have to be trimmed to square the circle, into 2017.

Looking in more detail:

Home lending benefited from the relaunch of Adelaide Bank Broker Direct proposition and a new retail mortgage “Connect Package”. The Mortgage Manage portfolio stablised.

Ben-FY16Mix Ben-FY16HLRetail Deposits grew, especially the useful term deposits, whilst wholesale funding and securitisation reduced in the funding mix.

Ben-FY16DepThe banks costs rose 1.5% year on year, and the expense to income ratio rose from 55.1% to 56%.

Ben-FY16-ExpThe jaws momentum, tells the story. Expenses are controlled, and they are targetting flat growth in FY17. The efficiency programme generated gains of $7m this year, and more next year. There was in increase in the capitalisation of expenses, and the advanced IRB status, when achieved will create more capacity in this regard.

Ben-FY16-JawsLooking in more depth, NIM tells an important story, with the drop from 2.20 last year to 2.16 in FY16.

Ben-FY16NIMThe trend is not pretty, reflecting the competition in the home loan market, pressure to capture retail deposits, and a reduction in securitisation.

Ben-FY16NIM-TrendThe monthly movement underscores the issue.

Ben-FY16-NIM-MoveBad and doubtful debts were down 35% from FY15 at $44.1m.

Ben-FY16BDDBusiness loans and mortgage arrears were stable, though the bank introduced an A$4m collective provision overlay for rural dairy exposures. Overall, rural loan arrears lifted quite noticeably in the last quarter.  Total arrears before Great Southern rose by 16.4% in 2H16 and total impaired assets were down 2.0%.

Great Southern provisions are behaving as expected with provisions down from $323.8m to $171.3m. Specific and collective provisions at June 2016 were $23.7m and $19.1m respectively. Collective provisions reduced by $6.1m and total borrowers fell from 3,321 to 1,821.

Homesafe contributed $54.5m in 1H16 and $25.2m in $H16, thanks to 10.8% rise in prices in Melbourne, and 9.2% in Sydney (Residex). Total funding provided is $343.6m. $6.4m of overlay was released in 2H16, reducing the total overlay to $23.6m. They assume 3% increase in property prices for the next 18 months, before returning to a long term growth rate of 6%.

Ben-FY16Homesafe

The banks indicative net stable funding ratio was 115% and the liquidity coverage ratio was 118%. Basel III CET1 ratio is 8.09% and total capital 12.21.

Ben-FY16-Capital However the CET1 ratio was 8 basis points down from 1H.

Ben-FY16CET1

Bendigo Pockets Some Of The Rate Cut

Bendigo Bank has announced it will decrease its residential variable interest rate by 0.20% p.a. to 5.48% p.a.

The Bank has also reduced the Bendigo investment variable rate by 0.15% p.a. to 5.76% p.a.

Bendigo and Adelaide Bank Managing Director Mike Hirst said the adjustment aims to find a fair balance for all of the Bank’s key stakeholders.

“When setting interest rates our Bank needs to consider many factors and carefully take into account the needs of our stakeholders including borrowers and depositors, shareholders, staff, partners and the broader community,” Mr Hirst said.

These historically low interest rates will also impact deposit holders. Mr Hirst noted the challenges the decrease will generate for those looking to earn money through investment in deposits.

“These customers remain front of mind for our Bank, and the rate reduction announced today seeks to strike the right balance between the needs of borrowers and depositors,” he said.

Customers on a residential variable interest rate with a $400,000 loan will see their repayments decrease by $50 a month (principal and interest home loan over 30 years).

The adjustment is effective 30 May 2016 for new and existing loans.

Bendigo and Adelaide Bank Update

In their business strategy and trading update today, they recapped on lending growth which  has been below system, and that they have a cost to income ratio which is still high (~2% above Suncorp).

Ben4NIM is under some pressure.

Ben6However, the bank is quite well positioned from a funding perspective. 81% is deposit funded, could go higher, this is significant because RMBS market funding pricing is line ball at the moment. They have moved from 20% to 6% RMBS, and this has created a capital headwind, so they will most likely focus on senior funding.

Ben7In terms of Strategy, Bendigo and Adelaide Bank, describes its aim to build around customer engagement and staff engagement, with an expectation that digital channels and customer centricity will out.

Ben3They are driving towards 24/7 digital platform, underpinned by their core banking system. Their vision is to be the most customer connected bank with a focus on customer service and the strengthening of core relationships.

Ben5However it is clear they are banking on benefits of moving from standard to advanced IRB capital model. Whilst they may wish to move to this basis, and this may be a phased implementation, it will be APRA who is holding the implementation cards. There is a benefit as their current mortgage risk weighting is about 39 basis points, whereas the major banks have a 25 basis point target by July 2016.

Homesafe will continue to be a drag on the business if property valuations in the major centres fall as the portfolios have to be marked to market, they of course had upside in the good times! 3Q16 Homesafe contribution was -$1.6m pre-tax. There are 2,500 contracts in the portfolio, average $125,000 funded.

Ben8Lending will be important and they wish to grow their books, with a focus on mortgages and small business (both highly contested areas). Arrears on mortgages and business seem under control.

Ben9Ben10They have a significant investment path in order to build the digital platform and IRB models. Restructure costs will be $2m or more in the half. The question will be whether the benefits out way the costs. You cannot really argue with the strategy, (though, it is not really a mobile first strategy), but its all about effective execution in a highly contested environment. The high customer satisfaction ratings will certainly assist.

 

Bendigo and Adelaide Bank Results Highlight Tough Times

Today Bendigo and Adelaide Bank presented their 1H results to December 2015. It has clearly been a tough half, because they are a small player with high penetration into the mortgage sector, in which competitive pricing has taken its toll. One-offs may flatter, but the underlying trends is the business show there is much to be done.

Statutory profit was $208.7m, while underlying cash earnings were $223.7m, up 2.7% on a year earlier. Cost income ratio remained unchanged at 55.6%. Cash earnings per share were up 1.7% on the prior corresponding period. Return on average ordinary equity was 9.10%.

Total lending growth was 1.5%, much slower than system (8.8%), with business lending falling 1.9% and home lending up 3%. Mortgages account for a significant proportion (66%) of the bank’s business, and they specifically mentioned troublesome competitive dynamics.

Ben-Mortgages35% of loans are investment property lending, 48% via third parties, and 35% fixed rate loans. Overall residential loan arrears (90 days+) was about 1.3% and is creeping higher.  High LVR loans are controlled.

Ben-LVRRetail banking’s contribution fell 3.7%, to $97.5m, thanks to a fall in NIM and other income, only partially offset by expenses growth. Customers are using more mobile devices for their banking, whilst PC banking is on the decline.

Third party banking’s contribution grew 19.4%, to $80.8m, and NIM grew a little, with around $300m a month, and a portfolio on about $16bn.

Wealth contribution a 4.2% increase to $10m, but again exhibited NIM compression. Funds under management reach about $4.5bn.

Agribusiness’s contribution was up 4.1% to $32.8m, but again NIM was compressed.

Homesafe revenues were up to A$54.5m or 17% of earnings, but this included revaluations, and is probably unsustainable. Margins were down and yet the shared equity portfolio is now $550m (doubled from 2013) and the value is linked directly to house price appreciation, which is slowing.

HomesafeDeposits grew below system at 2.9%.

Net interest margin fell by 1 basis point on the prior half year, to 2.16%. The bank suggested mortgage pricing was now a little easier, with monthly NIM trending up.

Ben-nimHowever the longer term data shows the pressure the bank is under.

Ben-MIN-2 Bad and doubtful debt provisions were down 46% to $20.6m.Specific provisions were helped by a fall in Great Southern, but there were rises in retail mortgages and the rural bank.

Ben-Spec-ProvTotal capital increased by 9 basis points to 12.66% and CET1 ratio was 8.24%, up 7 basis points. Work continues to move the bank towards the advanced capital management platform. $64.5m of Basel II costs have been amortised.

Bendigo Hikes Investment Loan Rates

Bendigo Bank has announced it will increase its residential investment standard variable interest rate by 0.20% p.a. to address recent industry-wide concerns regarding residential investment lending.

The residential investment package variable rate will also increase by 0.20% p.a. for new business and most existing investor variable rate loans.

Bendigo and Adelaide Bank Managing Director Mike Hirst said implementing this measure supports the Bank’s prudent management by appropriately pricing for risk and assists restraining investor mortgage book growth to less than 10 percent per month as required by the Australian Prudential Regulatory Authority (APRA).

“When it comes to setting interest rates, our Bank takes into account a wide range of factors and carefully consider its key stakeholders including borrowers, depositors, staff, shareholders, partners and the wider community,” Mr Hirst said.

“We believe this approach considers the needs of our stakeholders while continuing to provide customers with market competitive rates,” he said.

The adjustment is effective 1 September for new business and 1 October 2015 for existing residential investment loans.

As DFA has said previously, APRA has given the banks a convenient excuse to lift rates. It is really more to do with competitive dynamics.

 

Bendigo and Adelaide Bank Full Year Cash Earnings Up 13.1%

In the just released results, Bendigo and Adelaide Bank has announced a profit of $423.9 million to June 30 2015.  However, this is more from efficiency and provision adjustment than underlying business momentum, in our view, in a tough market. Nevertheless, they do have a good core franchise, with a relatively high customer satisfaction rating.

Underlying cash earnings were up 13.1%. Net interest margin was squeezed by 4 basis points to 2.20%, reflecting competition in the low interest rate environment. It dropped further in 2H15 to 2.17%. Common equity tier 1 ratio increased 15 basis points to 8.17%. Total capital increased 118 basis points to 12.57%. They continue to focus on achieving advanced capital accreditation, but are not there yet.

Lending growth at 5.3% was below system (7.5%), whilst business lending was 10%, above system, of 8.3%. Home lending was also slower than system growth, and they noted a 20% increase in excess repayments.

Great Southern specific provisions were reduced from $323.8m to $257.7m since December 2014.

They have been focussing on efficiency management, with the expense to incomes ratio down, though overall operating expenses rose 6.6% to $878m.

Looking at the segmentals, retail banking and rural were up, whilst wealth and third party banking were down.

BendigoFy15SegsBad and Doubtful debt provisions were down 16.6%, to $68.1m. However, 2H15 were higher due to $15.9m provision for Great Southern. We note that 90 day+ arrears were up for residential to  (~1.3%) and business to (~1.7%). Rural, their highest growth sector, had highest arrears around 5.5%.

Bendigo Bank Results Show Signs Of Home Loan Competition

Bendigo and Adelaide Bank (BEN), Australia’s fifth largest bank, today announced an after-tax statutory profit of $227.3 million for the six months ending 31 December 2014. The results were in line with the consensus expectations. Underlying cash earnings were $217.9 million, a 10.9 per cent increase on the prior half year result. Bad and doubtful debts expense was $30.1 million, down 29.5% on the prior corresponding period. NIM was maintained at 2.24%. Cash earnings per share were 48.1 cents, an increase of 3.4 per cent.

The interim fully franked dividend of 33 cents per share is up 2 cents on the 2014 interim dividend.

Basel III CET1 ratio increased by 12bps half on half to8.14% and an $292m additional Tier 1 capital issued in October. $600m RMBS was issued in December 2014. Total capital increased 80bps half on half to 12.19%.

Looking at the segmentals, Retail banking was up 14.2% from Jun 2014 ($128m to $146m), Third party banking was down 4.6% from Jun 2014 ($95.8m) to $91.4m, Wealth fell 37.5% from $19.5m to $12.0m and Rural rose 73.3% from $24.3m to $42.1m including the Rural Finance acquisition – in In July 2014, Bendigo finalised its $1.78 billion acquisition of Rural Finance Corp. from Victoria’s state government which has grown its agricultural lending. Overall, home lending grew at just 3.2% compared with system growth of 7.1%, whilst arrears were around 0.5%. There was strong competition through the broker originated channel.

BendigoHomeLendingDec2104They grew business lending by 19.7% compared with system of 7.4%. Business loan arrears were around 1.4%. Deposit growth was 1.5%, compared with system of 9.1%. Bendigo had an 8 basis point squeeze on lending margins thanks to competitive pressures and as a result they reduced term deposit pricing to help partly offset this so the net interest margin remained unchanged. Customer satisfaction remains higher than the majors, highlighting their unique position in the market.

The market reacted negatively to the results, because the growing business lending sector may imply higher loss rates, pressure on home lending margin and share, and reduced provisioning.