Bendigo & Adelaide Bank (BEN) – NEUTRAL
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector: Financials||52-Week Range: A$9.75 – 12.52|
|Industry: Banks||Market Cap: A$5,559.8m|
We rate BEN as a Neutral for the following reasons:
- Relative to major banks, BEN trades at fair value in our view, on 1.0x price to book and dividend yield of ~6.4%.
- Strong franchise model.
- Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
- Continued strong cost discipline, improving efficiency and boosting performance.
- Advanced accreditation in progress (which may improve ROE).
- Potential pressure on net interest margins as competition intensify with major banks in a low interest rate environment.
- Potential cash rate increases towards the end of 2018 to help with cash earnings as the loan book is repriced.
- Leading in terms of customer satisfaction and net promotor metrics, which are increasingly key in a period where trust is paramount (as noted by the Royal Commission)
- The Royal Commission levelling the playing ground for banks.
We see the following key risks to our investment thesis:
- Intense competition for loan growth, combined with further discounting.
- Volatility in Homesafe earnings.
- Increase in bad and doubtful debts or increase in provisioning.
- Funding pressure for deposits and wholesale funding.
Bendigo and Adelaide Bank (BEN) reported solid FY18 results, which were in line with market expectations. Earnings (underlying cash NPAT) was up +6.4% to $445.1m, return on equity (ROE) was up +13bps to 8.23% but return on tangible equity (ROTE) declined -9bps to 11.52%. BEN also noted a Common Equity Tier 1 (CET1) ratio of 8.62% (up +35bps) and continued progress towards Advanced Accreditation.
Net Interest Margins (NIM) showed strong growth, up +14bps to 2.36%, driven in part by favourable repricing of deposit and lending portfolios, however management did signal margin pressures in FY19 due elevated levels of cash bill spread.
We continue to believe that the royal commission into the financial sector continues to be a drag on sentiment towards banking shares. Indeed, on the analyst call, management pointed out that “there’s no doubt that it continues to be a challenging environment for Australian banks with the effects of the Royal Commission into misconduct casting a shadow across the industry and increased regulatory oversight and a renewed debate around culture. Trust in the banking sector is at an all-time low and it’s a subdued banking sector with declining asset growth, diminishing bank margins and increasing costs as banks seek to bolster their compliance functions”.
BEN appears to be unaffected by the Royal Commission at the earnings line. We expect lower loan growth going forward, and lacklustre dividend growth; BEN trades in-line with valuation and on 12.8x PE19; Reiterate Neutral.
- FY18 result – key highlights:
1. Underlying cash earnings of $445.1m (up +6.4% on pcp) driven by a 14bps improvement in net interest margin;
2. Underlying cash EPS of 92.1cps (up +3.6% on pcp);
3. Return On Tangible Equity (ROTE) of 11.52%, down 9bps, driven by strong net interest margins (NIMs) and cost controls;
4. Final dividend of 35cps (up 1cps on pcp),fully franked.
- Strengthening margins. NIM were at 2.36%, up +14bps on pcp. This was driven primarily by favourable repricing of deposit and lending portfolios in 1H18 and strong growth in core portfolio, partially offset by declining margins in 2H18 impacted by an increase in cash bill spreads. However, BEN signalled margin pressures for FY19, impacted by an elevated level in the cash bill spread and front book discounts.
- Bad and doubtful debts (BDD) improving. BDD charge was at 11bps of gross loans (or 10bps excluding the Great Southern book) which is an improvement from FY17. BEN continues to see declining Great southern credit costs as the portfolio continues to pay down significantly.
- Loan growth largely on par with system. BEN’s lending growth was in line with system at 4.8% versus BEN at +4.2%, despite a very competitive market for credit. Housing loan growth was +4.7% versus system at +5.1%.
- Strong capital position. Common Equity Tier 1 (CET1) ratio was at 8.62% (up +35bps), well ahead of APRA’s 2020 requirement, driven by strong organic capital generation, strong profitability and moves to lower risk weighted exposures. BEN has managed to maintain its CET1 ratio during the second half, following strong asset growth and in the absence of any RMBS transactions. Management reaffirmed that its progress towards Advanced Accreditation is going well and more clarity could be expected once the new APRA standards are finalised.
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Figure 1: : BEN’s declining cost-to-income ratio
BEN FY18 Result Summary…
Figure 2: BEN’s FY18 Results
Figure 3: BEN’s Capital Ratios (%)
Figure 4: BEN’s 2H18 Growth Outcomes vs Peers & System (%)
Source: APRA; Company
Figure 5: BEN’s Financial Summary
Source: Bloomberg, Company, BTIG
* Line items used for summary purposes only and may not reconcile to total.
Bendigo and Adelaide Bank Ltd (BEN) offers a variety of banking and other financial services including internet banking, housing finance, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuation and trustee services.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
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