Bendigo and Adelaide Bank (BEN)
SELL

Handbrake on margins

 16 Aug 2022
Sector: Financials

Need to know:

  • Cash earnings ahead, but a low-quality beat.   FY22 DPS inline at 53cps.
  • Both net interest margins and capital position are softer than expected.
  • Medium-term guidance implies lower earnings and ROE improvement.

Investment Implications

FY22 Result: Cash NPAT $500m vs market $490m. Dividend 53cps (100% franked) in line with the market. Net interest margin fell 11bps in the half to 1.74%, whilst capital was also softer than expected at 9.7% for CET1.

Result quality is low: BEN relied on bad debt provision release, stronger Homesafe income (reverse mortgage product), and change in capitalisation rates for infrastructure spending. These changes come under new CFO Andrew Morgan (June 2022). Overall, we consider this to be a low-quality result.

Margin Guidance: BEN guided to +27bps of net interest margin improvement expected in FY23 driven by higher interest rates. Importantly, BEN provided a caveat that implies earnings leverage will be much lower than the market previously assumed.

Medium-term outlook: “NIM should benefit from new replicating portfolio settings, largely offset by higher revenue share payments which are likely to exceed historical levels”.    

Expect downgrades to medium-term earnings: In our view, BEN guidance implies market earnings will need to come back 5-10% over 23-25E. This also raises the question of whether BEN can deliver an ROE improvement mid-cycle.

Maintain the Sell rating: BEN’s share price has rallied strongly since late June partly based on a potentially less bad earnings outlook. We remain concerned that a slower revenue growth environment will expose BEN as a low return on equity bank without a clear pathway of improvement.  The market was looking for +8% EPS CAGR into 2024E (ahead of many peers) going into this Result, which is now cum-downgrade.

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

Figure 1: Consensus BEN EPS growth forecasts are likely to be revised down to 2-3%

Figure 1: Consensus BEN EPS growth forecasts are likely to be revised down to 2-3%

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Stock overview

Share Price

Company overview

Bendigo and Adelaide Bank is an Australian regional bank.

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