We have upgraded BEN to Buy from Sell. The strong December trading update implies material upgrades to consensus earnings estimates over FY23-25E.
BEN trades below book value at 0.8x, in-line with regional peer Bank of Queensland (BOQ). In our view, BEN is too cheap relative to continued improvement in earnings and capital generation.
We now expect Net Interest Margins (NIMs) performance can continue to improve over 2023, with limited drag from housing-related bad debts.
The market is currently forecasting NIMs to remain steady at 1.75% over the FY23-25E periods. This compares to a November exit run-rate of 2.01% (was 1.69% in 2H22). The upgrade confirms cost growth to be running below revenue growth.
BEN appears to be prioritising profitability rather than volume growth. Housing volume growth has been growing below industry since July 2023. CEO incentive remuneration is biased towards profitability measured vs volume growth.
In short, the BEN share price is too cheap relative to improving earnings improvement. BEN is far from the highest quality bank, and tail-risk remains around a pickup in housing bad debts in late 2023/24. At 0.8x book value, improving capital position and a dividend yield of +6.0% we upgrade BEN to Buy.
Investment View
BEN is a regionqal bank that through the cycle has historically struggled to generate a return on capital > costs of capital. Relative to the larger banks, BEN’s inferior scale results in a higher cost of income and lower profitability.
We rate BEN Buy. BEN offers a strong valuation appeal on both an absolute and relative basis. Earnings momentum is at an inflection point. Higher interest rates are now providing clear evidence of margin improvement.
Whilst industry structure and BEN’s lack of scale ultimately cap the ROE over the cycle, this debate can be had when the stock is closer to book value. Further evidence of margin improvement, potentially at the 1H23 Results should see a further re-rating in the share price.
Looking further out, if industry conditions continue to improve and bad debts remain lower, it’s not hard to see BEN generating 0.60-0.80% points of organic capital p.a., which would open the capital management opportunities in 2024E.
December Trading update
BEN has released a trading updating. This unusual for BEN and reflects a rapid improvement in earnings seen over the half.
Unaudited cash earnings of $245m, five months to end November. Market was at $247m full half. Implies 15% upgrade to 1H23 earnings.
NIM YTD 1.85%, with November exit NIM at 2.01%. This up from 1.69% at June 30. Market estimates 1.75% for the FY23. The improvement in NIM suggests that BEN August guidance of ~0.27% margin improvement for FY23e will be comfortably beaten.
Capital. Core Equity Tier 1 (CET1) 9.98% end October, up from 9.68% at the end of June.
Housing lending 7.5% yoy, -0.2% five months to end November, reflecting a focus on margin management
Risks To Investment View
Upside risks relate to mortgage repricing and stronger than expected levels of credit growth.
Key downside risks include further deterioration in interest margins, intensifying lending competition, material slowing in credit growth, and delayed resumption of dividend growth. A significant and rapid fall in house prices driven by higher interest rates would present a risk to the share price.
Recommendation
We have upgraded our Sell recommendation to Buy.
Figure 1: Upside risks to ben roe are emerging given margin improvement
Figure 2: BEN consensus ROE declining into FY25e looks conservative
Figure 3: Bank sector margin estimates look to conservative given BEN November eit run rate of 2.01%
