Bendigo and Adelaide Bank (BEN)
BUY

Near Enough

 14 Aug 2023
Sector: Financials

RESULTS

Need To Know

  • In-line FY23 result.  DPS 61cps vs 60cps consensus.
  • Softer 4Q23 net interest margin captured in FY24 consensus.
  • Capital position remains sound. Expect flat revisions for FY24 consensus earnings.

Investment Implications

Revenue in-line, provision profit +0.5% ahead of consensus.

Cash earnings $577 -2% miss vs consensus.  Bad debts +5% ahead of the consensus, driven by higher fraud/scams and an increase in collective provisions. 

Small dividend beat 61cps, which implies a 60% payout ratio (bottom end of payout range guidance). This appears conservative given 11.25% CET1 (up from 9.7% in FY23), above the Boards 10-10.5% minimum.

Net interest margin performance saw 4Q23 margins below the 2H23 average. BEN has suggested that competition in residential mortgages has eased, with the industry largely removing cash-backed mortgage products.

Medium-term cost guidance has been wound back, with BEN dropping the commitment to have medium-term costs flat in FY22. This looks to be already reflected in Consensus expectations, which currently have FY25E/26E costs up ~8% on FY22. 

Overall, we see this result as being good enough. Returns have improved with ROE lifting 8.62% from 7.72% as NIMs rose during the FY. The consensus ROE’s profile into FY26E remains below the BEN’s assessment of the cost of equity of ~10%. BEN's conservative approach on CET1 (assumes a further 25bps RBA rate rise) keeps BEN conservative on capital management.

An ongoing benign credit quality into 1H24 would open the door to capital management (lift in dividend in payout ratio, on-consensus share buy-back).

BEN has had a clear preference for margin improvement over volume growth recently, and the 2H23 result is no different. BEN offers a strong valuation appeal on both an absolute and relative basis. Higher interest rates and reduced industry competition in residential mortgages should help slow-falling NIMs.

Whilst industry structure and BEN’s lack of scale ultimately cap the return on equity (ROE) over the cycle, this debate can be had when the stock is closer to book value vs the current 0.74x.

The potential for capital management at 1H24 Results remains the most visible catalyst for the share price should macro/industry conditions remain steady over the next 6 months.

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Stock Overview

Share Price

Company Overview

BEN is an Australian regional bank that provides banking, financial products and services to retail customers and small to medium sized businesses in Australia.

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