Bendigo and Adelaide Bank announces $173.9m half-year profit
- Cash earnings of $162.1 million
- Cash earnings per share of 44.7 cents
- Profit after tax $173.9m
- Interim dividend of 30 cents
Bendigo and Adelaide Bank has announced an after tax profit of $173.9 million for the six months ending 31 December 2010. Cash earnings were $162.1 million, representing cash earnings per share of 44.7 cents, an increase of 8.5 per cent on the prior corresponding period1.
Net interest margin remained relatively stable over the period – increasing one basis point from 2.14 per cent to 2.15 per cent. This was despite continued strong competition in the retail term deposit market in particular.
Directors announced an interim dividend of 30 cents per share (fully franked), which is consistent with the Board’s policy of paying out 60-70 per cent of cash earnings as dividends.
Bendigo and Adelaide Bank Group Managing Director, Mike Hirst, said the result continued the positive trend of successive increases in cash earnings and profit since the effects of the Global Financial Crisis peaked in the June 2009 half-year.
“We have built a sound and profitable banking business, based on the principle of engaging our customers, partners and communities,” Mr Hirst said.
“This is providing our shareholders with a sustainable business committed to growing through providing value and putting our customers and partners first. The business manages its risk and risk appetite appropriately and is well positioned for the future.
“Our balance sheet benefits from the strong support of our retail customers. These customers – through a network of more than 450 branches across Australia, including 260 Community Bank® branches – now provide in excess of 90 per cent of our total on balance sheet funding. During the reporting period we were also able to complete two separate RMBS transactions with a value of $2.5 billion.
“Our businesses continue to rank among the highest for customer satisfaction, brand advocacy and trust – not just among banks, but across all business sectors in Australia. This places us in an ideal position to benefit from the continued political, legislative and regulatory changes that the industry now faces.
“During the reporting period we were able to complete the purchase of the remaining 40 per cent of Rural Bank. This provides greater earnings diversity for our group, and valuable exposure to an industry which expects strong growth and high agricultural commodity prices to continue in the medium term.
“While the human costs of the recent natural disasters across Australia have been extraordinary, the effect on credit quality in both our rural and residential mortgage portfolios is expected to be relatively minor and short-lived as markets reopen and the significant rebuilding and investment program begins.
“At this time I would like to thank our staff, partners and customers for their efforts in helping their fellow Australian’s through these recent disasters. Together with Bendigo and Adelaide Bank’s charitable arm, the Community Enterprise Foundation®, they have raised more than $2.25 million for victims of Australia’s recent natural disasters – including the Queensland and Victorian floods, cyclone Yasi, and bushfires in Western Australia.”
Net interest margin
Net interest margin (NIM) remained relatively steady over the reporting period – from 2.14 per cent in the June 2010 half, to 2.15 per cent. The NIM run-rate in December was 2.23 per cent, reflecting the benefit of the residential mortgage re-pricing in November.
While the bank expects funding conditions to remain tight, we are confident in our ability to raise and hold retail term deposits through the retail network. Term deposit retention rates were consistently greater than 80 per cent over the reporting period – despite the bank continuing to adopt a less aggressive pricing structure than many of its competitors.
Credit quality
Credit quality remains sound across the bank’s various businesses. 90-day arrears in the key portfolio – residential mortgages – remained relatively steady over the period, increasing to 1.02 per cent from 0.90 per cent. This figure remains below the July 2009 arrears rate, despite seven increases in the official RBA cash rate since that time.
Business lending arrears (90-days plus) fell during the reporting period – from 2.19 per cent in June 2010, to 2.15 per cent in December 2010. The consumer portfolio performed well, with credit card 90-day arrears falling from 1.51 per cent to 1.23 per cent, while personal loan arrears also fell from 1.25 per cent to 1.07 per cent.
It remains too early to determine the exact effects of recent natural disasters. However, based on the information currently available, we do not expect a material deterioration in credit quality. In particular it will take some time to determine the impact on customers of Rural Bank, where we expect those effected to experience some short-term cash flow difficulties, albeit in an industry with sound fundamentals and strong commodity prices.
Credit quality in the margin lending business remains exceptional, reflecting the operational capability and risk management framework of that business.
Funding and capital
The bank successfully grew its retail deposit base, despite the continued competitive dynamics of the term deposit market. Bendigo and Adelaide Bank has done this without having to match market-leading pricing, and this has helped to support our stable NIM. We grew the retail deposit base by a healthy $3.3 billion – or 10.2 per cent – over the past 12-months.
We were also able to complete two separate RMBS transactions with a value of $2.5 billion in the six months to 31 December 2010, and current funding plans include additional transactions for this calendar year. The fundamentals for the securitisation market remain sound, with support from the AOFM confirmed by the Federal Government in December.
Bendigo and Adelaide Bank continues to explore funding alternatives that fit its pricing and risk profile. Currently the Group is considering the domestic retail bond market as another avenue for funding.
Capital levels remain conservative – particularly when the comparatively high risk weighting of our residential mortgage portfolio is taken into account2. Tier One capital levels reduced from 8.55 per cent to 8.06 per cent over the reporting period, primarily from the purchase of the remaining 40 per cent in Rural Bank, while total capital decreased from 11.15 per cent to 11.07 per cent. During the first half the group raised $250 million in subordinated debt, qualifying as Tier Two capital.
In September 2010, the bank had announced its intention to neutralise the effect of the Dividend Reinvestment Program (DRP) through a share buy-back, subject to market conditions. Given Bendigo and Adelaide Bank’s recent strong share price performance this buy-back was not conducted. The Board does not intend to neutralise the impacts of the DRP for the HY2011 interim dividend.
The bank continues to maintain conservative capital levels, and is well-placed to support the organic growth of our businesses.
Costs
Reported costs increased over the reporting period, primarily due to the full six-month contribution of Rural Bank3, an increase in staff salaries, bonus accruals, and a normalisation of staff additional leave arrangements.
While the cost-to-income ratio remained steady at 57.7 per cent over the six-month period, it remains better than the 58.5 per cent cost to income ratio for the prior corresponding period, and is still trending towards the Group’s long-term 55 per cent target.
Business performance
The bank maintained a clearly defined strategy of preserving capacity and capability within the network for the duration of the Global Financial Crisis. This strategy enabled us to record strong asset growth across most of our business streams. Total business lending for the 12-months to December 2010 increased 4.5 per cent, versus system growth of -3.4 per cent4. Mortgages grew by 8.5 per cent (system 8.1 per cent), and total loans and bills by 7.2 per cent (system 4.0 per cent).
Our retail brand – Bendigo Bank – consistently produces industry leading measures for customer satisfaction, customer advocacy, trust, sustainability, and corporate responsibility. These measures provide the foundation for continued growth in the second half. The group expects to open another 20 branches in the coming 12-months, with the pipeline for further expansion strong beyond this period.
The sustained recovery in our Third Party Mortgages business was supported by both the improved securitisation markets and a reduction in competition outside of the major banks.
Our margin lending business continues to reflect the general uncertainty in equity markets. However, outstanding credit performance and improving margins have resulted in a substantial profit contribution to the Group. This business is also growing market share, and reinforces our claim as the independent Australian margin lending provider of choice.
Outlook
Mr Hirst said the outlook for the Australian economy remained sound, but there were still significant headwinds and uncertainty for Australian banks.
“We expect there will be some volatility in trading conditions for the coming six months, particularly as wholesale funding markets remain challenging and the longer term effects of the recent natural disasters begin to be felt,” Mr Hirst said.
“Notwithstanding this, shareholders in Bendigo and Adelaide Bank have reason to be positive for the future. Theirs is a sustainable bank with a simple and low-risk business model that will continue to focus on meeting the needs of the customers, partners and communities that it serves.
“We are well positioned for growth, our forecast for margins is solid, and credit quality remains generally sound,” he said.
1 Unless otherwise stated, all comparisons are with the prior corresponding period (six-month reporting period to 31 December 2009)
2 Source: APRA APS330 disclosures. Average risk weightings applied to Bendigo and Adelaide Bank residential mortgages under the standardised approach to Basel II is approximately 40 per cent.
3 Compared to three months for the prior corresponding period.
4 Source: APRA
