Bendigo and Adelaide Bank announces $242.6m profit
- Cash earnings of $291.0 million - up 60 per cent1
- Cash earnings per share of 83.3 cents - up 32 per cent
- Profit after tax $242.6m - up 190 per cent
- Total full-year dividend of 58 cents - up from 43 cents2
- Announces intention to buy 24 per cent of Linear Asset Management
Bendigo and Adelaide Bank has announced an after tax profit of $242.6 million for the 12 months ending 30 June 2010 - a 190 per cent improvement on the prior corresponding period. Cash earnings were $291.0 million, an increase of 60 per cent.
Net interest margin rebounded strongly to average 2.09 per cent for the year - up from 1.66 per cent in the prior corresponding period.3
Directors announced a final 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 bank had delivered on its promise of improved earnings and profit, while managing the effects of the global financial crisis (GFC).
"We have delivered a strong result, and we have done it while fundamentally re-structuring the business to ensure it is sustainable and self sufficient through the business cycle," Mr Hirst said.
"Our shareholders are starting to reap the benefits of our prudent and responsible approach to funding and growth. Our business lending, residential mortgage and consumer lending portfolios all have strong growth momentum and are currently exceeding system growth4. The fundamentals in our retail, margin lending and third-party mortgages businesses also remain robust.
"We still fund the majority of our business through retail deposits. We have not relied on the government guarantee on wholesale funding, and have been able to launch three highly successful residential mortgage backed securities (RMBS) transactions in the past seven months - raising more than $3.5 billion.
"In announcing this result, I would particularly like to thank our skilled, loyal and engaged staff who have been critical to this success. They have developed and maintained relationships with more than 1.4 million retail customers, through more than 450 Community Bank® and company owned branches, and through a substantial network of partners and joint venture organisations. By continuing to listen to our stakeholders we are well placed to assist them in achieving their goals, whilst at the same time meeting our goal of being Australia's leading customer connected bank.
"Credit quality remains sound, with excellent performance in the residential mortgage, margin lending, and business lending portfolios in particular. Notwithstanding this, we have provided for future potential losses on a conservative basis.
"The bank will maintain its focus on providing a superior customer experience, process and capital efficiency and growth in revenue streams. Whilst essentially seeking to drive performance organically, we will pursue potential M&A opportunities that make strategic sense," Mr Hirst said.
Linear Asset Management
Today the bank has also announced its intention - through the signing of a heads of agreement - to purchase 24 per cent of Linear Asset Management. This business, and in particular the Linear wealth management platform, will provide significant scope for growth in our wealth deposit and financing businesses in a market that is faced with significant change.
"We gain access to a proprietary information technology system, and new generation independent platform which is experiencing solid growth," Mr Hirst said.
"This provides an ideal opportunity to leverage our retail and third party wealth distribution channels, and is a significant development for the group's wealth strategy," he said.
Net interest margin
Net interest margin (NIM) recovered over the reporting period - from a run-rate of 1.70 per cent in July 2009, to a sustained high of more than 2.00 per cent since October 2009. Average NIM for the reporting period was 2.09 per cent.
NIM is expected to be maintained at these levels into FY2011 - particularly as the bank has no government guaranteed or wholesale funding to re-price. Further improvement in securitisation markets and/or asset repricing have the potential to improve NIM in the coming reporting period.
Credit quality
Credit quality remains sound across the bank's various businesses. 90-day arrears in the key portfolio - residential mortgages - improved moderately over the period, falling to 0.97 per cent from 1.08 per cent. Forecasts for a more stable cash rate and employment growth augur well for credit conditions into FY2011.
Business lending arrears (90-days plus) also fell during the reporting period - from 2.21 per cent in June 2009, to 2.19 per cent in June 2010. The consumer portfolio performed well, with credit card 90-day arrears falling from 1.65 per cent to 1.51 per cent, while personal loan arrears increased marginally from 1.14 per cent to 1.25 per cent.
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 unprecedented competitive dynamics of the Term Deposit market over the reporting period. Bendigo and Adelaide Bank has done this without having to match market-leading pricing, and this has helped to support our NIM recovery.
Even though the bank predominantly manages its liquidity through the TD book we continue to roll more than 80 per cent of TD's at maturity. Excluding Rural Bank we grew the retail deposit base by a healthy $1.75 billion - or 6.1 per cent - over the reporting period. Total growth including Rural Bank was $5.2 billion, or 18.1 per cent.
Capital levels remain conservative - particularly when the comparatively high risk weighting of our residential mortgage portfolio is taken into account5. Tier One capital levels increased from 7.43 per cent to 8.57 per cent over the reporting period - and total capital increased from 10.91 per cent to 11.17 per cent. A significant number of new shares were issued during FY2010, and this resulted in dampening of our earnings on a per share basis.
FY2011 presents an opportunity to manage the group's capital base more efficiently - with significant head room for either organic growth, growth through mergers and acquisitions, or a combination of both.
Costs
Reported costs increased over the period due predominantly to the full-year contribution of the Macquarie margin lending business, nine months contribution of a consolidated Rural Bank, and the August 2009 acquisition of Tasmanian Banking Services. On a comparative basis costs grew marginally due to increases in certified staff salaries.
The bank maintained a clearly defined strategy of preserving capacity and capability within the network for the duration of the GFC. We consider that this will serve the business well as funding conditions and demand for credit improve.
Business performance
The retail network continues to grow, with strong demand evident for the Community Bank® business model. The retail business reaped the benefit of having retained capacity, as evidenced in the last quarter when system growth was matched or exceeded for all portfolios (mortgages, non-mortgage lending, business lending, and household deposits).6 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 growth.
The recovery in our Third Party Mortgages business has been supported by the significant improvement in securitisation markets over the reporting period. This portfolio has grown by $250 million since February 2010, and with a restructured commission structure and fewer competitors, the fundamentals for this business are sound.
Our margin lending business remains stifled by the general uncertainty and volatility seen in equity markets since late 2007. However, an outstanding credit performance and improved margins have resulted in a substantial profit contribution to the group. This business is growing market share, and reinforces our claim as the independent Australian margin lending provider of choice.
Our remaining wealth businesses are well placed to take advantage of improving market fundamentals. Rationalisation and consolidation of the industry, and potential benefits from planned regulatory and legislative changes are likely to provide long-term benefits for us in this sector.
Rural Bank - our joint venture business with Elders Limited - also announced its annual results to the Australian Securities Exchange this morning. Its net profit after tax increased to $55.4 million, which is a 23 per cent increase on the prior corresponding period. This result - achieved in challenging business conditions for many agricultural commodities - reflects the credit performance and margin improvements for the period. Retail deposits fund in excess of 95 per cent of Rural Bank's lending.
Outlook
Mr Hirst said volatility and uncertainty were still a concern for the global economy, and this had seen expectations for the banking sector into FY2011 tempered - particularly from a funding perspective. However, he said the Bank had sound reasons for restrained optimism.
"The effects of the GFC continue to dominate market sentiment, and will likely cloud the outlook for the 2010-2011 financial year. However, this uncertainty and volatility also presents opportunities for a business like ours with a respected brand, growing customer base and proven track record for opportunistic and value creating M&A activity. All this is complemented by a well-funded and low-risk balance sheet," Mr Hirst said.
"We look forward to growing our business, improving our financial performance and exceeding the expectations of our customers, partners and shareholders" he said.
1 All comparisons are with the 2008/09 financial year, unless otherwise stated.
2 Interim dividend (announced in February 2010) was 28 cents. Final dividend is 30 cents.
3 June 2010 NIM run-rate was 2.21 per cent before margin share with Community Bank® branches and alliances. NIM was 1.91 per cent after margin share.
4 Source: APRA
5 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.
6 Source: APRA
