Bendigo and Adelaide Bank announces annual profit

Bendigo and Adelaide Bank (BEN) has announced an after tax statutory profit of $195.0 million for the 12-months ending 30 June 2012. Cash earnings were $323.0 million, a decrease of 3.9 per cent over the prior corresponding period¹. Directors announced a final dividend of 30 cents per share (fully franked), which is flat on the prior corresponding period².

Bendigo and Adelaide Bank managing director Mike Hirst said the past 12-months had continued to be challenging for all Australian banks.

"Our core revenue generating businesses of retail, third party banking, wealth and rural banking continue to perform well, and we have been determined in our efforts to improve the funding and capital profile of the bank," Mr Hirst said.

"We have been able to limit net interest margin contraction through prudent and proactive balance sheet management. We have sought to price both assets and liabilities in the most appropriate manner for all stakeholders. This has been combined with an active hedging program which, while expensive, has successfully mitigated the risk of significant margin volatility over the period," Mr Hirst said.

"High funding costs and low demand for credit has been felt across the sector, but despite this Bendigo and Adelaide Bank continues to grow and invest in the business," Mr Hirst said.

The bank also announced the sale of the subordinated notes it holds in its TORRENS securitisation program. The sale of the entire portfolio of notes, with a face value of approximately $170 million, releases approximately $80 million of Core Tier One capital. This (together with the 8 August, 2012, sale of the bank’s 7.8 per cent interest in IOOF) has resulted in an additional 42 basis points of Core Tier One capital post the June 30 balance date.

"These non-dilutive capital management initiatives illustrate our commitment to managing a profitable, but ultimately low risk and prudent business," Mr Hirst said.

"We have further capacity to improve the efficiency of our capital structure through the issuance of a Basel III compliant Tier One Hybrid capital instrument – which we expect to launch sometime in 1H2013³ - but even without this issue we are confident that our current capital structure will meet the requirements of the proposed Basel III capital standards.

"Focussing on the bank’s long-term performance and sustainability is central to our strategy and requires us to continually balance the interests of all our stakeholders. This strategy has been vindicated by recent credit rating upgrades from Fitch and Standard & Poor’s, and is in stark contrast to the rating momentum of many banks across the globe.

"I would like to thank our customers, staff, partners and shareholders for their contribution to Bendigo and Adelaide Bank’s results," Mr Hirst said.

Business performance

Funding costs remained high over the reporting period, with sustained competition for retail term deposits in particular. Despite these pressures NIM fell just seven basis points over the 12-month reporting period. The bank’s term deposit retention rates have remained consistently higher than 80 per cent, notwithstanding the bank continuing to adopt a less aggressive pricing structure than many of its competitors. Retail deposits grew by $2.1 billion over the six months to June 2012, and more than $4 billion over the past year.

The bank’s margin lending portfolio has now fallen more than 70 per cent since its pro-forma peak of more than $8 billion in 2007. While this decline is being replaced by asset growth in other portfolios (notably residential mortgages sourced through both retail and third-party channels), it has had a significant impact on the weighted average margin achieved on assets. The decline in the margin lending portfolio, and an assessment of the value of the wealth division, resulted in December 2011’s write off of $95.1 million of goodwill associated with this business, and this has affected the full year statutory profit announced today.

Cost containment and efficiency has been a major focus of management over the period. Operating expenses (excluding the purchase of the Bank of Cyprus Australia (BOCA)) grew by just 1.1 per cent over the period. Operational expense growth including the BOCA acquisition was 2.2 per cent. However, due to deteriorating revenues the cost-to-income ratio increased to 59.1 per cent, versus 57.4 per cent in FY2011. The group maintains its long-term 55 per cent cost-to-income target. As part of the group’s continued cost focus the Board has announced there will be no short term incentive (STI) bonus pool for Executives relating to FY2012.

Despite this cost focus the bank continues to invest in the strategic initiatives and front-line capacity of the bank. The integration of BOCA continues ahead of plan and in excess of synergy targets. There has been significant investment of staff and resources into the group’s Basel II Advanced Accreditation project, and customer-led connection strategy. This is in addition to the continued investment in the roll-out of the bank’s newly-developed customer relationship management system. These investments are being resourced from within the business, with considerable effort being made to maintain front-line capacity and service levels, while managing back-office functions to fit the needs of the evolving business.

Credit quality is sound across the bank’s businesses. 90-day arrears in our largest portfolio – residential mortgages – deteriorated slightly over the period, sitting at 0.82 per cent in June 2012, while business lending arrears (90-day) increased marginally to 2.8 per cent. The consumer portfolio continued to perform well, with both credit card and personal loan arrears at near historical lows of 1.56 per cent and 0.99 per cent respectively. Rural Bank arrears and provisions are returning to historical norms after the trade disruptions and natural disasters of the past 24-months.

Outlook

Mr Hirst said the outlook for the coming financial year remained difficult to predict, with significant market volatility and revenue challenges facing all banks. Funding costs, changing asset mix and demand for credit are all volatile reflecting the global environment.

"Notwithstanding these pressures, Bendigo and Adelaide Bank continues to invest in our business, our people, and the communities we operate in. We will work diligently in our efforts to become Australia’s leading customer-connected bank," Mr Hirst said.

"We don’t take for granted our industry-leading customer satisfaction levels, or our industry-leading business customer satisfaction levels. And we certainly don’t take for granted our staff engagement levels, which are 2 per cent above the Australian high-performance benchmark.

"We will continue to leverage these strengths, and the strengths of our funding and capital profiles, to take advantage of the significant opportunities that exist for Bendigo and Adelaide Bank," he said.

1 Unless otherwise stated, all comparisons are with the prior corresponding period (12-month reporting period to 30 June 2011).
2 Ex-dividend date is 23 August 2012, record date is 29 August 2012, and payment date is 28 September 2012.
3 Subject to relevant Board and regulatory approvals.