Bendigo and Adelaide Bank announces strong first-half profit

Bendigo and Adelaide Bank (BEN) has announced an after tax statutory profit of $189.4 million for the 6-months ending 31 December 2012. Underlying cash earnings were $169.7 million, an increase of 4.4 per cent on the prior corresponding period¹ . Directors have announced an interim 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 business conditions over the past six months continued to be characterised by lacklustre demand for credit and heightened competition for retail deposits.

Like all Australian banks we have had to adapt to these conditions, however our strategy of focussing on customer engagement and our drive to be more efficient has held us in good stead, Mr Hirst said.

I am pleased with our progress on both fronts, which has enabled us to report an improvement in performance across the board. Despite the very low absolute rates of credit growth across the economy, we have been able to gain market share by growing faster than system. In addition, there has been a marked improvement in both our net interest margin and cost to income ratio.

Much of the past three years has been about strengthening our balance sheet and establishing a platform for growth.

Together, each of these factors helped to produce an improved profit for the group, and lay solid foundations for the remainder of the financial year. I would like to thank our customers, staff, partners and shareholders for their contribution to Bendigo and Adelaide Bank's results, and we look forward to working with them to make BEN Australia's leading customer connected bank, Mr Hirst said.

Business performance

Disciplined pricing of both assets and liabilities led to a 10 basis point improvement in net interest margin, to 2.18 per cent, over the reporting period. The bank's term deposit retention rates have remained consistently higher than 80 per cent, despite the bank continuing to adopt a less aggressive pricing structure than many of its competitors.

While retail deposits continue to make-up approximately 80 per cent of the BEN's total funding, there has been a material improvement in the cost and availability of wholesale funding options for the bank. This was felt mainly in the latter months of the reporting period (and has continued in the six weeks since 31 December 2012), so the impacts of this should be more pronounced in the second half of the financial year.

Cost containment and efficiency has been a major focus of management over the period. Operating expenses grew by just 1.7 per cent over the period. Staff numbers increased by less than one percent, as head office efficiencies allowed the business to continue to invest in new branches, and in key strategic initiatives like the group's Basel II Advanced Accreditation project. This efficiency focus was reflected in an improved cost-to-income ratio of 57.8 per cent, versus 59.8 per cent in the six months to June 30, 2012. The group maintains its long-term 55 per cent cost-to-income target.

BEN continues to invest in its distribution footprint and capability. This, combined with industry leading customer satisfaction and brand advocacy, has allowed the business to grow total lending at an annualised rate of 4.7 per cent over the past six months. This compares favourably with system growth of just 2 per cent over the same period.

The group's Tier 1 capital ratio has increased 92-basis points over the six-month reporting period, with the benefits of the sale of BEN's stake in IOOF, the sale of subordinated notes relating to past Torrens securitisation issues, and the issue of convertible preference shares all having a positive impact.

Even though the bank experienced an increase in bad debt expense to $32.1 million over the half, absolute losses remain low as a percentage of total assets. BEN's provisioning remains conservative. Total provisions and reserves as a percentage of impaired assets are above 100 per cent, and provisions cover of bad debt expense remains materially higher than that of most other Australian banks. 90-day arrears continue to fall across all major lending portfolios.

Outlook

Mr Hirst said while business conditions and sentiment had improved in the second quarter of the financial year, there was still a high level of uncertainty and volatility in the market.

In particular, we are yet to see more recent rallies in debt and equity markets translate into a material increase in demand for credit," Mr Hirst said.

In this environment our industry-leading retail and business customer satisfaction levels and the maintenance of an efficient business model becomes even more important.

At Bendigo and Adelaide Bank 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 our business," he said.

¹ Unless otherwise stated, all comparisons are with the prior corresponding period (6-month reporting period to 31 December 2011).
²Ex-dividend date is 20 February 2013, record date is 26 February 2013, and payment date is 28 March 2013.