Bendigo and Adelaide Bank March quarter trading update - positioned well in a challenging environment
Bendigo and Adelaide Bank has released a March quarter trading update and revised guidance for the financial year ended June 30, 2009.
The bank has continued to re-structure in response to the pressures being presented by the Global Financial Crisis and subsequent deterioration in the domestic economy. While these efforts have had a short term negative impact on parts of the business, they have placed the bank in the best position to withstand the current challenges and grow both earnings and profits into the future.
Revised forecasts for the financial year are for cash earnings of between $205 million and $218m, which represents between 70 and 75 cents per share.
The bank has completed the structural changes required in its balance sheet to deal with today’s market conditions. Retail deposits now represent nearly 90 per cent of on-balance sheet funding, with strong growth being experienced every month since June 2008 – well before the creation of the Government Guarantee. More than 86 per cent of maturing accounts are currently being written to new Term Deposits within the bank, while more than 95 per cent of all maturing funds are being retained within the group funding structure. These factors are providing the bank with certainty of funding and the flexibility to take advantage of future opportunities.
Interest income and margin
Funding continues to be constrained across the sector, and this is being reflected by a significant increase in the cost of both retail and wholesale deposits. Assets, particularly residential mortgages, have not been re-priced in line with this increased cost, and this has at least in part contributed to a continued deterioration in net interest margin (NIM). A rapidly falling official cash rate has only compounded these issues, as fixed rate term deposits continue to add a lag effect to the weighted average cost of the liability book.
Securitisation costs have risen over the period – primarily as a result of increased costs through our warehouse structures. However, securitisation continues to fall as a proportion of total funding, and this is expected to reduce the overall impact this has on NIM in the future.
Interest income was lower than forecast as a continued deterioration in equity markets impacted on the size of the margin lending portfolio. In addition, the slowing domestic economy led to less demand for credit through our retail branch network, specialised lending, third party mortgages, and business lending businesses.
An expansion of NIM is occurring as outstanding Term Deposits roll onto lower rates.
Group credit remains sound, and reflects both the low-risk nature of our lending book and our predominant exposure to well-secured residential lending. Arrears levels in our standard variable mortgage portfolio remain relatively stable, and while lo-doc arrears are trending higher, the additional security provided by this product means expected losses remain low.
Business lending arrears continue to track higher, but the majority of growth relates to four loans already disclosed in the December half.
Unsecured consumer lending represents a very small part of the overall lending portfolio, and arrears levels remain low. Margin lending credit quality remains exceptional, with no provisions or write-offs to the end of March.
Tier One capital increased to 8.12 per cent over the period, while total capital reduced slightly to 10.75 per cent. A significant number of new ordinary shares have been issued over the past 12-months, and while this has replaced Tier 2 capital, it has also provided significant dilutionary pressure on the group’s earnings per share performance.
Costs continue to reflect the higher service retail model that has been employed by the bank for a significant period. This model has provided benefits during the last 18-months through the generation of significant retail deposit growth.
Notwithstanding this, an increased focus on cost control due to current economic conditions, combined with synergies from the merger between Bendigo Bank and Adelaide Bank, will see costs decrease by an estimated five per cent in the two years to June 30, 2009. Current market conditions dictate that a tougher focus on cost control will be employed in the coming period.
Dividends and guidance
Board policy for dividends has been maintained at a 60 to 70 per cent payout ratio of cash earnings per share. Guidance for the financial year ended June 30, 2009 has been revised to cash earning per share of between 70 and 75 cents. This reflects the challenges faced by the bank in the first nine months of the financial year, and the efforts to re-shape parts of the business.
Bendigo and Adelaide Bank managing director Rob Hunt said the bank was well positioned to manage the difficult trading environment facing all Australian banks.
“We have taken decisive action to protect this bank from the risks posed by the current banking environment,” Mr Hunt said.
“And we have placed the bank in the best possible position to take advantage of any improvement in market conditions and confidence.
“Our strategy and business model remains sound, we continue to grow customer numbers, we continue to grow branch numbers, and demand for the Community Bank® business model remains strong.
“While we expect to see continued volatility and uncertainty in global financial markets, we believe Bendigo and Adelaide Bank is in an ideal position to weather these conditions and provide lasting sustainable returns to our shareholders,” he said.