Bendigo Bank (BEN) announces half-year results
- Cash earning per share up 10.3% to 43c
- Net profit after tax up 34% to $72.8m
- Full-year target of 12% cash EPS growth reaffirmed
- Interim dividend up 16.7% to 28 cents per share (fully franked)
- Excellent credit quality
- First result since merger with Adelaide Bank Ltd
- Share Purchase Plan and DRP discount announced
Bendigo Bank Limited (BEN) has announced a $72.8m profit after tax for the half-year ended 31 December 2007. The result – which is the first since the 30 November 2007 merger with Adelaide Bank Limited – is a 34.1 per cent improvement on the prior corresponding period. The result includes six months of Bendigo Bank accounts and one month of Adelaide Bank.
Cash earnings per share increased by 10.3 per cent, while the interim dividend was increased by four cents (16.7 per cent), to 28 cents per share (fully franked).
Bendigo Bank managing director Rob Hunt said the result demonstrated the bank’s ability to achieve solid growth at profitable prices despite current market conditions.
“The global financial services sector is experiencing a period of significant volatility and reduced confidence, with funding more difficult and more expensive to obtain,” Mr Hunt said.
“In that environment, we have demonstrated a commitment to write quality credit in reasonable volumes and at profitable prices – and that remains the focus of the merged Group.
“We have a proven retail banking capacity, strong liquidity and adequate funding which we are directing towards business that improves profitability, enhances customer relationships and improves our long-term prospects.
“So our strategy has not changed, just the market conditions in which we find ourselves.”
Dividend and share purchase plan
The Bendigo Bank Board has announced an interim fully franked dividend of 28 cents per share, which is an increase of 16.7 per cent on the prior corresponding period, and reflects the Board’s long-held strategy of producing sustainable increases in shareholder value. The payout ratio was 65 per cent of the combined earnings for the six-month period.
The Board also announced its intention to offer existing shareholders up to 300-shares each through a Share Purchase Plan. Details will be mailed with the dividend, payable on 31 March. The Board also announced that a 2.5 per cent discount would apply to the calculation of the share price at which shares would be issued under the Dividend Reinvestment and Bonus Share Plans, in relation to the interim dividend.
As a merged group Bendigo Bank has shown a continued commitment to its retail and Community Bank business model, which has continued to produce strong deposit growth.
Cash earnings per share were up 10.3 per cent for the reporting period, reflecting a disciplined approach to new business and cost management across the Group.
Credit quality remains in excellent shape across the business, with gross impaired loans as a percentage of total assets steady at just 0.08 per cent. Credit performance across the residential mortgage and margin lending businesses in particular remains excellent.
While the result incorporates just one month of contribution from Adelaide Bank, the rationale and strategic intent behind the merger remains sound.
Costs continue to fall as a percentage of operating income, despite continued investment in the business and staff. The cost to income ratio fell 2.8 per cent to 63.7 per cent. This is expected to further improve in the second half as Adelaide Bank’s wholesale business is fully integrated.
Funding and Treasury
The bank has experienced an increase in the cost of funds – particularly for wholesale funds – through the reporting period. This has been offset by the re-pricing of some assets, particularly the residential home loan portfolio and margin lending books.
“While this cost of funding has increased, it has served to illustrate the strength and deposit-generating ability of our retail branch network,” Mr Hunt said.
“Notwithstanding this, we have a disciplined strategy of only writing business that remains profitable and secure in the current funding environment.”
Net interest margin fell moderately over the reporting period, but has been actively managed through current market conditions. Pro-forma results prepared on the basis that the two banks had merged for the entire reporting period indicate a 0.12 per cent fall in NIM for the six-months to 31 December 2007.
“Ongoing management of NIM will continue to benefit from our commitment to writing and maintaining profitable business,” Mr Hunt said.
Mr Hunt said the strength of Bendigo’s retail franchise was an asset in a tight funding market. Retail deposits rose by 19.3 per cent on an annualised basis and continue to grow strongly in a competitive market.
While customer satisfaction continued to lead the industry, Bendigo Bank has recently completed a nationwide training program to reinforce key aspects of the Bendigo style of retail banking.
“As non-branch transaction volumes increase, we are well advanced on our plans to transition the branch network from a transaction focus to providing customers with higher levels of advice and support in achieving their financial goals,” Mr Hunt said.
Demand for Community Bank continued to be strong. “We are targeting 20 new sites in the current financial year and are already working with 50-plus sites beyond that.”
Adelaide Bank brings significant scale and diversity of wholesale operations to the merged Group. The merged business, which incorporates Wholesale Mortgages, Margin Lending, Business Partners and Funds Management, continues to operate in competitive sectors that have been affected by the increased cost of funding since August 2007.
Growth in the Wholesale Mortgages business is being actively managed in response to these funding challenges. The underlying profitability of the portfolio has been managed through a 0.55 per cent increase in Lo-Doc interest rates (rate rises above movements in the official RBA cash rate), and a 0.25 per cent increase in the delivered cost of funds for variable rate loans.
Significant volatility in equity markets has tested and proven the integrity of the margin lending business model. The credit quality and underlying performance of the business remains sound. Operational risks have been successfully managed throughout the recent market turmoil, with all margin calls being made, and all settlements met despite record levels of margin call activity. This business has solid growth opportunities as investor confidence and value returns to equity markets; as margin lending becomes a more mainstream offering; and as Bendigo Bank’s 1.3 million retail customers gain greater access to these products.
The portfolio funding business continues to perform strongly, with a solid pipeline of active discussions and approved mandates ensuring the longer-term fundamentals of the business remain sound. The current environment has facilitated a margin increase on a number of the portfolios funded through the business.
The significant task of merging Adelaide Bank and Bendigo Bank continues, with a dedicated Merger Integration Committee formed and operational. Sixteen individual work streams have been identified and work teams have been formed to implement the merger process.
The Group is on track to deliver initial forecasts for $60m to $65m in merger synergies (with 80 per cent delivered by the second full year of operation).
“All the work we have completed to date gives us confidence in achieving these synergies without affecting the growth and investment in our business that is needed in the coming years,” Mr Hunt said.
“Our cultures and staff are working well together to ensure this merger delivers real value for our shareholders, and we are pleased with the progress we have made and the senior management team that is in place,” he said.
In late January shareholders approved a name change for the merged group to better reflect the origins of the business. The new name, ‘Bendigo and Adelaide Bank Limited’ comes into effect from March 31, 2008.
Mr Hunt said the outlook for the merged bank was sound and the Group was focused on further improving shareholder returns.
“As our retail bank continues to expand and mature, and as partnering with our communities, business partners and customers continues to produce tangible benefits, we will continue to produce sustainable and consistent results,” Mr Hunt said.
“The merger, and the way in which the two banks have already been able to work together, augurs well for the continued success of this business,” he said.
Bendigo Bank reaffirmed its full-year target for cash Earnings Per Share growth of 12 per cent.
*All results reflect six months of Bendigo Bank results and one month of Adelaide Bank. Balance sheet figures are for the consolidated group.