Strong rebound in net interest margin and profit for Bendigo and Adelaide Bank
Highlights 2010 interim results
- Cash earnings per share of 41.2 cents - back to pre-GFC levels
- Net profit after tax before significant items of $134.2m
- Net interest margin recovers as forecast - from 1.66 per cent to 2.09 per cent1
- Credit quality remains sound
Bendigo and Adelaide Bank (the Bank) today announced an after tax profit before significant items of $134.2 million for the six months ending 31 December 2009 - a 23.2 per cent improvement on the prior corresponding period.
Directors announced an interim dividend of 28 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.
Net interest margin recovered strongly to 2.091 per cent, with the adverse effect of term deposits raised in a rapidly falling interest rate environment of the prior year having worked through the business.
Bendigo and Adelaide Bank Group Managing Director, Mike Hirst, said the improved performance of the Bank was testament to its strong and low-risk balance sheet, the good work of staff, and the resilience of its business units through the global financial crisis (GFC).
"This is a great reflection of the support we receive from a large and loyal customer base, both directly through our branch network, and also through our alliance, joint venture and third-party partners," Mr Hirst said.
"Our early action to de-risk the balance sheet and prepare ourselves for a period of market dislocation has paid dividends over the period, as evidenced by the significant and sustainable recovery in net interest margin and profit.
"Our ability to compete for retail deposits on the basis of customer service and value has provided the company with an effective and affordable funding source. This, combined with emerging opportunities in the wholesale and securitisation funding markets, should provide our shareholders with continued reason for optimism.
"Credit quality remains exceptional across the majority of our loan portfolio. This reflects not only the strength of the Australian economy and employment market in general, but also the sound underwriting standards and low-risk nature of our portfolio.
"The fundamentals for each of our businesses remain sound, with solid growth prospects for our retail, wealth and third party businesses," Mr Hirst said.
Net interest margin
Net interest margin recovered dramatically over the period, to 2.09 per cent. Net interest margin on a run-rate basis reached 2.27 per cent in December 2009, and is expected to be maintained at around these levels into the next reporting period.
Forecasts of an increasing official cash rate are expected to assist margin expansion. However this will be offset by continued strong competition for retail deposits - and retail term deposits in particular.
Despite this competition, the Bank continues to roll more than 80 per cent of term deposits at maturity, and has grown its retail funding base over the reporting period.
Credit remained sound, with the reported increase in non-performing loans due mainly to the consolidation of Rural Bank's accounts during the reporting period. Real growth in non-performing loans was minimal, with the residential mortgage and margin lending portfolios performing particularly well. Gross impaired loans as a percentage of total assets rose just 0.01 per cent to 0.50 per cent.
While the bank remains vigilant about credit quality, the continued growth of the Australian economy and relatively low unemployment levels augur well for a continued benign credit environment.
The Bank continues to work through the issues relating to its portfolio of loans to investors in Great Southern managed investment schemes. Total arrears have remained relatively steady since August 2009, and the Bank has recently initiated court action against the first of its defaulting customers. The Bank has repeated its intention to use all of its rights under the terms and conditions of the loan contracts to recover the money owed to it.
While the Bank has continued to seek repayment from defaulting customers, it has also maintained its efforts to help ensure any existing value in the schemes is preserved and increased. A recent grower vote saw Gunns Ltd take over as responsible entity for the 1998 to 2006 woodlot schemes. The vote means Gunns is now responsible for taking these schemes through to maturity - providing investors with the best possible chance of receiving a return on their investment. The Bank continues to work with all relevant stakeholders in an attempt to produce similar outcomes for the remaining schemes.
Funding and capital
While the availability of both retail and wholesale funding was maintained over the reporting period, the cost of this funding remained expensive. Notwithstanding this, the Bank successfully launched a $1 billion RMBS issue in December. While it is too early to declare that securitisation markets have recovered fully, there are promising signs for the future of this market.
The Bank maintains its target of being 80 per cent retail funded (on balance sheet), but continues to monitor wholesale markets for alternative funding sources.
Capital levels remained strong, with Tier One capital at 8.95 per cent, and Total Capital at 11.97 per cent. These capital levels allow for significant flexibility as economic conditions improve, and will trend towards the Board’s target ratio of 7 to 7.5 per cent (Tier One).
Costs remained relatively flat, and reflected a concerted effort to improve efficiency and restrain spending over the period. The bank has managed its cost base while maintaining capacity for an improvement in business conditions. The support and contribution of our staff through this process has been particularly significant. An improvement in revenues over the reporting period resulted in a lower cost to income ratio - from 63.7 in June 2009, to 57.7 in December 2009.
Our retail network of both company owned and Community Bank® branches continues to grow, with a more than 20 branches opening over the previous calendar year. Demand for the Community Bank® model remains strong, with more than 25 branches expected to open in the coming 12-months. The relative immaturity of this network means the Bank is well placed to deliver further liability and asset growth.
Our margin lending business - operating under the Leveraged Equities banner - continues to perform well, with the portfolio growing in line with the broader share market. Strong margins and a further improvement in equity markets provide further reason for optimism.
Our remaining wealth businesses, Sandhurst Trustees and Adelaide Managed Funds, are expected 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 to this sector.
Our Third Party Banking business, which predominantly sells residential home loans through mortgage brokers and mortgage managers, has emerged in sound shape from a period of consolidation and restructure. Commission structures have been adjusted, and demand through this channel remains strong. Any improvement in securitisation markets will further boost prospects for this business.
Bendigo and Adelaide Bank remains cautiously optimistic about future financial performance. While it expects to deliver strong financial results in the coming reporting period - supported mainly by a stable net interest margin and sound credit conditions - asset growth will continue to be dictated by broader economic conditions.
1 Before Community Bank® distribution. In the six months from June 2009