Unique business model delivers $170.5m profit for Bendigo and Adelaide Bank
- Cash earnings per share up 13.0 per cent to 93.7c
- Cash earnings up 70.4 per cent to $201.9m
- Net profit after tax up 40.0 per cent to $170.5m
- Credit quality remains sound
- First annual result since merger with Adelaide Bank
Bendigo and Adelaide Bank has announced an after-tax profit of $170.5 million for the 12 months ending 30 June 20081. The result represents growth in cash earnings per share of 13.0 per cent – to 93.7 cents per share.
Directors announced a final dividend of 37 cents per share (fully franked), taking the full dividend paid for the financial year to 65 cents – an increase of 12.1 per cent on the prior corresponding period.
Bendigo and Adelaide Bank group managing director Rob Hunt said the bank’s ability to deliver sustainable growth in profits – despite the severe dislocation in global credit markets – was testament to the bank’s unique business model and management approach. He said it also demonstrated the strength of the larger organisation, which was formed as a result of the merger between Adelaide Bank and Bendigo Bank.
“We have approached these testing market conditions fully aware of the likely implications for our businesses – from a higher cost and reduced availability of funding, to a possible deterioration of credit quality across the sector,” Mr Hunt said.
“Notwithstanding this, our determined and disciplined approach to writing sustainable and profitable business has placed the group in the best possible position to manage these market challenges.
“We remain predominantly funded by retail deposits; our credit quality remains sound; and our prospects for growth remain solid.
“The Bendigo Bank retail network continues to expand by around 25 branches each year and with a high proportion of branches yet to reach maturity, future income growth is to some extent locked in.
“We are also taking the opportunity afforded by the current disruption to wholesale markets to reshape those businesses for growth, and improved margins, once funding begins to flow again.
“The current market conditions demonstrate the strength and flexibility of the merged bank. While current conditions have challenged our wholesale businesses, we have been able to leverage the strength of our retail franchise to sustain our momentum. Equally, as conditions improve for our wholesale businesses, they will be well-placed to ride the upswing,” he said.
Group performance
Profit after tax for the reporting period grew by 40.0 per cent to $170.5 million – reflecting not only the solid performance of the key businesses of the group, but also seven months’ profit contribution from Adelaide Bank, which merged with Bendigo Bank in November 2007.
Cash earnings per share exceeded guidance by 1.0 per cent, for a total growth of 13.0 per cent, to 93.7 cents per share2. Underlying earnings after significant items grew by 70.0 per cent, to $201.9 million.
The cost to income ratio improved over the period from 64.6 per cent to 59.6 per cent. This improvement was due to a combination of Adelaide Bank’s lower cost wholesale model, synergies achieved through the merger integration process, and a concerted effort to manage costs appropriately in the current business environment. Operating expenses before significant items grew by 35.2 per cent – mainly due to higher salary costs from the addition of an additional 1140 full time equivalent staff through the merger with Adelaide Bank.
Asset quality
Asset quality remains sound, with gross impaired loans representing just 0.09 per cent of total assets – down from 0.11% in the prior corresponding period. Bendigo and Adelaide Bank manages a highly granular portfolio of assets, with just 6-loans greater than $30 million, out of a portfolio nearing $40 billion. Residential mortgages are the predominant asset class, while residential property is the predominant security.
Bad and doubtful debt expenses grew to $25.7 million – an increase of $16.9 million since 2007. This was due to a 174.7 per cent increase in group loans under management (predominantly as a result of the merger with Adelaide Bank). General and collective provisions remain a conservative 0.51 per cent of Group Risk Weighted Assets.
Specific provisions in our Consumer Portfolio – which includes residential mortgages – are just 0.04 per cent of the total portfolio balance. While levels of 90+ day arrears are trending upwards, this appears in line with industry trends but comes from a very low base.
The margin lending business has withstood the recent market volatility to remain in excellent shape, with record margin call activity resulting in specific provisions of just $4.4 million, or 0.12 per cent of the portfolio.
Funding and capital
Like all banks, Bendigo and Adelaide Bank has experienced an increase in the cost of funds during the reporting period. However, the group has lifted its retail funding, with more than 75 per cent of all on-balance sheet funding coming from this source as at end July 2008.
The period saw a significant re-structure of the group balance sheet to reduce the reliance on any single wholesale funding source. Total securitisation fell to $11.4 billion – from $13.1 billion when the banks merged; Euro Commercial Paper outstandings have reduced to $1.09 billion from $2.49 billion as at June 20073. The ability of our branch network to produce sustainable liability growth has been clearly evident, with growth of 15.8 per cent over the reporting period – to a total of $23.6 billion.
The Group remains strongly capitalised with a total capital position of 10.43 per cent and a tier 1 ratio of 7.52 per cent. Liquidity is also strong and remains well in excess of our statutory requirements.
Retail Bank
The Retail Bank – including the Community Bank® model – continues to enjoy strong growth and profitability. Branch openings included four new company owned sites, 18 new Community Bank® branches, and the addition of 25-branches through the merger with Adelaide Bank. Demand for new company owned and Community Bank® branches continues to remain strong. The group expects to continue to open about 25 new branches each year.
Our unique focus on the customers we serve – and the communities and partners we work with – continues to deliver sustainable value for our shareholders. Customer numbers grew by more than 70,0004 this year, and our customer and business satisfaction ratings remain industry-leading.
“We remain confident that our retail network will continue to utilise the significant investment that has been made over many years in this business,” Mr Hunt said. “The momentum in this business places us in an ideal position to deliver significant value to our customers, partners, communities and shareholders.”
Wholesale Bank
The Wholesale Bank continues to provide strong results, despite the current trading environment which has meant a significant increase in the cost of funds. Our margin lending business, Leveraged Equities, has managed the extreme market volatility exceptionally well. All our margin calls were made and settled during the period, and the overall credit quality of the portfolio remains excellent. Despite the severe market volatility, customer account numbers continues to grow, and this augers well for sustained growth in this business.
The Wholesale Mortgages business is being actively managed to meet the challenges of the current funding environment. New and existing portfolios have been repriced, and the bank has recently rolled-out a new commission structure with its distribution partners. We are working with our partners to ensure this business has a sustainable and profitable future.
Outlook
Mr Hunt said while Bendigo and Adelaide Bank had not provided specific guidance for the 2008-09 financial year, the company did expect to continue to grow shareholder value – even if the current economic conditions continued.
“We believe the business model employed by Bendigo and Adelaide Bank is strong and unique,” Mr Hunt said.
“Our non-negotiable focus on customers, communities and partners – and a strategic focus on growth at profitable prices – means we are able to create value throughout the business cycle,” he said.
- The result includes seven months contribution from Adelaide Bank, which merged with Bendigo Bank in November 2007.
- Cash EPS was based on a weighted average number of shares, taking into account the merger with Adelaide Bank.
- ECP for both banks as at 31 June 2007, prior to the merger.
