House prices will weather six rate hikes by the end of 2023: Bendigo Bank boss Marnie Baker

The bank expects the central bank to lift interest rates six times from mid-year to the end of 2023, but still expects house prices to keep rising.

Bendigo and Adelaide Bank managing director Marnie Baker. Credit: Joel Bramley

Bendigo and Adelaide Bank managing director Marnie Baker expects the Reserve Bank to lift rates up to three times before the end of 2022 followed by a further three hikes next year, but is tipping the housing market can withstand the heat with property prices lifting from here, albeit at a slower pace.

Speaking to The Australian after handing down the lender’s interim results, which showed a near 19 per cent jump in cash profit, Ms Baker said the bank was “very much leveraged to a rising cash rate environment”.

Investors pushed Bendigo Bank’s shares more than 4 per cent higher to $9.65 in late trade on the back of the better-than-expected result and despite the looming headwinds.

“(Those rate hikes) are becoming more and more likely as the data that’s dropping supports that view, along with the comments that are coming from the Reserve Bank. From the bank’s perspective, we’re very much leveraged to a rising interest rate market,” Ms Baker said.

“I think we’re still going to see some increases in property prices, though not as pronounced as what we’ve seen in the last couple of years. But there’s still scope, both in regional and metropolitan areas, for some further increases there.”

Over the six months through to the end of December, Bendigo Bank posted cash profit of $260.7m as it eked out above-system residential growth of 1.1 times. Total income rose 2.9 per cent to $873.4m.

But even as the bank grew slightly above system in the hyper-competitive residential space, overall lending growth fell well behind its peers, rising at 4.3 per cent compared with system growth of 8.3 per cent, with business and agri lending the biggest drags.

Ms Baker pointed to increased competition and “sharp” pricing in the current market as drivers of its business lending moving backwards.

“We’ve got some big players now competing on price and competing more broadly across some of the markets that we’re in.

“And with that kind of pricing we’re very mindful and we actually did step out for a bit because we couldn’t match the pricing that was occurring while still maintaining the appropriate risk/return.”

Bendigo Bank earlier this month announced it would combine its business and rural banks as it looks to snatch back some of the lost market share.

“I’m really focused on bringing together systems, lifting the service and focusing back in on the markets where we’ve always been and will remain,” Ms Baker said of the move to tie the two divisions together.

The bank also flagged lower revenue in the coming months as competition in the mortgage market squeezes margins.

The bank’s net interest margin dropped a sharp 14 basis points to 2.09 per cent over the six-month period, due to pricing pressure on mortgages, customers shifting to fixed loans and a higher balance of lower yielding liquid assets.

“Challenges in the form of margin compression and non-recurring other income are expected to drive revenue lower in the second half. Costs will need to decline for us to continue driving the cost-to-income ratio lower. Delivering positive jaws remains the intent of our executive team,” Ms Baker told shareholders.

But rising rates in the first half of the 2023 financial year should in time work to ease the pressure on margins, Travis Crouch said in an analyst briefing.

“We are managing our margin by repricing and are confident that our approach to margin management, combined with better leverage to a rising cash rate, will play out with improved returns over time,” he said.

“Looking ahead, we expect residential loan growth to continue to exceed system growth and the seasonal return of agribusiness growth to drive better near-term lending growth,” Ms Baker added.

The bank declared a 26.5c a share fully franked dividend, which will be paid on March 31.

Morningstar banking analyst Nathan Zaia said it was a solid result with good momentum in residential lending.

“Another positive is it doesn’t seem like it’s come at an exorbitant cost either, so they’ve got some good control over the investments they’re making into the business.

“Business lending was particularly weak and I think that comes down to some big competitors investing a lot (to win market share) and maybe Bendigo fell behind a bit.”

Macquarie analysts said the result was ahead of their forecasts and driven by lower expenses, lower-quality non-interest income, as well as better margin performance underpinned by ongoing deposit pricing tailwinds.

“While this is a respectable performance at the time when mortgage competition is exerting pressure on margins, the result appears to be more in-line with more bullish consensus forecasts ... Bendigo Bank highlighted its leverage to higher rates, and we continue to see the bank as the key beneficiary of this thematic later this year.”