Bendigo shares smashed on margins hit

The regional lender increased deposits and home lending well above its peers over the six months to December 31, but it came at a cost.

Bendigo and Adelaide Bank CEO Richard Fennell. Picture: Jane Dempster/The Australian

Bendigo and Adelaide Bank shares cratered 18 per cent on Monday after the regional lender revealed a shock margins plunge that tore into its earnings for the first half of the year.

Cash earnings for the six months through to December 31 fell to $265.2m, down 1.1 per cent on the prior corresponding period and 10 per cent lower than the June half.

Bendigo’s net interest margin (NIM), a key measure of profitability, sank 6 basis points in the half as customers piled into the bank’s home loans, catching the lender off guard and forcing it to turn to more expensive wholesale funding when deposits fell short. At the same time, it saw higher-than-expected growth in high-interest savings accounts, adding to the margin pressures. Its shares sank 18 per cent at the open before paring a portion of the losses to be down 15 per cent to $11.37 by the close.

Customer deposits rose 5.4 per cent over the six months, above system, while total lending jumped 3.4 per cent, with residential lending up 5.3 per cent, twice the rate of the broader market.

In a bid to protect margins it made pricing changes, mostly in the second quarter, but had seen only a “small decline in volume since”, new chief executive Richard Fennell told The Australian.

“We weren’t the absolute sharpest in the market (on pricing through the half), and that’s not where we ever look to position ourselves. We like to be price competitive, but we don’t look to be a price leader,” Mr Fennell said.

“We were expecting (lending growth) in the order of 1.2 to 1.3 times system. It turned out that the demand for our offering was much stronger than that. We have moved lending rates for new business higher in both the Bendigo broker offering and our digital channels. We’ve seen a small reduction in application volumes, not a massive drop off,” he said.

The result was also impacted by higher expenses as part of the bank’s transformation program, now in its final stages.

In a call to go through the results, veteran banking analyst Brian Johnson took aim at the bank for failing to give any warning of the steep drop in NIM.

“Under the continuous disclosure requirements, we should never see a share price down 17.8 per cent in a day,” the MST analyst said as he called on Mr Fennell to provide more detail on when Bendigo first became aware of the “collapse in the margin”.

“We’re talking about a five basis point reduction in our margin. (It’s) disappointing that we saw that movement but clearly from our perspective, that didn’t require an update from a continuous disclosure perspective,” Mr Fennell shot back.

Barrenjoey banking analyst Jon Mott said the half-year result was “much weaker than expected” and 5 per cent below consensus estimates.

“The moving parts were concerning. NIM was 7 basis points lower than consensus, given competition in mortgages and business & agri, deposit cost and wholesale funding. Expenses (were) higher with wage and price inflation, tech costs and volume-related costs,” he said.

Mr Fennell said more of the bank’s customers had built up financial buffers in the half, including 40 per cent who are at least one year ahead on repayments. He expects the Reserve Bank to cut rates this week and a further two times this year to bring the cash rate to a neutral 3.5 per cent but would not confirm if Bendigo would fully pass on the rate cut to borrowers.

“As we always deal with these things, we look to balance the needs of borrowers and savers. Our pricing committee meeting is scheduled for Friday, obviously to coincide with following the RBA meeting,” Mr Fennell said.

“I don’t want to pre-empt (the decision) made then, but personally, I suspect most banks will be looking to pass on the benefit of a rate cut to borrowers and, as a price taker, I can’t expect we’ll be looking to do something vastly different to the rest of the industry.”

Operating expenses climbed 5 per cent on the prior half and were up 8.3 per cent on the first half of 2024 due to increased investment spend and inflationary pressures. Excluding investment spend, operating expenses jumped 3.8 per cent.

“The increase in costs is due to a combination of wage inflation, new digital assets, higher amortisation charges, and the impact of price rises from existing technology vendors,” Mr Fennell said, adding that the six-year transformation program was in its final stages.

“Over the half, we made strategic decisions to increase our investment spend that will support delivery of our transformation program in 2025.” Improvements in its home lending offering as part of the transformation program helped drive the above-system growth in the half, he added.

Bendigo will pay a dividend of 30c per share, in line with the payout for the first half of 2024.