Bendigo and Adelaide Bank interim profit climbs, signals focus on returns amid ‘crazy’ home loan pricing

Chief executive Marnie Baker says the bank will step back from the mortgage market when pricing becomes ‘a little crazy’, declaring she is targeting appropriate returns.

Bendigo and Adelaide Bank chief Marnie Baker says the regional lender is prepared to step back from the mortgage market when pricing becomes “a little crazy”, declaring she was targeting growth that generated appropriate returns.

Her comments came as Bendigo Bank reported a bigger-than-expected jump in first-half profit to $294.7m buoyed by higher interest rates, and as Ms Baker signalled plans to keep pace with or outperform industry loan growth rates. That would only happen, however, if returns were attractive to Bendigo Bank, given fierce competition for borrowers has some lenders writing loans at below the cost of capital.

“The fact that a lot of business is being written below the cost of capital … The long-term sustainability to be able to continue to do that, that’s a question I’m sure shareholders would have,” Ms Baker said of competitive dynamics in the market.

“We have stepped out of the market at times when we just think it’s (pricing and cash back offers) a little crazy, and I have heard the market say to me many times that we need to be covering our cost of capital, and that’s what we’re doing in really managing our volumes and margins.”

Banks are jostling to retain and win customers that are refinancing from ultra-low fixed rates to markedly higher variable-rate home loans this year. That is against the backdrop of the Reserve Bank having hiked interest rates by 3.25 percentage points since May last year, prompting a slowdown in credit growth.

Bendigo Bank expects the RBA to lift the cash rate to 4 per cent from 3.35 per cent currently, which will put more borrowers under pressure to meet sharply higher repayments. The bank’s cash profit after tax climbed 13 per cent to $294.7m for the six months to December 31, compared to the same period a year earlier.

Total income rose 9.7 per cent to $958.2m in the half, compared to the prior corresponding period. But since June 30 total lending dipped 1.1 per cent to $77bn, as residential loans written slowed given the intense competitive activity in the market, including more cash back offers on mortgages.

Bendigo Bank’s cash profit after tax climbed 13 per cent to $294.7m for the six months to December 31, compared to the same period a year earlier. Picture: AAP

Bendigo Bank’s net interest margin – what it earns on loans less funding costs – increased 19 basis points to 1.88 per cent, from the prior six months. That came as it benefited from higher rates given the RBA’s rapid hikes through last year, which continued in February. The back didn’t provide guidance on the net interest margin for the remainder of the fiscal year, given the intense competition in the mortgage market.

Bendigo Bank shares climbed 1.9 per cent to $9.79 on Monday, outpacing gains in other bank stocks.

“While Bendigo (Bank) continues to navigate the challenging operating environment well with strong margin trends and likely consensus upgrades following the result, we see Bendigo as well valued in the current environment,” Macquarie analysts said.

UBS analysts said: “The positives in this release in our view are the commentary around NIM (exit NIM 2.03 per cent and guidance) and costs.”

The exit net interest margin refers to what the profitability measure was as at December 31, being 2.03 per cent, while the 1.88 per cent reflects an average over the six months.

Bendigo Bank declared an interim dividend of 29c a share, up from 26.5c in its last three halves.

Ms Baker also flagged higher credit losses, albeit from a low base, as the tightening cycle continued. The bank’s credit expenses rose in the first half to a $5.6m charge.

“While credit expenses are benign, they are likely to come under pressure … and move closer toward historical averages for the bank,” Ms Baker said.

“Borrowers remain well positioned with 43 per cent at least one year ahead on repayments … We have seen very little deterioration in these numbers, with 84 per cent of home loan customers maintaining a financial buffer.”

That suggested 16 per cent of borrowers had already hit the level the bank assessed their ability repay at, leaving them no buffer. Banks have passed on all of the RBA’s 3.25 per cent in rate hikes since May, and many borrowers were assessed on their prevailing mortgage rate plus a buffer of 2.5 or 3 per cent.

Ms Baker said while 16 per cent of borrowers did not have a buffer, some 80 per cent of those weren’t at their maximum borrowing capacity.

She does, though, expect further declines in house prices as the official rate continues to rise.

“Which in turn, will lead to lower system credit growth,” Ms Baker added.

Asked about potential merger talks between Bendigo Bank and rival Bank of Queensland, she said she didn’t comment on speculation. But Ms Baker did express an appetite for the bank to undertake acquisitions if the metrics stacked up.

“More generally, we have undertaken M&A activity in the past,” Ms Baker said.

“Under the right conditions … we would look at that (deals that are accretive for shareholders).”

Bendigo Bank has previously expressed competition concerns about ANZ’s acquisition of Suncorp Bank, after it was rebuffed by the target in its own takeover approach.

The bank’s consumer division posted a 44.8 per cent rise in cash earnings, fuelled by a 75 basis point increase in the unit’s net interest margin, which hit 2.91 per cent. The business and agribusiness arm saw cash earnings increase 12.5 per cent and the division’s net interest margin rise to 3.05 per cent.

Expenses across the bank edged up 1.1 per cent in the half, versus the same period a year earlier. But the cost-to-income ratio fell to 54.6 per cent and the bank aims to get that metric closer to 50 per cent as it undertakes an overhaul of its legacy systems and ramps up digital lending.

Bendigo Bank’s common equity tier one capital ratio was 10.13 per cent as at December 31.

Investors have also received insights into the health of the banking sector from the biggest four lenders this month. Westpac last week reported an increase in 30-day mortgage and consumer finance delinquencies in the December quarter, due to cost-of-living pressures and seasonal factors.