Bendigo balance sheet ‘a long way from luxuriating in a capital surplus’

Half of Bendigo’s customer deposits have interest rates less than 0.25 per cent - a significant increase on 35 per cent at last year’s annual result. Picture: AAP

The $300m capital raising by Bendigo and Adelaide Bank on Monday is the predictable answer to persistent questions about the bank’s capital adequacy.

What remains unanswered, though, is whether the 4c cut in the interim dividend to 31c is enough, given the Bendigo balance sheet is a long way from luxuriating in a capital surplus.

The easy answer to that question is that the board thinks it’s enough, for the moment anyway.

Bendigo’s common equity tier one ratio was a skinny 9 per cent at the end of last year, and will increase to 9.81 per cent after the raising.

The board will review its CET1 target of 9 per cent to 9.5 per cent after the Australian Prudential Regulation Authority completes its overhaul of the banking industry’s “unquestionably strong” capital framework.

Bendigo’s problem is that the business environment is far from forgiving.

Jefferies analyst Brian Johnson put Bendigo’s capital adequacy into a broader context on Monday, asking if the dividend cut was sufficient when a margin squeeze was on the horizon, trading profits were under pressure, operating costs were going to increase, loan losses could rise, and a further 27m shares, or 5.4 per cent of issued capital, was about to be farmed out.

Chief financial officer Travis Crouch answered in precisely the way you’d expect, given the circumstances.

Above-system growth in the mortgage book also had to be funded, he said, and as chief executive Marnie Baker had already noted: “The board has considered the dividend and reset it to what we think is a sustainable level.”

Bendigo is no different to its peers in that the squeeze on margins is tightened with every cut in the cash rate, as the proportion of deposits paying zero or near-zero rates inexorably rises.

Half of Bendigo’s customer deposits have interest rates less than 0.25 per cent - a significant increase on 35 per cent at last year’s annual result, with the market pricing in another rate cut sometime before August.

While the net interest margin edged up 2 basis points to 2.37 per cent, the so-called exit margin at the end of December was 6 basis points lower at 2.31 per cent.

It’s true, as Crouch said, that it’s partly a good problem to have, because there are strong flows into Bendigo’s targeted - but lower-margin - segment of owner-occupied residential lending paying principal and interest.

But as the margin pressure intensifies in the second half, the big challenge for Bendigo will be to cushion the impact through mortgage repricing and spreading even more pain to depositors.