Bendigo community bank model under microscope amid review as cash profit jumps nearly 10pc to $500m

The regional bank will put its community banking model under the microscope as part of a broader review and will adopt a sharper focus on ROE and capital generation.

Bendigo and Adelaide Bank is putting its community banking model under the microscope as part of a broader review of its business and says it will adopt a sharper focus on return on equity and capital generation, as it reported a lift in cash profit for the year.

The regional lender on Monday reported a cash profit of $500.4m for the 12 months through June 30, a rise of 9.4 per cent, as it increased both its lending and deposits over the year and saw the benefit of a one-off $27.2m writeback of provisions related to the pandemic. It was the first time its cash earnings had lifted above $500m.

Speaking after handing down the results, managing director Marnie Baker said ASX-listed Bendigo Bank was taking a closer look at its community model, set up in the 1990s.

“Over the last few years, we’ve seen the economy change and we’ve seen conditions change. We are looking at all of our businesses to ensure they are running effectively and we’re continuing to meet the needs of our customers,” Ms Baker told The Australian.

“Both the community partners and ourselves have been introducing efficiencies into that model to reduce costs...We are (now) looking at what does this community bank model, which was born out of physical distribution, what does look like in the digital age.”

The review comes as Bendigo told investors of the impact rising rates and greater deposits would have on its revenue share arrangement with the community banks.

“If community banks write footings (loans and deposits) at a faster rate than the group then revenue share will increase,” chief financial officer Andrew Morgan said.

“There’s also a rate aspect. If community banks write a higher proportion of call versus term deposits, then revenue share will increase... if historical trends continue, both rising cash rates and a rising proportion of deposit funding sourced from community banks will have a meaningful upwards influences on revenue share and therefore a downward influence on net interest margin.”

More than 20 years after it first kicked off the community model, Bendigo currently has 324 community bank branches that it partners with. Ms Baker said these community franchises helped to boost both Bendigo’s deposits and customer numbers.

While the idea of a community model came about in a time well before digital banking upended access to banking, Ms Baker said digital and physical offerings were not mutually exclusive as she confirmed their importance to the overall bank.

“We are reviewing all of our businesses but the community banks are very important to our organisation... However, our community partners and ourselves know that models need to evolve and to change as the environment and customer preferences change. So we are reviewing that model, along with our community partners, to ensure that it actually is sustainable well into the future.”

Ms Baker’s comments come as the lender’s shares were hammered on Monday in the wake of the full-year result.

Investors eyeing an uncertain net interest margin outlook and challenges to the bank’s cost targets sent the shares tumbling, with the stock down 8.3 per cent at $9.88 in afternoon trade.

After driving down costs through the year, the lender cautioned on the inflationary headwinds to expenses, saying it was aiming to keep costs “broadly flat” this year and would look to keep its investment spend at current levels through to 2024 before a decline further out.

Amid the focus on costs and return on equity, Ms Baker cautioned on the lending outlook, warning credit growth would likely moderate even amid “intense” home lending competition.

Mr Morgan flagged that a new focus on getting the balance between volume and margin management right on the lending front may see it pull back from home lending this coming year.

“As we look forward over the medium term, we’ve got a heightened focus on getting that balance right between volume and margin management. It’s a very competitive market. If that means that pricing is unsustainable, and we need to step out for a period of time then we’re prepared to do that.”

The shift comes after the bank increased residential lending over the past three-and-a-half years, including in the most recent half, and as its net interest margin squeezed a further 21 basis points to 1.74 per cent.

Ms Baker said she still believed the bank could grow at system even with a greater focus on margins.

Total lending rose $5.6bn, or 7.7 per cent, over the year to $77.8bn, while customer deposits increased $6.3bn, or 11 per cent, in the year. Total income was 0.4 per cent higher at $1.7bn.

“These results show we have delivered what we promised in a challenging and competitive environment. Bendigo and Adelaide Bank has delivered continued growth in loans, deposits and customer numbers,“ Ms Baker said.

“We have reduced costs and improved our cost to income ratio while maintaining a strong balance sheet and preserving our credit quality.”

Even with the competitive pressures on lending Ms Baker said the impact of rising rates was starting to filter through to the NIM.

But she cautioned on the uncertain outlook for the economy and the housing market.

“What we hoped was going to be a relatively smooth economic landing coming out of Covid has got a little bumpy, as we face into growing inflationary pressures, a tight jobs market, rising wages and general global uncertainty,” Ms Baker said.

“Cash rate increases from the Reserve Bank are beginning to have an impact on property values in some markets and we can expect credit growth to moderate and competition to remain intense.”

The share price drop early on Monday, below $10, came despite the full-year result beating expectations, largely as a result of the greater-than-expected provision release.

“A solid result, characterised by an asset quality beat but in-line core earnings,” Citi analysts said.

“Overall, while there are both positive and negative factors, we think the focus still lies on overall leverage to the higher cash rate given Bendigo Bank’s strong deposit franchise.”

The board declared a final dividend of 26.5c per share, bringing the full-year payout to 53c per share, fully franked. This is a 6 per cent rise on the prior year’s payout.