Bendigo Bank sell-off a buying opportunity, Citi says

An analyst says the regional bank’s near 30 per cent share price tumble in the past month is a buying opportunity with it having among the best leverage to rising rates.

Bendigo’s stock has plunged 28 per cent since its full-year result in August. Citi sees this as a buying opportunity. Photograph: Cameron Bates

Investment bank Citi is bullish on Bendigo Bank’s prospects, telling clients the regional bank has among the best leverage to rising rates in the sector and that its recent share price sell-off is a buying opportunity.

The optimistic take on the ASX-listed lender comes after weeks of selling pressure, with Bendigo’s stock plunging 28 per cent since its full-year result in August, as cost pressures and an uncertain net interest margin (NIM) outlook spooked investors.

The market has missed the bank’s NIM leverage from unhedged deposits, Citi analysts led by Brendan Sproules said.

“Bendigo Bank has significantly underperformed the banks index since its fiscal 2022 result.

“We view this largely reflects Bendigo Bank’s management’s NIM guidance where it guided to replicating portfolio returns and increased share to Community Bank partners, but not overall NIM leverage from unhedged deposits,” the analysts wrote in a note.

“We think Bendigo Bank has rates leverage in spades, and see the sell-off from management’s poor outlook statement as a buying opportunity.”

At its August results, chief executive Marnie Banker and chief financial officer Andrew Morgan guided to a 27 basis point benefit to its replicating portfolio in 2023, with a 46 basis point benefit to be seen over three years due to higher rates.

This is multiples above what other banks have guided to and what Citi has forecast over the coming 12 months, the analysts noted.

These forecasts include a 6bp benefit for ANZ Bank and Commonwealth Bank, 9bps for Bank of Queensland, 10bps for NAB and 12bps for Westpac, according to Citi.

There is also more NIM leverage on the unhedged deposit portfolio, the analysts said.

“Disclosure (at the full-year result) around the unhedged deposit portfolio’s NIM leverage was entirely absent from the outlook slide.”

“Bendigo Bank has $64bn of customer deposits. Thirteen billion of these are hedged, and therefore included in the replicating portfolio guidance. However, that still (leaves) $50bn of unhedged deposits of which management made zero comment on their exposure to higher rates.”

The NIM leverage from rising rates on the $50bn “is very real, and playing out larger than what we expected”, the analysts added.

“Bendigo Bank is leading the pack in growing margin on deposits, pricing well below all peers on savings and term deposit rates.”

Citi sees the lender’s NIM expanding by around 35bps over the next 12 months, with a fiscal 2023 NIM of 1.97 per cent vs the consensus 1.78 per cent expected.

The analysts also argued that the community bank “drag” is not the headwind the market thinks it is.

Ms Baker at the full-year result flagged that the community banking model would be put under the microscope as part of a broader review of the business.

It came as CFO Mr Morgan 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,” he 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.”

Citi’s Mr Sproules took a more optimistic view on the revenue share arrangement.

“For some in the market, the quantification of the ‘headwind’ from the Community Bank sparked fears around Bendigo Bank’s leverage to rising rates.

“However, this is analogous to paying more tax – if you are paying more tax, you are getting paid more. For every incremental 50c to the Community Bank, Bendigo Bank is to receive another 50c.”

Citi has a buy rating on the stock, with a price target of $9.75. Bendigo fell 0.3 per cent to $7.77 at 10.34am AEST, down 28 per cent from the $10.72 it was trading at before it handed down its full-year results in August.