Bendigo’s challenges in managing a better big bank

  • By Christine St Anne

The fifth largest lender is confronting high costs but has reported solid lending growth with its digital partnerships driving a 349 per cent increase in millennial customers.

On Monday, Bendigo and Adelaide Bank announced a 2 per cent fall in cash profit to $215.4 million.

In a statement, the bank's CEO Marnie Baker said that earnings for the half were impacted by ongoing technology investment, regulatory and compliance costs and staff investment to support mortgage growth.

On the cost front, the bank’s cost to income ratio was 59.3 percent, up 200 basis points on the prior corresponding period.

This was due to IT investment to support growth and an increase in staff costs to support the Bank’s strategy.

There was an additional $16.9 million invested in the first half of fiscal 2020 which saw an additional systems and process simplification, automation, strengthened digital services and capability, including open banking, and compliance and regulatory initiatives.

Operating expenses were $487.4 million, up 5 percent on the prior corresponding period.

This excludes pre-tax software impairments ($87.1 million) and software accelerated amortisation charges ($19.0. million), following reviews of the bank’s software assets.

The bank is targeting a cost-to-income ratio of 50 per cent.

Speaking to AB+F, Baker said here the bank would be focusing boosting its growth. This requires the bank to “scale up” and with that comes costs by investing in people and technology.

However, the bank is adopting a variable cost approach. One such strategy sees it adding contract staff in the processing centre so as the processes are automated, the bank has the flexibility to reduce its head count.

Positive for the bank was a solid growth in its mortgage book.

Total lending was up 2.8 per cent on the prior corresponding period to $62.9 billion and above system.

In the half, residential lending was well above system at 7.7 per cent, reflecting strong customer demand driven by strategic focus in its retail and third-party businesses, the bank said.

Baker remains upbeat that the bank can continue to grow its lending book in part because it is the better big bank – Bendigo continues to lead on the NPS front.

“We have a unique opportunity in the market as a trusted bank.”

This has positioned the bank to grow and work effectively in its communities and will continue to work with its strategic partners to drive this growth.

Agribusiness lending was down 6.8 percent, influenced by seasonality and the ongoing multi-year drought.

Partnerships in the pipeline

For small business customers, focused relationship banking strategies delivered growth and margin improvement, with small business lending up 15.6 percent.

Its consumer banking division performed strongly, driven by investment in processing capacity, to support settlement growth, new mobile relationship and business development managers and new and enhanced third party white label partnerships.

Lending applications increased 45 percent and settlements 35 percent on the prior half.  

Net interest margin increased 2 basis points on the prior corresponding period to 2.37 percent, “reflecting the active management of margin and volume for lending and deposits”.

Importantly, bad and doubtful debts were down 9 percent to $23.2 million.

According to Baker, all business divisions are well secured, and portfolio performance remains sound.

The bank’s partnerships with Up and Tic:Toc continue to deliver for the bank.

Up, increased its customer numbers by 57 percent in the half to more than 165,000 customers

Tic:Toc continues to deliver sustained growth with approvals in the first half up 55 percent on the previous half.

The bank continues to see the average age of its customers decrease as a result of those partnerships.

The average age of new customers continues to be more than 10 years younger than the average age of the customer base.

The net growth in the number of millennials choosing to bank with Bendigo increased 349 percent on the prior corresponding period and there was also an uptick in small business customers.

“Our strategy to develop lasting relationships with millennials is designed with future growth in mind and our strong customer growth validates our proposition to this market,” Baker said.

She added that the bank would provide “more flavour” around how it is engaging with this newly garnered segment particularly on whether it is winning on the MFI front in its year end result in June.

“The bulk of our customer base is in bank deposits and getting them to choose Bendigo as the MFI is part of our strategy.”

Partnerships similar to those struck with Up and Tic:Toc are also on the horizon but at this stage it is a wait and see.

The bank also continues to overhaul its branch network.

During the half, the Bank closed five branches and one agency outlet and opened two new agencies. The total number of national points of presence is more than 700.

Merger talks dismissed

The bank also announced a $300 million capital raise via an underwritten institutional placement and non-underwritten share purchase plan.

The proceeds of the capital raising will be used to support the growth the Bank is experiencing in its residential mortgage lending, further strengthen our balance sheet and provide an increased buffer above APRA’s ‘unquestionably strong’ CET1 capital ratio requirements.

The bank plans to use these funds to give it flexibility to invest in technology and address any regulatory-related change initiatives.

Common Equity Tier 1 improved by 24 basis points to 9 percent on the prior corresponding period as a result of our long-term focus and prudent risk management.

The banks also reduced its first half dividend by 4 cents to 31 cents per share.

Baker also dismissed reports around a possible merger with Bank of Queensland – a theme “that has been discussed for a decade”.

“In  low credit environment,  there is always the potential for mergers and acquisitions but we remain focused on executing our own strategy.”