Bendigo and Adelaide Bank has logged a full-year cash profit of $418.3 million driven largely by hiking home-loan rates and consequently stronger margins in the second half.
While Australia’s fifth largest lender reported a modest 4.2 per cent rise in its cash earnings for the year to June 2017, subdued lending and deposit growth caused the bank to miss analyst expectations of a $428 million profit.
Net interest income was 4 per cent higher at $1.23 billion and a focus on efficiency kept expenses flat year-on-year. Bendigo’s net interest margin fell 1 basis point to 2.22 per cent on the year as repricing in the lending portfolio was offset by the continuing heavy competition for deposits.
However, the latest round of mortgage rate increases led to a margin recovery in the second half of the financial year. Net interest margin was up 8 basis points half-on-half with the exit margin reaching 2.34 per cent.
'Fraught with danger'
Bendigo’s chief executive Mike Hirst said that the result was a strong one driven in part by the need for mortgage repricing to respond to those regulatory caps on interest-only and investor growth.
“Additionally, our disciplined approach to front book mortgage pricing held us in good stead following the May and August 2016 cash rate reductions putting pressure on net interest margin.”
At a briefing immediately following the profit announcement, analyst interest focused squarely on margin growth and they queried whether that exit margin is expected to continue into the next half as July repricing benefits flow through.
“We are hopeful we can keep the margin toward that sort of number … and we will be doing our best to hold it although it is hard in a dynamic environment that is fraught with danger," said Hirst. “Not all dynamics are visible and getting a good margin on the front book is hard to do."
He also said the annual result was hampered by the prudential regulator's lending caps.
“In part, this was driven by the need for mortgage repricing to respond to those regulatory caps on interest only and investor growth. Lending growth has been predominately funded by strong growth in customer deposits which increased by $2.3 billion, or 4.7 per cent.”
Common equity tier one capital ratio sits at 8.27 per cent.
“Importantly, our ability to organically generate capital will enable us to achieve APRA’s unquestionably strong capital benchmarks well within the required timeframe, given what we currently know," Hirst told the briefing.
However, he claimed until APRA announces the risk weights "we really only know half the story about what unquestionably strong means".
Also, at the briefing, the Bendigo boss touched on the issue of governance following the news that Commonwealth Bank boss, Ian Narev, would step down next year in the wake of money-laundering allegations.
Acknowledging the challenges facing banks on the trust front, he told analysts that part of the regional lender's risk management strategy lay in its commitment to its branches - against industry trends.
"As we move into an environment where the regulatory environment and the oversight on institutions and the penalties for not doing the right thing became greater and greater, owning your own branches becomes more and more important," he said.
Hirst added that while the bank remained committed to its third-party network, it's how the two systems converge that remained a key issue. Once again, the chief executive said the bank is still working towards advanced accreditation although further announcements from APRA on risk-weighted assets would better inform this decision.
"Regardless, this significant investment has already helped management better understand risk and how it develops. Before that we didn’t have that understanding.”
Return on equity was up 31 basis points on the second half and up 10 basis points for the year. Hirst said he was not seeing any particular stress on its mortgage portfolio with the exception of “pockets” in Queensland and Western Australia as well as its Great Southern portfolio.