Bendigo and Adelaide Bank (ASX BEN) is the fifth largest commercial bank in Australia with its roots in Victoria and Queensland. Despite regulatory pressures from the Australian Prudential Regulatory Authority (APRA), BEN has the capacity to increase its net profit via reducing deposit interest rate and taking a larger market share in the home loan market. The Bendigo Bank share price is a potential bank share to buy as they are mostly outside of the banking royal commission crosshairs with strong growth.
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About Bendigo and Adelaide Bank (ASX BEN)
Merged by the previous Bendigo Bank and Adelaide Bank in 2007, Bendigo and Adelaide Bank (ASX BEN) is operating primarily in retail banking. The company delivers its products and services through over 400 branches in Australia. Bendigo Bank’s unique business model is that the local community owns and operates the bank while Bendigo Bank provides all the infrastructure and support. Its local partners share any remaining profit with the bank after paying its branch running costs.
Lower Deposit Cost and Moderate Bad Debt Performance
Bendigo and Adelaide Bank has lowered its deposit rate, which lies behind the lift in its profit margin. Almost 80 percent of Bendigo’s lending is based on the new rate, which is higher in proportion compared to other major banks. The company had notched up 10.7 per cent growth in its cash profit, hitting $225.3 million.
Bendigo’s bad debt was up 16.3 percent last year due to higher provision, but its overall level of bad debt is still fairly low as far as the industry is concerned. Total impaired loan of Bendigo Bank had fallen by $11.9 million to $288.8million, which implies that the risk on bad debt and impaired debt have been controlled reasonably.
Home Loans Could Help Battle Headwinds From APRA
APRA further regulates loan-to-value ratio, meaning that Bendigo can only provide loans maximum equal to 65 percent of the house value. Down payment proportion at BEN is 35 percent of the house value, while that at the big four banks is 25 percent.
Despite the headwinds, the increasing amount of immigrants leads to an increasing aggregate demand for home loans. Bendigo and Adelaide Bank experienced strong growth in home loans over the term with loans to home owner up 13 percent.
Additionally, with higher capital requirements and offshore funding rates from the four major banks (Commonwealth Bank, ANZ, Westpac and NAB), Bendigo and Adelaide Bank is well positioned to pick up market share as loans at the major banks become more expensive.
Strong Financial Performance
BEN shares has had bullish growth on profit during the last five years, except for a slight decline in 2014, as shown in the graph below. Statutory profit has grown 213% and net profit has grown 36%.
Cash earning has increased gradually, exceeding statutory profit after 2014. An excellent performance on cash earning indicates that BEN has adequate funds to meet APRA’s demand, and the cash would strongly back up mortgage activities.
| Bendigo and Adelaide Bank (ASX BEN) | Bank of Queensland (ASX BOQ) | Westpac (ASX WBC) | Commonwealth Bank (ASX CBA) | ANZ (ASX ANZ) | NAB (ASX NAB) | |
| Interest Margin Ratio | 2.36% | 1.8% | 2% | 2% | 1.9% | 1.8% |
The table above highlights BEN share’s Interest Margin Ratio compared to its primary competitor in Queensland, Bank of Queensland (ASX BOQ) and the big four banks; Westpac, Commonwealth Bank, ANZ and NAB. Bendigo and Adelaide Bank has the highest IM Ratio among all the listed competitors, which indicates that BEN has the most outstanding profitability per dollar lended, exceeding primary bank corporations in Australia.
| Bendigo and Adelaide Bank (ASX BEN) | Bank of Queensland (ASX BOQ) | Westpac (ASX WBC) | Commonwealth Bank (ASX CBA) | ANZ (ASX ANZ) | NAB (ASX NAB) | |
| Price to Book Ratio | 0.95 | 1.06 | 1.62 | 1.93 | 1.4 | 1.43 |
Nevertheless, at the current Bendigo Bank share price, Bendigo and Adelaide Bank has the lowest price-to-book ratio at 0.95, which could indicate that Bendigo Bank shares are undervalued compared to its peers. There is potential for the Bendigo Bank share price to appreciate and for the price to book ratio to reach the industry average (1.50), which is over 50% upside.
Potential Growth of Bendigo and Adelaide Bank
Overall, Bendigo and Adelaide Bank has been performing well in an environment where the major banks are coming under pressure from the banking royal commission. Bendigo Bank shares’ profitability and growth in cash flow should provide confidence for investors in its diversified businesses. Although APRA limits loan-to-value ratio, the Bendigo Bank share price could have strong upside potential as loans become more expensive and LVR’s become higher at the major banks.
