Regional lender, Bendigo & Adelaide Bank (BEN) posted a slightly below consensus 4.2% rise in annual cash profit to $418.3m. The result was boosted by above industry average lending growth and a recent lift in some mortgage rates. Its bottom line was held back by APRA’s lending caps which were introduced to protect the economy from financial shocks and have restricted lending across its Retail business. 

Australia’s fifth biggest bank will pay eligible investors a $0.34 fully franked final dividend on 29 September 2017. BEN will trade ex-dividend (the date that determines dividend eligibility) on 5 September 2017. This takes dividend payments for the year to $0.68, matching the prior year’s distributions. BEN has a ~5.7% dividend yield (higher than CBA and ANZ). 

BEN’s Net Interest Margin (NIM) fell slightly over the year from 2.23% to 2.22% but improved over the second half by 8bps thanks to an increase in some mortgage rates. This was a highlight in the results. NIM is a key metric for banks as it measures the difference between interest it makes on deposits and the rate it lends at. Its NIM was held back partly by strong deposit competition. 

Common Equity Tier 1 (CET1 ratio) improved by 30bps since December 2016 and currently sits at 8.27%. This is the capital measure and requirement imposed by the financial regulator, APRA. CET1 is a measure of financial strength as far as APRA is concerned. While its Bad and Doubtful Debts rose substantially over the year, it still marked a smaller lift than many analysts expected. 

BEN’s Homesafe investment property portfolio generated $90.4m in income over the year. Due to a change in the division’s accounting treatment, 2H18 is expected to be more representative of future earnings. Homesafe contracts allow retirees to sell a share of the future sale proceeds of their home in exchange for an upfront cash amount. 

BEN shares are lifting strongly on Monday. The bank is one of the more heavily short sold companies on the ASX and is likely to be improving today thanks partly to short covering (when those who went short, buy back positions). BEN shares are also substantially underperforming the four larger major banks this year. Since January 2017 BEN is down ~8% which compares to an average decline of 2.3% for CBA, WBC, ANZ and NAB. 


Looking ahead, a risk for the sector remains tighter APRA lending requirements. While there were very few headwinds flagged in the result, there has been a ~40% slide in mortgage approvals which sets the company up for soft volumes over 1H18. 


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