Dour returns persist at Bendigo

Bendigo and Adelaide Bank has plenty of scope to stretch its earnings after reporting a  lacklustre lift in profit yesterday for the half year to December 2009.

Net profit more than doubled to $104.1 million in the December 2009 half, up from $50.6 million in the December 2008 half, at least on a statutory basis, and which takes into account ineffective cash flow hedges and integration costs.

On the cash basis preferred by the bank, profit increased to $139.7 million in the December 2009 half, up from $69.9 million in the June 2009 half and $112.3 million in the December 2008 half.

The absence of pro-forma financial data on the core banking business of Bendigo and Adelaide Bank clouds the comparisons in the financial report, given the consolidation of Rural Bank from October 2009 and also Tasmanian Banking Services.

Still, the bank reported a rise in the net interest margin to 2.09 per cent (on a normalised basis) in the December 2009 half from 1.67 per cent in the June half.

Most of the gain in the NIM followed the repricing of the very expensive term deposits that kept Bendigo (and plenty of other small ADIs) funded in the early part of calendar 2009.

The bank was much slower to reprice its loans, however, with lending margins a distinct drag on the NIM (and rather undermining the repetition of the longstanding management mantra of "growth at profitable prices").

Not that there is any growth to speak of in the loan book of the bank.

Residential lending fell two per cent over six months and five per cent over 12 months, to $27.9 billion.

Growth in business lending is also pretty minimal (after backing out the addition of $3 billion in agribusiness loans from Rural Bank).

Margin lending is the only growth category for Bendigo at present, up 11 per cent over six months. The book took control of the margin lending business of Macquarie Bank in January 2009, folding that into Leveraged Equities.

There's some controversy over provisioning, with a cut in the bad debt expense to $17 million from $26 million even though the ratio of impaired assets jumped to 0.60 per cent from 0.36 per cent.

The bank's provision coverage fell to 87 per cent from 113 per cent a year before.

Bendigo said it classified $148 million in loans to investors in Great Southern forestry and agribusiness projects as more than 90 days past due, up from $16 million in June 2009.

The bank said the number of people involved in class actions relating to the financing of these tax-effective schemes was declining, mainly due to the resolution of the management of the forestry projects taken over by Gunns.

Broader measures of profitability are mixed for the bank.

The return on equity in the latest half was 5.90 per cent, up from 1.8 per cent six months before and 2.9 per cent 12 months before.

Using the cash profit the ROE was 8.2 per cent and double the level six months before.

The return on assets increased to 0.42 per cent at December 2009 from 0.14 per cent six months before and 0.21 per cent 12 months before.

Bendigo and Adelaide Bank says it cannot expect to earn a return on equity of 15 per cent or more, or match the returns of major banks, with returns constrained by the goodwill carried on the balance sheet and mainly relating to the merger of Bendigo Bank with Adelaide Bank in 2007.

The chief financial officer, Richard Fennell, described return on equity as "more of an outcome rather than a target". He said the bank did target a return on net tangible equity.

The CEO, Mike Hirst, said management did look for returns of 15 per cent or more when considering investment options. He indicated these may be in the wealth management sector in the future.

The bank plans to open around 25 new branches this year, many of them community banks, and is also looking to step up home loan funding through its network of mortgage managers.