Bendigo Bank faces additional margin pressure after its community-owned branches signalled they are on track to carve out big earnings gains this year under revenue-sharing agreements with their franchisor.
Disclosures in the latest financial accounts of 15 community-owned branches show that most are expecting revenue to surge in the first half of 2023 as they continue to originate retail deposits at a faster rate than Bendigo’s proprietary channels.
Under a revenue sharing plan known as “funds transfer pricing”, the bank typically increases margin payments to the community branches when they expand their deposit bases in a rising rate environment.
The Canterbury and Surrey Hills community bank operating across four eastern suburbs of Melbourne describes the interest margin sharing formula in the following way in its annual report for the 12 months to the end of June: “The Company (Canterbury Surrey Hills Community Bank) has entered into four franchise agreements with Bendigo Bank that provide for a share of interest, fee, and commission revenue earned by the Company.”
“Interest margin share is based on an agreed pricing methodology which recognises that income is derived from deposits held, and that loans granted incur a funding cost.”
Around 300 community owned branches operating as independent businesses have distribution agreements in place with the bank.
The community branches appear to be entering an earnings sweet-spot also because the downturn in the home loan market could result in them having to reimburse much less to the bank this year for covering the funding costs on mortgages they originate.
Such a development, which appears to be unfolding in the new cycle of rising interest rates, is set to lower the operating costs of the community branches and boost their slice of interest margins shared with the bank.
The expected revenue surge across the community branches is revealed in their latest balance sheets lodged in the last month with the Australian Securities and Investment Commission.
At the end of June several community branches were expecting monthly revenue payments from Bendigo to more than double in the early part of 2023.
On 30 June the Sunshine Coast community bank franchise in Queensland reported a trade receivables item – tied to a July profit share distribution from Bendigo - at A$155,000.
The equivalent trade receivables item in the 2021 financial accounts was reported at only $69,000.
The financial accounts of 14 other community branches indicate that most were expecting to harvest average increases of around 20 per cent to their July profit distributions.
At the end of June, the WA-based Geraldton community bank had pencilled in a 33 per cent uplift in monthly payments from Bendigo.
In the Northern Territory, the Katherine and Coolalinga community branches reported increases of 10 per cent and 18 per cent, respectively.
Victorian community branches reported increases in Bendigo-related trade receivables of between 15 per cent and 30 per cent: Heidelberg District
(up 30 per cent); Manningham (up 20 per cent); Beaufort (up 20 per cent); and Canterbury (up 15 per cent).
At Bendigo’s full year results in August, chief financial officer Andrew Morgan alerted the bank’s shareholders to the pressure that the revenue sharing arrangement was likely to exert on the group net interest margin in the next few years.
“If historic trends continue, both rising cash rates and rising proportion of deposit funding sourced from Community Bank will have an upward influence on revenue share to Community Bank and other partners,” he said.
While Bendigo is in talks with community banks with a view to overhauling aspects of the community banking program, Banking Day understands that the revenue sharing
arrangements are not part of the review.
The discussions are mainly focused on options for adding digital capability to the offerings of the community branches.
The Community Bank program has been a key channel of deposit generation for Bendigo since it was launched more than two decades ago.
Community branches now account for more than $30 billion of deposits, which equates to around 70 per cent of Bendigo’s household deposits base.