Bendigo and Adelaide Bank’s share price was hammered on Monday amid investor concern over the company’s interest margins, which could come under pressure from revenue sharing deals the bank has with its community-owned branches.
Chief executive Marnie Baker confirmed during an investor briefing that the company was reviewing the business model for its community banking program.
In response to a question from Jefferies senior banking analyst Brian Johnson, Baker revealed that the bank was in discussions with the boards of 307 community branches to determine “a sustainable model” for the program.
“We are reviewing all of our businesses, but the community banks themselves are very important to our organisation – they are a deposit roving franchise for us and they are a customer aggregator as well.
“Our community partners know that models need to evolve and change as the environment changes and customer preferences change.
“So, yes, we are reviewing that model along with our community partners to ensure it is a sustainable model well into the future.”
Baker indicated the bank would provide more details when the new business model was finalised.
Bendigo reported a 9.4 per cent rise in full year cash earnings to A$500.4 million that was in line with analysts’ forecasts.
The statutory profit, which includes non-cash adjustments, fell 7 per cent to $488 million because of revaluations in the Homesafe equity release lending business.
The bank expanded its mortgage book by more than $4.1 billion to $56 billion in the 12 months to the end of June, making Bendigo one of the fastest growing home lenders in the country.
This represented an 8 per cent rise in the size of the residential home loan business, with broker-originated mortgages accounting for almost three quarters of the bank’s new home lending during the year.
However, throughout 2022 Bendigo competed aggressively on fixed rate mortgages to deepen its market share in home lending and this contributed to an 11 basis point decline in the group net interest margin to 1.99 per cent.
Chief financial officer Andrew Morgan warned that the expected recovery in the group’s net interest margin flowing from the RBA’s official rate rises might be constrained by an expected increase in income accruing to community branches under revenue sharing arrangements with the bank.
“Because of the number of moving parts in respect of the Community Bank revenue share it’s very difficult for us to give you specific numbers,” he said.
“We think that the revenue share will rise – now exactly where it will rise to you’ve got to take into account a range of different factors.”
Bendigo operates 307 branches across Australia that are owned by local communities.
Under longstanding revenue-splitting deals, the bank shares revenue generated through the community branches with local owners.
The community branches are currently growing deposits at a faster rate than other parts of the Bendigo group and have a disproportionate exposure to transaction deposits compared to term deposits.
This means that the community branches stand to claim a higher share of their revenue in 2023 because rising rates are making their individual businesses more profitable.
Although most banking analysts expect Bendigo’s interest margins to recover in 2023, the concern is that the improvement might not match peer banks such as Bank of Queensland because of the revenue sharing issue.
Investors appeared to punish Bendigo scrip because of the mixed outlook on margins.
The share price underperformed all other ASX-listed bank stocks, sliding 90 cents or 8.3 per cent to $9.88.
Jefferies analyst Brian Johnson said he took some encouragement from management commentary about improving the financial performance of the group but indicated the operating environment was getting tougher.
“It was good to hear them say they would like to earn their cost of capital but the path ahead looks very difficult,” he said.
While discussion around the direction of the group’s net interest margin dominated the investor briefing, Baker also highlighted the bank’s focus on lowering operating costs across the group.
Bendigo’s cost-to-income ratio improved 90 basis points in 2022 to settle under 60 per cent.
Baker and Morgan each renewed the company’s commitment to reducing costs.
They said the company was prepared to slow investment spending in coming years to ensure expenses were checked.
“Taking inflationary headwinds into account, our aim is to keep costs broadly flat,” Baker said.
“Our investment spend will remain at current levels through to FY24 before declining and impairment expenses should return to historical averages over the medium term.
“We will have a tighter focus on factors within our control such as our cost base and our continued judicious use of shareholder capital.”
The focus on cost management is part of a wider effort to improve returns to investors.
Bendigo improved its return on equity by 5 basis points to 7.72 per cent in 2022, but lags other banks on this benchmark – CBA (13 per cent) NAB (10 per cent) and Bank of Queensland (8.2 per cent).
Directors declared a second half dividend of 26.5 cents per share, which brings total franked distributions for the 2022 financial year to 53 cents.