Bendigo and Adelaide Bank’s share price was hammered on Monday after a slide in its lending margins prompted investors to question whether it could maintain lending momentum.
Managing director Marnie Baker unveiled a 172 per cent increase in full year profit to A$524 million that was propelled by booming home loan activity, cost reductions and credit provision releases.
But nervous investors marked down the company’s stock heavily following a big contraction in its net interest margin and the announcement of a potentially dilutive buyout of Melbourne-based fintech, Ferocia.
The bank’s scrip closed down $1.10 or 10 per cent to $10.
Bendigo’s NIM declined 7 basis points to 2.26 per cent in the year to the end of June 2021.
The southward margin trajectory has cast doubt on Bendigo’s capacity to retain sharp pricing in the mortgage market, which could signal declining profitability and slower volume growth in 2022.
The bank is currently one of the fastest growing home lenders in the banking sector, having grown mortgages at almost four times the industry average in the last year.
“We anticipate economic and market conditions will continue to provide both ongoing challenges and opportunities for our bank,” Baker said.
“While we expect the housing and employment markets to grow nationally – as well as the economic expansion of regional Australia – we remain cautious of the potential impacts of further pandemic induced lockdowns, a slower than initially anticipated vaccine rollout and take-up, international trade sentiment and the continuing effects of natural disasters, and climate change.
“Even though we face a historic low interest rate environment, which continues to place pressure on our margins, we will continue to take advantage of strong customer lending demand across our consumer, business, and agribusiness divisions.”
Jefferies senior bank analyst Brian Johnson said Bendigo’s full year result more or less met consensus forecasts but that margin erosion and the $116 million price tag on Ferocia spooked investors.
Bendigo is planning to issue more scrip to fund the Ferocia buyout.
“I don’t think anyone thought the net interest margin would decline as much as it did,” Johnson said.
“In my view Bendigo doesn’t generate a high enough return on equity as it is, so issuing more scrip to buy Ferocia looks like a dilutive acquisition to me.”
The acquisition of Ferocia, which is expected to close by the end of December, will mean Bendigo will take full ownership of the UP mobile banking business.
Bendigo’s chief financial officer Travis Crouch said the acquisition would increase the group cost base by 1 per cent this year and was not expected to have a positive impact on earnings until after 2023.
In response to a question from Johnson during a teleconference for analysts, Crouch said he expected most of the Ferocia transaction to be accounted for as goodwill.
A key to driving UP’s profitability will be the introduction of home loans to its product suite early next year.
Baker defended the Ferocia deal, saying the UP joint venture had exceeded expectations in terms of customer growth. UP has amassed a deposit base of $840 million from 400,000 customers