Patient Bendigo uncovers micro business

Ian Rogers

OPTIMISTIC: Bendigo Bank CEO Marnie Baker

A complicated cost outcome and a lower first half profit coloured the result for Bendigo and Adelaide Bank over the half year to December 2023.
 
Questions will be being asked about the value in the bank’s proprietary branch channel, now only the third most relevant of its sales channels.
 
Third-party lending (an area of historic strength for the bank) is its most successful sales channel, while digital channels (including Tiimely and Up) are next.
 
All of these will need to continue firing if one grand gesture by Bendigo yesterday is to have meaning.
 
Bendigo yesterday called out micro business as an area of focus and a strategic priority.
 
Pursuing this niche will be compromised by the decision to offload its merchant acquiring business to Tyro some time ago, although a reseller arrangement remains.
 
CFO Andrew Morgan told the investor briefing this customer base overwhelmingly brought deposit and transaction business to the bank.
 
Unfortunately, average products per customer is little more than one, telling you there is very little lending going on among Bendigo’s micro business base.
 
This is surprising but now at least the bank is setting out to rectify this gap.
 
Highlighting the importance of this work and in search of operating savings, Bendigo has transferred the micro business customer base from the consumer bank to the business bank.
 
“Transformation” and “productivity” define the modern Bendigo Bank, a regional business champion seeking relevance to its slogan “the better big bank”.
 
There were restructuring costs of A$37 million in the last year in this result, a number likely to grow.
 
There are cost savings, plenty of them and especially in retail banking, in the latest half, amid the seven per cent 12-month blowout in operating costs that disappointed the market yesterday.
 
Staff costs fell 0.3 per cent due to one per cent fewer FTEs half-on-half. But IT spending increased 19 per cent.
 
The bank’s payroll, however, still looks bloated. There were 1734 FTEs in the corporate segment at December  – up 16 per cent over one year and up four per cent over six months.
 
Investment spend remained flat as Bendigo continues to revamp its IT architecture. Fewer core systems is the goal, with the hope of eventually reducing to something close to one system.
 
One plausible avenue for savings is to follow Westpac’s lead and junk all the cash profit paraphernalia.
 
Sticking with this means there is a marked disconnect in the group’s reporting this half.
 
The group’s statutory net profit increased by $34.3 million, or 13.8 per cent, to $282.3 million compared with the half year ended June 2023.
 
Cash earnings fell to $268.2 million from $294.7 million over one year, eroding the market’s confidence in management.
 
The Homesafe revaluation gain this half was $112 million compared with a loss of $23 million in 2022.
 
Many on the Bendigo board, along with Jefferies analyst Matt Wilson, are enthusiasts for selling down Homesafe and ideally selling out completely.
 
Late in the Mike Hirst era, Hirst made it clear value creating options via a disposal of Homeside was on the table, but it’s been not been all that well canvassed since then.
 
The duration of Homesafe equity release loans is seven to eight years Morgan said, in a business with a prosperous 18-year history.
 
The bank’s Community Bank network is fast becoming not merely a key pillar but arguably the central pillar of Bendigo Bank.
 
Fewer and fewer corporate branches will survive. Bendigo must cut back on avoidable costs and (heavily) cull its branch network the same as every big bank.
 
This leaves the Bendigo Community Bank network as the primary public face of the bank going forward. And it’s probably tougher to shut Community Bank branches which are, after all, owned by the community.
 
The network is moderately profitable to boot, generating profits which are shared (sometimes in full) with the community via sponsorship and grants.

There are 217 Community Bank companies operating 307 Community Bank branches.

Then there are 951,000 customers via this channel, cared for by 1540 local directors.

Most impressive are the Community Bank footings of $54 billion, representing a quarter of the bank's balance sheet.

With a 100-year strategy – the only bank with one of these – Bendigo has plenty to work towards and it’s apparent the current board and management are (let’s choose a friendly word) ‘strivers’.
 
“We are patient,” chief executive Marnie Baker said.  And “we are optimistic”.