Competition for taking deposits and making home loans has squeezed the net interest margin at Bendigo and Adelaide Bank, which has reported a cash profit for the half year of $224.7 million, up 0.4 per cent on the previous period and just ahead of consensus expectations.
Bendigo said net interest margin (NIM), the difference between what banks pay for funding and receive from loan customers and a key driver of revenue, had contracted over the past six months from 2.16 per cent to 2.10 per cent.
This was despite Bendigo using the Reserve Bank of Australia's cash rate reduction in August to reprice mortgages. However, the margin recovered towards the end of the half as market repricing of loans washed through, resulting in an "exit margin" of 2.14 per cent, the bank said.
Bendigo said its repricing, including increases to variable interest rates in December, "were partially offset by a highly competitive environment for new lending". It also said its "repricing of deposit accounts following the May and August cash rate reduction was limited by the ongoing strong competition for deposit funding".
Part of the reduced margin was a result of extra liquidity the bank is forced to carry after acquiring the West Australian government's Keystart loan portfolio for $1.35 billion last year.
Bendigo said its "arrears remain benign" although charts in the slide back show residential, consumer and business loans arrears are moving higher off their low base.
Bendigo will pay a full-franked interim dividend of 34¢, which is flat on the prior period and in-line with analyst expectations.
Project Reset
The bank's profit was boosted by loan growth of two times the average of the system. Costs improved, with the cost to income ratio falling to 54.3 percent, from 56.4 per cent at June. But the bad and doubtful charge was higher.
Chief executive Mike Hirst said the investment Bendigo has made in Project Reset and in new technology "will continue to provide a material contribution to efficiency gains". The bank also lost 107 full time equivalent staff positions in the first half.
Common equity tier 1 capital contracted slightly to 7.97 per cent, from 8.09 per cent in June, driven by the increase in risk weighted assets. The bank expects CET1 to improve in the second half.
Revenue was 5 per cent higher on the half at $804 million.
Bendigo has been the best performing banking stock on the ASX with its shares surging by more than 60 per cent over the last nine months, driven by the bank's direct exposure to rising house prices given one of its core products, Homesafe, gives Bendigo direct exposure to homes of their customer who can borrow against their equity.
However, Bendigo said in its results that income from its Homesafe trust was $8.1 million lower, "primarily due to slower growth in residential property markets of Melbourne and Sydney".
With analysts looking for an update on Bendigo's "advanced accreditation" from the Australian Prudential Regulation Authority - which will allow it to carry less capital against its loans to better compete with the major banks - Bendigo said on Monday "the timing for this remains in the future".
Bendigo is 80 per cent funded by its customers' deposits, more than its larger bank rivals which rely more on capital markets.
Mr Hirst said this funding structure provides flexibility and to allow Bendigo to consider merger and acquisition activity including of other loan portfolios. "Our industry leading funding position continues to be a particular strength for our bank, providing flexibility for executing on organic and inorganic growth opportunities," he said.
