Bank bolsters distribution but margins under attack

One of Australia’s largest regional banks has reported positive home loan growth over the 2016 financial year but record-low rates are beginning to squeeze its margins.

Bendigo and Adelaide Bank yesterday reported underlying cash earnings of $439.3 million over the 12 months to 30 June, a 1.6 per cent increase on the prior corresponding period. The bank grew its mortgage book by 4 per cent to $39.8 million over the year.

In a trading update, the non-major noted that last week’s RBA rate cut will have an impact on the profitability of its home lending: “August price changes aim to deliver neutral margin outcome following recent cash rate reductions.”

Bendigo and Adelaide Bank only passed on 10 basis points of the RBA’s 25 basis point cut to mortgage customers.

Bendigo’s managing director, Mike Hirst, noted that lending growth accelerated in the second half, with costs well managed in an “unprecedented low interest rate environment”.

“The strength of our retail funding base has helped deliver a half on half increase of 1 basis point in our net interest margin to 2.17 per cent, despite the continuing fierce competition for mortgage growth,” Mr Hirst said.

However, while demand for residential mortgages remains high, the regional bank boss highlighted that in a low interest rate environment customers are opting to reduce debt, which has impacted Bendigo and Adelaide’s net loan growth.

“Many of our mortgage customers are ahead in their loan repayments, while excess loan repayments continued to increase and mortgage offset accounts grew by 11 per cent over the year,” Mr Hirst said.

The bank has managed to stabilise its home loan portfolio over the last six months, growing broker distribution by 9.2 per cent, well above retail (6.6 per cent) and system (6.3 per cent).

Bendigo and Adelaide admitted some flaws in its mortgage distribution strategy back in April, when the group’s executive partner of connection, Bruce Speirs, said the bank’s third-party proposition was very heavily skewed towards the mortgage management market, with more than 80 per cent of its portfolio originated through that channel.

“That’s a channel that’s had relatively limited growth in recent times and has been the subject of pretty intense price competition that we’ve actively not engaged with,” Mr Speirs said.

“And hence, on a relative basis, we’re underweight in terms of our broking exposures, so [while] we have almost 10,000 accredited mortgage brokers, only 1,500 of those have actively engaged with us in some form over the last 12 months.”

However, yesterday’s results show that the lender has actively pursued the broker channel in recent months, while lending growth via mortgage managers was relatively flat (0.5 per cent) over the six months to 30 June.

Managing director Mike Hirst said Bendigo and Adelaide customers provide approximately 82 per cent of the group’s funding.

“The second half saw solid growth in new customer and existing customer deposits, with retail deposits up 8 per cent. At 30 June 2016, our indicative net stable funding ratio sat at approximately 115 percent and liquidity coverage ratio at 118 percent,” he said, adding that, with a Basel III common equity tier 1 ratio standing at 8.09 per cent and total capital at 12.21 per cent, the regional lender has ample capital to grow its business organically.

“This all serves to fortify what are already particular strengths for our bank,” he said.

Mr Hirst is confident that Bendigo and Adelaide’s strong capital, funding and credit position means its outlook remains “extremely positive”.

“We’re targeting flat cost growth for the 2017 financial year and our focus on the success of our customers and strategies to deliver balance sheet growth means our bank continues to be well placed for growth and the challenges ahead,” he concluded.

[Related: Bendigo and Adelaide Bank admits to mortgage distribution flaws]

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