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As forecast by Morgan Stanley last week, Bendigo and Adelaide Bank has announced that it has bolstered its level of provisioning through an overlay of an additional $148.3 million for potential impacts from the COVID-19 pandemic.
The additional capital would increase Bendigo’s collective provision and credit expense by $127.7 million, and the general reserve for credit losses (GRCL) by $20.6 million, for the 2020 financial year (FY20).
This equates to approximately 56 bps of total collective provisions and GRCL over gross loans.
Bendigo stated that, as a result, its common equity tier 1 (CET1) capital ratio would decrease by approximately 40 bps, leading to 9.30 per cent as at 31 March 2020, but added that its total capital – which stood at 13.7 per cent as at 31 March 2020 – would remain unchanged.
According to Bendigo, the COVID-19 provision overlay is based on three components:
- a significant change to the base case economic outlook given COVID-19 impacts – including lower GDP, higher unemployment and a reduction in residential and commercial property prices;
- a shift in the weightings of the scenarios used in the calculation of the provision towards an increase in the downside economic scenarios; and
- an overlay specific to business and consumer portfolios reflecting further potential COVID-19 impacts.
Bendigo noted that it has not assumed a “sharp recovery” in the economic outlook, but instead expects a “slower recovery with probabilities biased to the downside”.
The non-major stressed that the increase in provisioning does not reflect any “deterioration in observed credit quality” across its balance sheet, with mortgage arrears declining in April and stable across the consumer portfolios.
However, Bendigo acknowledged a “slight increase” in delinquencies across both its business and agribusiness portfolios, but claimed that a “targeted rebalancing” of the business portfolio away from real estate construction and development lending has “improved the risk profile”.
Bendigo stated that it would continue to monitor its lending portfolios to assess the provisioning levels required.
Following the announcement, Bendigo’s managing director, Marnie Baker, said: “We are very well placed, driven by our longstanding and prudent risk appetite settings, increased credit provisioning and a strong balance sheet and capital base, above APRA’s unquestionably strong benchmark target for standardised banks and further bolstered by our recent capital raise.
“COVID-19 has demonstrated the flexibility of our organisation to adapt at scale in how we do business in line with our vision to be Australia’s bank of choice.”