The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price has jumped over 7% after the regional bank gave an update on FY23.
Strong start to FY23
In the first five months of FY23 to November 2022, the business has generated cash earnings after tax of around $245 million, which is an increase of around 22% year over year.
Bendigo Bank revealed that lending balances had increased by 5.2% over the prior 12 months and decreased by 0.7% over the previous five months.
The bank revealed that residential lending increased by 7.5% over the last 12 months and decreased by 0.2% over the last five months, reflecting “slowing system growth and a focus on margin management since 30 June 2022”.
Business lending (including agribusiness) saw a 3% fall over the last 12 months and decreased by 3% over the last five months. This “reflected an increasingly competitive environment and a heightened focus on margin management across both portfolios.”
Deposit balances increased 8.9% over the last 12 months and increased 2% over the last five months.
Improving profit margins
Bendigo Bank explained that the net interest margin (NIM), post revenue share arrangements, in the year to date was 1.85%, with an exit NIM of 2.01%.
That says that the bank it has a profit margin of 1.85% when comparing its lending (eg mortgages) to its interest costs (eg savings accounts). The exit NIM suggests that the business’ profitability is going to increase for the last seven months of the financial year compared to the first five months. Well, as long as bad debts and arrears don’t climb noticeably.
Lending portfolio performance
The company said that credit expenses have “positively contributed” with arrears remaining “at low levels across all portfolios”. Residential loans that were over 90 days in arrears at November 2022 were 0.41%, an improvement of 8 basis points compared to 30 June 2022.
It had a common equity tier 1 (CET) ratio at 31 October 2022 of 9.98%, up 22 basis points compared to 30 September 2022.
Outlook for the Bendigo Bank share price
The company said it’s expecting continued careful management of volume growth and margins given the competitive environment in both lending and deposits.
Bendigo Bank is expecting further RBA interest rate rises, to a rate of between 3.5% to 4%. NIM tailwinds are expected in the second half of FY23 “reflecting the strength of BEN’s deposit gathering network”.
Operating expenses are expected to increase “modestly” compared to FY22.
The business seems to be hitting a sweet spot at the moment. This could be good for earnings and the dividend, though I’m wary about the potential of higher bad debts in the future. Compared to Commonwealth Bank of Australia (ASX: CBA), I think Bendigo Bank shares are a buy. But, there are other ASX dividend shares I’d rather buy.
