Bendigo gets back on track

Bendigo, like many smaller lenders, found it tough to compete against bigger rivals in the past year, but with bad debts stabilising and funding markets thawing, it has been able to return to profit growth.

Bendigo is better known for grassroots banking with its Community Bank franchise, but managing director Mike Hirst is also looking to keep investors onside by focusing more on costs and margins. He said the bank was also looking to take part in the carve-up of the wealth management market by bigger rivals led by NAB with its move on AXA Asia Pacific.

While there has long been speculation the bank would link with mid-sized wealth player IOOF, analysts said it could instead be looking to snap up any unwanted assets being sold off as a result of the present batch of merger proposals.

Bendigo delivered cash earnings of $139.7 million for the six months to December 31. This was at the top end of market expectations and up from $112.3 million in the previous corresponding period.

The bank declared a first-half dividend of 28? a share, unchanged from a year ago. But a low rate of return on equity has meant Bendigo's shareholders are yet to see all the upside in earnings.

The latest result was struck on lending growth of 7.8 per cent, while deposits jumped 18.4 per cent during the half.

The bottom-line profit was also boosted by the unwinding of more than $5.6 million of provisions initially put aside to protect the bank from economic shocks.

But it was the rebound in the bank's net interest margins a key driver of profit that buoyed investors. Shares in Bendigo yesterday rose 3 per cent to $10.20.

As a smaller bank, Bendigo is more reliant on its own deposits to fund its lending. It was badly caught out in late 2008 when the Reserve Bank slashed official interest rates and it was unable to quickly reprice its deposit book at the lower prices. This crunched its interest margins, slashing profit.

The rise in interest rates from late last year helped the bank claw back margins. Its interest margin of 2.09 per cent was up sharply from a low of 1.49 per cent the same time last year and compares with 1.67 per cent just six months ago.

Mr Hirst said margins were expected to stay at present levels through the second half. But he warned that if Bendigo was forced to match bigger rivals in pricing deposits it would have to raise interest rates across mortgages.

BENDIGO AND ADELAIDE BANK

December half-year

Revenue $561 million 15.2%

Cash profit $139.7m 24.4%

EPS 29.7? 83.3%

Interim dividend 28? unch