Bendigo's Challenge

Rob Hunt, managing director of Bendigo Bank, has an enviable task: extending his own success. But that task is starting to weigh heavily as the bank falls from grace with stockbrokers. In today's video interview, Hunt outlines his plans to extend Bendigo Bank's reach across Australia and to broaden revenues to capitalise on continued strength in business banking.

As a regional bank, Bendigo is expected to come under pressure if the drought in rural Australia persists; Hunt says the bank is less dependent on rural communities each year; nevertheless it will be hoping for better agricultural conditions in the near future.

Over the longer term, Hunt’s primary strategic challenge will be to extend the lift the bank enjoyed from the success of its community banking initiatives. The community banking scheme worked in an era when major banks were closing branches; but it has become tougher now that big banks such as Commonwealth are reopening branches and extending trading hours.

Bendigo Bank reported a powerful 17.8% increase in earnings in the six months to December 31 compared to the previous corresponding period. Hunt is adamant he can keep profits growing strongly through extending '” rather than replacing '” current growth strategies.

But there are weaknesses in the Bendigo Bank model revealed by a closer look at the bank's financials. With competitor such as St George capable of achieving return on equity figures in excess of 20%, high costs at Bendigo Bank mean its figure is a modest 13%, while the bank's cost-to-income ratio, at 68.3%, is the highest in the retail banking sector.

The interview

James Kirby: You have an unusual problem at Bendigo Bank. Your share price has been running so strong for so long that stockbrokers are actually slow to recommend the stock at the moment. How do you deal with that?

Rob Hunt: Well, I think the share price largely reflects the shareholders’ view of what they think the prospects are and I do think that because it’s run on a high P/E (price/earnings multiple) for a long period of time now I suspect that really reflects their comfort with the type of strategy we’ve applied '” the focus about building effectively a branded retail banking strategy.

In our national expansion there’s always been the Bendigo brand in each of the markets. It’s raised deposits and loans. It’s got a close connection with its customer base, whether it be Community Bank or our traditional branches, and that’s I think given shareholders, particularly existing shareholders, a good deal of comfort that we can manage to keep the momentum going while there’s still strong demand for the business around the country.

Many investors would associate Bendigo Bank with the success of the community banking initiative but you can’t do that all over again. How will you drive future earnings growth at the bank?

For a start off, I think we can actually on Community Bank because there’s still really strong demand for community banks and it’s no longer in a sense of loss of the local branch or the potential loss. It’s really much more around community building. The way that we’ve positioned the business, though, is we’ve got strong growth happening in the company branches. We’ve got good potential in our existing Community Bank branches that have been launched over the last little while. We’ve still got new branches to be opened. We’ve got a series of joint ventures and alliances '” our Elders Rural Bank joint venture for the primary production sector; our community sector banking.

They’ve run through half a dozen of the ways in which we have tried to go out and engage with the buying base and to build a different structure that will get us a greater market share in that particular segment. So I think all of those are now starting to come to some level of maturity and I expect therefore that they will make contribution in terms of increased earnings as they mature while we’re still growing effectively because of that demand that’s naturally there for the different style.

Now in the near term, perhaps, the outstanding issue for a regional bank like yourself could be the prospect of a drought. How will you deal with an issue like that?

We’re not directly affected because most of the primary production activity is really through our Elders joint venture and that’s still going very well because it understands that industry really well and we’ve come through a very difficult time and yet they’ve still managed to grow. But really, from Bendigo’s point of view, the effect of the drought usually affects the discretionary money that comes in through those regional markets. But, look, we’re pretty much spread, you know '” 50% of our base is in cities now, including Community Bank, and a good deal of our effort over the last few years has really been to lessen our dependency on housing, to lessen our dependency on any individual market, region, rural or suburban market '¦ So I think we’re actually pretty well positioned to maintain reasonable growth rates in all of those markets given that some will go a little softer for a while and then, you know, when others are really quite strong.

You’re running a return on equity at the moment of about 10%, which is less than half I suppose of what a major bank is doing. Why is the ROE figure so low at Bendigo?

Yes it is. Well, for a start, we’re coming from a lower base and we accept that we’re really building '¦ we’re trying to build sustainable revenues and sustainable growth in profit. You know, there’s a greater leverage, I suppose, of scale in the bigger businesses but in our business '¦ ours is also a high-service, high customer-focus model and we still think '¦ we said ourselves a target of 15% return on equity was possible within the model, but of course the level of development that we’re doing also being expensive actually had some impact on that. Also I think it really relates to the maturity of the brand, its position and its market today.

After 17 years in the top job at Bendigo Bank, can you synopsize for investors what you see as the key aspect of a CEO role at a listed bank?

I think it is to clearly set the strategic agenda, to apply energy to ensure in the culture of the organisation that it’s able to implement that strategy and then to effectively execute the strategies appropriately to produce the outcomes that you desire.

Yes, but are you surprised at how quickly the market can actually turn sour on an individual bank CEO when things go wrong?

We spent an enormous amount of time to ensure that the Bendigo is a whole organisation. I happen to be very proud to lead it, but in essence the “champion CEO” '” I’m not really a real focus around that. To my way of thinking I play a role as does everyone else in the organisation to produce our outcomes.

Yes, but you have managed to stay in that CEO role for a very long time. What do you think is the toughest part of the CEO job?

Well I think the toughest job is in some ways just simply being able to focus your organisation and the culture and the energy in the areas where you think you really have a strategic advantage because banking is largely being drawn to being commoditised and I think banks are very important. We’ve got one of the best banking systems in the world. Leaders '¦ really '¦ we do need to be able to make sure that we can portray that and present that to the market as being not about the individual but about the bank’s style and its commitment.

At National Australia Bank they’ve tried something unusual with, if you like, two hands at the tiller. How are you planning succession at Bendigo Bank?

Every organisation applies different succession processes. We’ve got a great team of executives in our organisation and all of them really should aspire to lead this organisation.

Now as you said earlier, there is to some extent a commoditisation going on inside the banking system, so how does a private investor actually select between individual bank stocks?

I think investors will clearly try to align both their investment objectives, their performance outcomes and also the sustainability issues and what we’ve focused on is around that sustainability issues '” the reliability of growth in profit rather than play a market share game. So I think investors really do need to understand whether the bank is playing a price and volume game or is actually producing a value focus that will make the returns more sustainable longer term.