Ann: Bendigo and Adelaide Bank Half Year Result P, page-4

re: Ann: Bendigo and Adelaide Bank Half Year ... Bank's solid performance makes the mirrors sparkle, but behind them is smoke ADELE FERGUSON from SMH


Bendigo and Adelaide Bank's surprisingly good profit numbers turbocharged the share price yesterday, but strip out the impact of acquisitions and accounting tomfoolery and some lurking issues remain.

These include a lack of organic growth, the relatively small level of provisions on its $510 million exposure to the collapsed Great Southern management investment scheme, rising costs and intense competition in home lending and deposit taking.

Little surprise, then, that at the bank's half-year presentation, the managing director, Mike Hirst spruiked the idea that it was in the market for acquisitions, namely wealth management ones. In the six months to December 31 Bendigo's cash earnings rose 23.8 per cent to $139.7 million, up from $112.8 million in the previous corresponding period, and net interest margins rose 43 basis points, to 2.09 per cent.

Hirst said "the improved performance of the bank was a testament of its strong and low-risk balance sheet, the good work of staff, and the resilience of its business through the global financial crisis".

But take away the acquisitions, and the result is less impressive. Importantly, residential loans fell 2.7 per cent over the six months, consumer loans flat-lined and the two businesses that did grow, margin lending and commercial loans, were the direct result of acquisitions.

Last year Bendigo bought Macquarie Group's margin lending portfolio, lifted its stake in Rural Bank and bought out the residual 50 per cent interest in Tasmanian Banking Services, all of which helped bolster its margin lending loan book and its commercial loan book.

As for Bendigo's net interest margin, which it believes is sustainable at 2 per cent, questions remain.

In a nutshell, costs are rising, and there is little asset growth. If deposit costs rise and securitisation costs continue to do the same in the short term, that will eat away at the margins. In addition, the bank's net interest margin was a major beneficiary of term deposit repricing, which is a one-off benefit.

And as Bendigo starts vying for new term deposits, it will see just how competitive the deposit market is getting, with some of the bigger banks offering five-year terms of 8 per cent. Bendigo's last annual report indicated that it had shortened the length of the maturity on deposit offerings, presumably to keep costs down. If it keeps doing this, a point will come when deposits start slipping.

There is also the issue of how it treats bad and doubtful debt. While the quality of the bank's assets has improved markedly, with debt it has done a few tricky things.

Don't forget changes in provisions go through the profit and loss account, so any reduction becomes a source of profit. But any changes in general reserves for bad debts are booked through the balance sheet, so have no impact on profit. With that in mind, for the six months Bendigo opted to reduce provisions, enabling it to book a profit of $3 million, but it raised its general reserves for bad debts by $15 million, which goes through the balance sheet.

Axiome Equities said in an email to clients: "It does seem that Bendigo likes to provide for bad debts as an allocation of capital rather than a deduction from profit."

What makes this decision all the more curious is that impaired loans rose $22 million to $253 million and it booked net write-offs of $25 million.

Let's now look at its treatment of Great Southern, which tallies up to an exposure of more than $510 million to 8200 customers who had invested in managed investment schemes through Great Southern.

These loans are full recourse to each individual borrower, which means the loans are secured by woodlots, and if the bank cannot get all of its money through a sale of the plantation trees or woodlots, it faces the messy and risky task of having to chase down each investor and get them to repay their loans individually. In some cases this could mean the bank going after their homes.

At December 31 Bendigo had just $29 million allocated in specific and collective provisions against the Great Southern exposure. No provision is made for those who can afford to pay but refuse to do so.

The latest results shows that in relation to Great Southern there

are $148 million loans in arrears. This is up 855 per cent on the previous six months and 2172 per cent on the previous corresponding period, which was $6.5 million loans in arrears.

Bendigo has taken legal action against a few Great Southern investors refusing to repay loans, and a few months ago started listing with credit agencies the details of other defaulters.

Hirst continues to talk tough. The bank will get its money back, so does not need to allocate any provisioning to those who refuse to pay, he says. He also says that as various schemes are sold or wound up, including the move last month by Gunns to take control of nine of Great Southern's pulpwood schemes, things will improve .

If he is wrong the share price will be hit hard and his reputation will be damaged. If he is right he will go down as the local hero.

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