ANALYSTS' REPORT[PARA]Bendigo Shareholders Ordered to Perform...

ANALYSTS' REPORT[PARA]Bendigo Shareholders Ordered to Perform Community
Service[PARA]By Richard Harrison, 04 Dec 2002
[PARA][PARA]Bendigo Bank Limited (BEN) Rating: SELL
[PARA]Price:[NL]8.15 @ 3/12/02 (-0.04) Av. Monthly Volume:[NL]0.125 (m)
Shareholder Benefits:[NL]Yes
52 Week Range:[NL]$6.30 - $8.52 Market Cap ($m):[NL]978.0 Dividends
Paid:[NL]Apr, Oct
%Move Last 3mths:[NL]+2.9% Sector Weight:[NL]0.516%
Report Contents
InvestorWeb ViewPoint[NL]Recent Share Price History[NL]Earnings History and
Forecasts[NL]Activities[NL]Sectoral Comparison[NL]SWOT Analysis


[NL]InvestorWeb ViewPoint [PARA][PARA]
[PARA][PARA]Bendigo Bank can boast of providing superior service to its
customers. That's good news for the customers, but it means higher costs for
the bank, and lower returns for shareholders: Bendigo's ROE is barely half
that of three of the majors, ANZ, NAB and Westpac.[PARA]Despite lower
profitability, the bank can at least boast profit growth. Unfortunately,
while profit has grown strongly, it has been based largely on the issue of
scrip. Earnings per share for the last three years have grown at a compound
rate of 10% per annum, which is respectable, but it is less than the growth
enjoyed by some of the majors.[PARA]On top of these negatives, the bank's
high exposure to the housing and rural markets could prove costly in the
near future. These exposures might make the coming year a difficult one for
the bank (although the threat disappears in the long term
perspective).[PARA]With these factors in mind, an appropriate valuation for
Bendigo's shares would be at a discount to its larger and more profitable
peers, as measured by PE multiples and dividend yields. With the shares
currently trading at a significant premium to those peers, the stock is
substantially overvalued by the market, and we rate the stock a Sell.
[PARA]Recent Share Price History [PARA][PARA]
Share Price Performance [PARA][PARA]
[PARA] 4 wks 3 mths 1 yr
Bendigo Bank Limited -0.6% 2.9% 12.4%
All Ordinaries Index 1.0% -1.9% -7.1%

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[NL]Earnings History & Forecasts [PARA][PARA]
[PARA][NL]Bendigo's profit for the year to 30 June 2002 of $48.8 million was
up 47% and exceeded market expectations. The bank managed to hold (and even
slightly widen) its net interest margin, while adding more than $600 million
to its loan book. [PARA]However, costs also expanded, leaving Bendigo's
cost-to-income ratio at 69%. As a result, return on equity, while a little
higher, still came in at 11.6% for the year, compared with 20% and more for
some of the major banks. Return on assets at 0.72% was similarly
substandard.[PARA]On the positive side, Bendigo's capital position remains
strong, with tier 1 capital of 9.28% and total capital of 11.69% of
risk-weighted assets. The level of impaired assets was reassuringly low, at
just 0.19% of total loans.
[PARA]Earnings (cents per share) [PARA][PARA]
Dividends per share [PARA][PARA]

[NL]Key Financials [PARA][PARA]
[PARA] 00A 01A 02A 03F 04F
NPAT ($m) 28.2 33.3 48.8 61.5 68.8
Diluted EPS (cents per share) 36.5 31.5 41.1 50.0 53.8
Price-Earnings Ratio 13.5 20.9 16.5 16.3 15.1
Dividend per share 24.0 41.0 29.0 33.0 36.0
Yield 4.9 6.2 4.3 4.0 4.4
Franking 100.0% 100.0% 100.0% 100.0% 100.0%
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[NL]Activities [PARA][PARA]
[PARA][PARA]Victorian based regional bank Bendigo Bank (BEN) - formerly
Victoria's largest building society - now operates some 220 branches
throughout Victoria and interstate, with outlets in each of the mainland
state capitals. This includes more than 80 Community Bank branches in
partnership with local communities, with plans to increase that network to
more than 100 branches by June 2003. BEN boasts total assets in excess of $8
billion and is the only Australian bank headquartered outside a capital
city.[PARA]The bank and its subsidiaries offer a wide range of products
including commercial mortgages and unsecured loans, investment products,
insurance, superannuation, trustee services and foreign exchange
services.[PARA]Subsidiaries include Sandhurst Trustees (funds management),
Worsley Securities Ltd (financial planning and stockbroking) and National
Mortgage Market Corporation (securitisation and mortgage management). BEN
has entered into various strategic alliances. Partners include Elders Rural
Services (joint owner of Elders Rural Bank), IOOF, Tasmanian Trustees and
Victoria's Country Fire Authority.[PARA]In 2000, the Bank significantly
broadened its geographical reach through the acquisition of the
Queensland-based First Australian Building Society.
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[NL]Sectoral Comparison [PARA][PARA]
Valuation Ratios [PARA][PARA]
[PARA]Code Name Forecast PE Current PE Price to Cash Flow Price to NTA Price
to Net Assets
BEN Bendigo Bank Limited 16.3 19.8 15.4 2.4 6.9
ADB Adelaide Bank Limited 13.4 15.6 12.8 2.4 -1.2
BOQ Bank of Queensland Limited 13.6 15.4 11.5 2.3 8.6
BWA Bank of Western Australia Ltd 13.2 13.9 12.2 2.0 15.9
[NL]Yield Comparison [PARA][PARA]
[PARA]Code Name Yield Franking Dividend Cover
BEN Bendigo Bank Limited 4.0 100.0% 1.5
ADB Adelaide Bank Limited 4.7 100.0% 1.6
BOQ Bank of Queensland Limited 4.7 100.0% 1.6
BWA Bank of Western Australia Ltd 5.3 100.0% 1.4
[NL]Operating Ratios [PARA][PARA]
[PARA]Code Name Earnings Growth Return on Equity Return on Assets Return on
Funds Employed
BEN Bendigo Bank Limited 21.5 9.9 1.1 -20.6
ADB Adelaide Bank Limited 16.4 14.0 1.0 -16.1
BOQ Bank of Queensland Limited 13.2 14.3 0.9 -21.9
BWA Bank of Western Australia Ltd 5.3 14.6 1.1 -6.5
[PARA]
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[NL]SWOT Analysis [PARA][PARA]
Strengths [PARA][PARA]
[PARA]* Strong Brand - Bendigo enjoys a brand that is probably held in
higher regard than any other in Australian banking, thanks to its community
bank strategy and other initiatives.[PARA]* Distinctive Strategy - The
bank's strategy of targeting discrete markets, assisted by acquisitions and
alliances, allows it effectively to expand its distribution and customer
base. This distinctive strategy also helps reduce competitive
pressures.[PARA]* Customer Focus - As part of its strategy, BEN has
developed a strong customer-oriented focus resulting in a loyal customer
base. The fruits of this approach are evidenced by its fast-growing customer
base - the bank is attracting 10,000 to 15,000 new customers per
month.[PARA]* High Profit Growth - Over the past three years, the bank's net
profits have grown at a compound rate of 38% per annum (although this is
expected to slow sharply in the near future).[PARA]* Strong Loan Growth - In
its latest result, the bank's lending approvals were up 46%, and outstanding
loans at balance date were up 11%.
[NL][NL]Weaknesses [PARA][PARA]
[PARA]* Small Scale - In common with the other regional banks, Bendigo lacks
scale compared to the four majors. This results in a lower diversity in
lending (and hence a greater risk of bad loans), a much lower credit rating
(BBB for Bendigo, compared with the AA category for the majors), and reduced
economies of scale.[PARA]* High Cost Structure - BEN's cost structure is one
of the highest among listed banks. In its latest result, the bank's
cost-to-income ratio stood at 69%, compared with less than 50% for
ANZ.[PARA]* Geographic Concentration - Even after its Queensland
acquisition, BEN's asset base remains highly geographically concentrated.
The latest APRA statistics show that Victoria still accounts for 66% of
BEN's loans.[PARA]* EPS Dilution - While profit growth has been very strong
over the past three years (38% per annum, compounded), large issues of new
shares have diluted growth in EPS to a less spectacular 10% per
annum.[PARA]* Low ROE - At 11.6%, BEN's return on equity (ROE), a critical
parameter in the creation of shareholder value, compares unfavourably to its
banking peers, several of which have ROEs above 20%.
[NL][NL]Opportunities [PARA][PARA]
[PARA]* Business Initiatives - The bank's various growth initiatives,
including strategic alliances, will assist it to expand its distribution
channels (and hence customer base). This gives the bank the opportunity to
expand its growth profile. In particular, the Community Banks and Elders
Rural Bank are anticipated to contribute to strong loan growth. These
initiatives also enhance BEN's diversification, both in geography and asset
mix.[PARA]* Non-interest Income - As part of its growth strategy, the bank
intends to continue to grow non-interest income through product alliances
and joint ventures. In particular, we favourably rate the bank's increasing
focus on wealth management. This will enable BEN to further diversify its
income base.[PARA]* Cost Reductions - Allowing for its small scale, we
believe that BEN has the opportunity to reduce its high cost structure.
[NL][NL]Threats [PARA][PARA]
[PARA]* Asset Quality Concerns - Given its increasing commercial exposure
and relatively small size, the bank remains vulnerable to the deteriorating
credit cycle. For example, the result for 2000 was hurt by a single credit
exposure - Daewoo.[PARA]* Operational Risks - The bank's large number of
business initiatives (Community Banking rollout and strategic alliances) may
affect its ability to manage its day-to-day operations. For example, this
situation may hinder cost reductions.[PARA]* Reliance on Housing - Given
BEN's current high reliance on this portfolio (64% of gross loan balances),
the bank's medium-term growth profile may be adversely affected by a housing
downturn.[PARA]* The Drought - Bendigo's high level of exposure to rural
Australia leaves it vulnerable to indirect effects from the current drought,
including a lack of growth and a higher level of bad loans.
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