bendigo bank drops the ball

Commentry by Tony Boyd

'Bendigo drops the ball.'
'It is tough being a regional bank and based on today's profit downgrade by Bendigo & Adelaide Bank, it got a lot tougher in the first three months of this year.

It would seem the management at Bendigo has been far too optimistic about the outlook for its business.

Bendigo's earnings problems stem from the cost of holding 50 per cent more liquidity than a year ago, higher funding costs from retail deposits, more bad debts and a margin lending book that continues to shrink.

Also, somewhere in that mix is an accounting stuff-up which meant that $14 million in revenue from the December half was counted twice.

Bendigo today slashed its earnings guidance relative to market consensus by about 20 per cent and flagged a 40 per cent cut in its final dividend from 37 cents a share to about 21 cents a share.

The profit downgrade would have been a bit of a shock for shareholders because it was contrary to the guidance of increased cash profit for 2009. That guidance was issued in August last year and was not updated at interim results in February.

The market interpreted the lack of comment on the previous guidance to mean everything was fine which explains today's downgrade to the consensus. The bank made no mention of the deterioration in earnings in a letter to shareholders on March 19.

Instead of earning an expected $250 million in the year to June, the bank said cash earnings would be between $205 million and $218 million, or about 70 to 75 cents a share.

The bank's senior executives today identified six key issues that will hit the Bendigo profit line in the year to June 2009. A number of these issues, however, were described as one off items that would be reversed in the second half of this year.

The biggest single factor is increased funding costs. But Bendigo says it has restructured its balance sheet to deal with today's market conditions.

About 90 per cent of funding now comes from retail deposits and about 95 per cent of maturing term deposits are staying with Bendigo. The bank is now more competitive than the majors. It is offering term deposits of 4 per cent compared to 3.3 to 3.5 per cent offered by the big four banks.

Shares issued as part of the $190 million capital raising in December and staff share issues will dilute full year earnings. The bank says it has enough capital to get it through until the last quarter of this year. As Tier 2 capital rolls off its books it may need more capital.

The $3.5 billion margin lending book is shrinking more rapidly than expected. Also, bad loans in commercial property have deteriorated further in the latest three months. The bank reviewed closely each of the 100 loans in excess of $10 million.

Excess liquidity will cost the bank about 4.5 cents per share in cash earnings while increased funding costs will cut EPS by about 13 cents a share.

Bendigo made it clear that it was able to cope with the current difficult funding environment but it repeated its special pleading for help from the Treasury in Canberra.

Bendigo wants the cost of accessing the AAA rated government guarantee for wholesale funding slashed in order to preserve competition in Australian banking. A similar request has been made by the Bank of Queensland CEO, David Liddy.

The two banks are rated BBB which means they must pay 150 basis points for the AAA rating.

Bendigo said the cost of the AAA guarantee of funding was so high at 150 basis points that it had not bothered to use it in wholesale markets.

Treasury should ignore the special pleading from Bendigo and Bank of Queensland.

Levelling the playing field for accessing the government guarantee would be the start of a slippery slide into dangerous territory. Taxpayers deserve to be compensated for the risks associated with underwriting the borrowings of BBB rated banks.'