bendigo shafts the shorters robert gottliebsen

The big rally in the overall market has given the shorters a huge kick in the teeth. But nowhere have they been hit harder than at Bendigo Bank which was earmarked by the shorters as a potential major killing.

As revealed by Alan Kohler (Who's on the short list, March 10) the shorters had borrowed an incredible 14.5 per cent of Bendigo stock from the superannuation and index funds ready for a massive bear raid on the stock. In their usual pattern, to unsettle the market the shorters had started to spread false rumours about the stock – a repeat of what had happened in more prominent situations.

But this week the shorters were tripped up. George Lekakis from the Melbourne Herald Sun revealed that the French bank BRED Bank Populaire had bought a small but significantly holding in Bendigo Bank. (The French bank had earlier bought 6.3 per cent of Bank of Queensland). Almost certainly some of its Bendigo holding was purchased from the shorters. The emergence of a major buyer scared the shorters and Bendigo stock rose 10 per cent yesterday and a similar amount today as part of the market rally – a total increase of an incredible 20 per cent in two days. Given the losses the shorters have incurred, it will be a long time before they attack the Bendigo Bank again.

Bendigo bank chief executive Rob Hunt will not talk about the shorting but admits he did not realise that 14.5 per cent of the stock had been borrowed from superannuation and index funds until the Business Spectator revelation.

Hunt told me today that at the beginning of 2008, with the Adelaide bank merger completed, he assumed that there would be no securitisation of bank loans available because the superannuation funds would remain nervous. In addition, he also factored in that wholesale funding would remain very restricted. He then secured all the wholesale funding the bank would need until well into 2009 (73 per cent of the bank's funding comes from retail deposits). Those conservative assumptions meant that the bank would need to cut its lending cloth to the availability of funds. The area that was hit hardest was the old Adelaide's wholesale lending business. Bendigo has stayed in the market, but only offers loans at very attractive margins.

Hunt says the quality of the businesses acquired from the Adelaide Bank has been excellent. Bendigo Bank took aboard about $5 billion in share margin lending from the Adelaide Bank. While that lending has declined, it's still in excess of $4 billion (which means there are a lot of people punting on a stock market rise). Bendigo Bank's traditional business is home mortgages and financing of a myriad of smaller enterprises – often strip shopping centres. While Adelaide was a pioneer of low-doc lending, when the margins on this sort of business contracted it cut back its new low-doc loans and sought other growth avenues.

Bendigo is now investing in the run-down Adelaide Bank retail operation and plans to substantially increase its branch footprint in SA with the introduction of community banks. Hunt assures me that the bank has no big ticket exposures. In response to a stock exchange query about the big share price rise, Hunt repeated that the company expects to increase earnings per share by 12 per cent in the current year which would take earnings per share to 92.8 cents. Cop that shorters. Clients of the superannuation and index fund managers who facilitated the raids can be very thankful that the raids were unsuccessful.