A near-halving in interest costs has significantly improved the financial position of Bendigo and Adelaide Bank, one of Australia's three remaining regional banks of any note, but it still faces challenges in what has become an increasingly fierce war for deposits to help reduce the pressures on its overall funding base.
Amid the optimistic noises emanating from the bank today at its latest half-yearly results, it was interesting to note that the bank's interest income had actually declined by $664 million over the corresponding period from December 31 2008.
Thankfully for Bendigo, the costs of offering higher deposit rates to suck in the necessary funds to then lend out to customers fell by more, in both cash terms ($746 million) and percentage-terms to offset the large drop in interest income.
That was a direct result of the sharp cut in official interest rates which meant that all the banks - not just Bendigo - were able to lower the rates that they had been offering to depositors thus reducing the price of doing business in this key area of funding.
But in Bendigo's case, this was of greater importance given that the bank relies on deposits for more than 80 per cent of its funding - a figure which is significantly higher than the big four banks, and one which has jumped over the last couple of years as the regional group has been forced to reduce its reliance on the securitisation markets.
This is by no means a bad thing and Bendigo is well within its rights to argue that it is a positive in its case. Certainly such a high level of deposit funding would transform the combined balance sheet of the Australian banking industry if the same figure applied to the majors.
However, this has not necessarily been a completely deliberate strategy on behalf of Bendigo (or the old Adelaide Bank which it bought a couple of years ago).
Market moved
Regional banks such as Bendigo grew in the pre-global financial crisis years to rely on packaging up their home loans and selling them off to investors through the residential mortgage-backed securities market (RMBS) to help extend their sources of funding.
This route was cut off when credit markets dived and then froze during the GFC, and despite some signs of life over the past six months (and with a fair degree of funding help from the federal government) this market has yet to recover as a dependable area of future funding.
And not withstanding the success of a $1 billion RMBS issue in December, that's why deposits will continue to be of vital importance for Bendigo over the coming years.
It will therefore be telling to see how the bank goes financially as interest rates and therefore deposit rates start to head upwards with the Reserve Bank moving to choke off any inflation-led growth in the economy.
In the meantime, Bendigo has turned in a half decent set of results which show a reasonable recovery at the bottom line and jump in margins. The latter will be welcomed by investors but won't be a great deal of comfort for customers if they feel they are being squeezed on the lending front.
But that's the trade-off if banks like Bendigo are to survive - and even thrive in the post-GFC, competition-crunched banking environment.
As for its shareholders, they will also note that the interim dividend has been held at 28 cents a share despite the doubling of half-year net profits to $104 million. That's telling in itself as it's a sign that the bank is hanging on to its cash to see exactly how the current recovery pans out and if it will be sustained over the remainder of the financial year.
If it's well-entrenched by June 30 they at least will be pushing for a higher second-half - and therefore full-year - pay-out.
djohn@smh.com.au
SMH
