Bendigo and Adelaide Bank

Transcription

1 AUSTRALIA BEN AU Price (at CLOSE#, 17 Aug 2012) Neutral A$8.69 Volatility index Low 12-month target A$ month TSR % Valuation - DCF (WACC 12.1%) A$ 8.28 GICS sector Banks Market cap A$m 3, day avg turnover A$m 8.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Net interest Inc m , , ,190.3 Non interest Inc m Underlying profit m Reported profit m Adjusted profit m EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % Equity to assets % EV/EBITDA x P/BV x BEN AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in AUD unless noted) 20 August 2012 Macquarie Securities (Australia) Limited Solid in a soft environment Event BEN FY12 results/dividend came in broadly in-line with our expectations. While the earnings growth outlook remains subdued, should rationality prevail in funding/asset markets, we see upside from improving margins, further BOCA synergies and absence of cost one-offs in FY13. Despite this BEN looks fairly priced to us, given the balance of risks. Neutral. Impact FY12 result solid although low growth FY12 cash profit came in at A$323m, broadly in-line with our forecasts ex-grcl movement. NIM was slightly higher than our expectations of 1.76%. Costs were also higher than our expectations, although on further examination this appears to have been driven by a one-off adjustment to long service leave liabilities due to lower CG rates. Asset quality was in-line with our expectations, although exceptionally well contained by sector standards. FY13 upside improving margins, further BOCA synergies and absence of cost one-offs While the economic environment remains subdued, we believe BEN has a number of opportunities to incrementally improve returns. The current spot margin (1.82%) is higher than 2H (1.77%) with management guiding to a flat margin outlook. This bodes well for FY13 margins, with all the normal caveats of rational deposit competition and repricing. Management lifted synergy expectations from the BOCA acquisition in FY13 to A$2.5m from A$1.8m. Finally we anticipate that the A$4m drag from the change in assumptions around long-term bond rates is unlikely to be repeated in FY13. Balance sheet now strongest in the sector Capital continues to grow, with core tier 1 capital at 8.09% helped by post balance date capital actions such as the IOOF sale and sale of securitisation B Notes. BEN has also improved its level of deposit funding, which now sits at 80% vs 75% a year ago. Given this, BEN continues to look best of breed on balance sheet quality. Earnings and target price revision Our FY13 earnings remain largely unchanged with softer growth partially offset by incremental areas for improvement highlighted above. Our target price declines from A$9.58 to A$9.28 with small FY14 downgrades. Price catalyst 12-month price target: A$9.28 based on a DDM methodology. Catalyst: 1Q13 Pillar 3 statement; 1H12 result Action and recommendation While we see further incremental upside in FY13 earnings and BEN has a strong balance sheet, we believe the bank is fairly priced at current levels, particularly given the risks around our assumptions of rational deposit competition and repricing. Maintain Neutral. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 What we liked What we didn t like What else was interesting? Dividend dependability 30cps delivered again BEN delivered on dividend dependability again, providing shareholders with 30cps despite a goodwill write-down and capital issuance at the end of last year Margins slightly higher than we were expecting with spot margin higher than 2H run-rate - NIM of 1.77% was slightly higher than our expectations of 1.76% (FY12). Liability repricing came to the rescue in this result. The current spot margin (1.82%) is higher than 2H (1.77%) with management guiding to a flat margin outlook. This bodes well for FY13 margins, with all the normal caveats of rational deposit competition and repricing. Strong balance sheet momentum relative to peers Asset growth was reasonably strong, with balances up 4% HOH helped by the BOCA acquisition. This was lower if BOCA is excluded (c1.3%), although remember the margin lending book continues to run-off as well (excluding BOCA and margin lending the portfolio declined 1.7%). Deposit funding position improving The bank balance sheet is now 80% deposit funded, compared to 75% in FY11. This has been driven by a substitution of securitisation funding with deposits. BDD charge in-line with our expectations -The BDD charge came in at 7bp on gross loans (vs 9bp in FY11), which was in line with our expectations. Impaired assets came in at A$358.5m (vs A$358.7m FY11). Capital increase during the year Core tier 1 capital came in at 8.09% (vs 7.85% FY11), with the change driven by the sale in the IOOF stake adding ~13bp. Including the B note sale, core tier 1 capital will move to 8.32%. Cost outcome was strong ex-boca/long service leave At first glance, cost growth appeared reasonably high. However, much of the growth in costs came from inclusion of the BOCA acquisition as well as a one-off adjustment in commonwealth government interest rates, which increased the value of long service liabilities to staff. Outside of these two items, costs were up 50bp. 90 days past due and development impairment increased - 90 days past due increased significantly in 2H12 due to the inclusion of a few large credits. Management are working with these accounts to see how payments can be structured to attempt to help them to work through issues. In addition, impaired assets were up in the property development space. Cost-to-income increasing The bank is drifting further away from its long-term C:I target of 55%. FY12 saw a 1.7% increase in C:I, to 59.1%, although we do note that costs did include a one-off from the change in commonwealth government interest rates. GRCL increased and collective provisions were released While bad debts were within expectations, we did note that A$10m was released from the collective provision. Clearly without this release bad debts would have been higher, although still very low (c9bp) by sector standards. The GRCL also increased by A$17.6m. Homesafe has increased income volatility While the Homesafe portfolio was a positive contributor to the 2H12 result it was a drag on earnings in 1H12. Overall the portfolio has added to the volatility of the earnings of BEN and as such could be a material swing factor (either positive or negative) at some point in the future. While it could add to earnings at some point, generally earnings volatility is met by the market with a discount in the bank s share price. BOCA synergies travelling better than expected more to come in FY13 with rebranding expected to be announced in 1H13 BEN stated that they have delivered A$3.1m of synergies on the acquisition, well above the A$2.2m forecast. Next year the bank expects to deliver a further A$2.5m of synergies, above the A$1.8m target. BEN mentioned that they intend to increase the branch network by branches in FY13 BEN, unlike the major banks, continue to grow their branch network. Obviously this is a function of BEN s much smaller branch footprint as well as the ongoing funding constraints of the majors vs. the smaller deposit-funded competitors. Implementation timeline for second phase of NII sharing with community branches appears to have been changed BEN mentioned that, due to abnormal funding conditions, they intend to delay round 2 of the margin sharing arrangement they had carved out with the community branches. Plan now is to extend implementation out to April next year. BEN continues to look for bolt-ons BEN continues to look for attractive bolt-on opportunities, which is to be expected given the low growth environment. 20 August

3 Analysis BEN FY12 results came in at A$323m, which was broadly in-line with our expectations. The final DPS of 30cps was in-line with both our expectations and consensus of 30cps. The main concern of the market was margins, which were in-line with expectations (1.77% vs. 1.76% MQG expectation). Fig 1 Cash profit down on lower Non NII and higher costs ($ m) FY11 Cash profit NII Non NII Costs BDDs Tax Other FY12 Cash profit Source: Company data, Macquarie Research, August 2012 Our FY13E earnings remain largely unchanged, with softer growth partially offset by incremental areas for improvement highlighted above. Our target price declines from A$9.58 to A$9.28 on FY14 downgrades and a slightly higher payout ratio eroding the terminal value/sustainable growth level. Fig 2 Earnings changes ($ m, except per-share figures) Forecast Changes FY13E FY14E FY15E Old Cash NPAT (Macq Basis) New Cash NPAT (Macq Basis) % Change 0.6% -3.5% -2.0% Old Cash EPS (Macq Basis) New Cash EPS (Macq Basis) % Change -1.4% -5.2% -3.5% Old DPS New DPS % Change 1.6% 1.5% 1.4% Source: Macquarie Research, August 2012 We discuss the key themes for the result below. 20 August

4 FY12 result solid, although low growth BEN took control of BoCA in March-12 and is yet to fully benefit from the synergies of the acquisition. As a result, BEN s cost line was hit by BoCA s 73% Cost-to-Income ratio. Excluding BoCA s costs and the one-off off adjustment to long service leave liabilities due to lower CG rates, BEN s cost growth reduced to 0.6% YoY, compared to 2.2% YoY. Fig 3 Normalising for one-offs and the lower-quality BoCA book, NPBT ($m) Cost Growth: 2.2% YoY $8.1m Normalised Cost Growth: 0.6% YoY 740 $752m $4m $736m $740m 725 FY11 Op. Exp FY12 Op. Exp BOCA Op. Exp Long Service Leave FY11 Adj. Source: Company data, Macquarie Research, August 2012 Balance sheet momentum in the group was driven by the BoCA acquisition. Organic asset growth accounted for 38% of balance sheet momentum (1.9% YoY growth in assets), compared to the 62% inorganic asset growth from the BoCA acquisition (3% YoY growth in assets). Whilst underlying organic asset growth (ex. margin lending) was in line with system 3.7% YoY, the 37% YoY reduction in the margin lending book took 1.8% off the underlying asst growth. To see a turnaround in the margin lending book, we would require equity market appetite to return. Fig 4 BoCA acquisition contributed more to asset growth YoY than organic group asset growth Fig 5 A turnaround in BEN s margin lending assets will require an improvement in equity market appetite $(b) $46.6m Organic asset growth (ex. BoCA and Margin Lending): +3.7% $1.7m -$0.9m Organic asset growth 45.7 (Margin Lending): -1.8% $1.4m Inorganic asset growth 47.4 (BoCA): +3.0% $48.8m FY11 BEN BoCA FY12 Source: Company data, Macquarie Research, August 2012 Source: BEN, Macquarie Research, August August

5 Asset quality in-line with our expectations Asset quality was in-line with our expectations, although exceptionally well contained by sector standards. BDD/GLA, declined 3bp YoY and remained constant HoH. The BoCA acquisition, despite having an asset mix skew toward higher-risk SME loans, improved group level Impaired assets to GLA (declining 1bp HoH, to 73bp). Past dues, however, increased over the half, past dues to GLA increasing 7bp HoH (from 1.03% in 1H12 to 1.10% in 2H12). Whilst these assets are well-secured, we do raise caution, given the uptick in non-performing loans across the sector. Fig 6 Past dues, ticking up on an absolute level, but flat relative to GLA Source: BEN, Macquarie Research, August 2012 Balance sheet now strongest in the sector Capital continues to grow with core tier 1 capital at 8.09% helped by post balance date capital actions such as the IOOF sale and sale of securitisation B Notes. BEN has also improved its level of deposit funding, which now sits at 80% vs 75% a year ago. Given this, BEN continues to look best of breed on balance-sheet quality. Fig 7 BEN maintains the highest level of deposit funding in the sector Fig 8 Core tier 1 (Basel II) comparison BEN continues to grow capital 90% 9.20% 80% 70% 60% 50% 40% 30% 20% 10% 80% BEN Jun-11 Deposit Funding Level = 75% Sector average = 61% 57% 60% 62% 51% 54% 9.00% 8.80% 8.60% 8.40% 8.20% 8.00% 7.80% 7.60% 7.40% +20bp (HoH) Sector average = 8.24%% 8.09% 8.60% 8.92% 7.82% 8.05% 7.96% 0% BEN BOQ ANZ CBA NAB WBC 7.20% BEN BOQ ANZ CBA NAB WBC (Jun-12) (Feb-12) (Mar-12) (Jun-12) (Mar-12) (Mar-12) (Jun-12) (Feb-12) (Mar-12) (Jun-12) (Jun-12) (Mar-12) Source: Company data, Macquarie Research, August 2012 Source: Company data, Macquarie Research, August August

6 Outlook FY13 upside improving margins, further BOCA synergies and absence of cost one-offs While the economic environment remains subdued we believe BEN has a number of opportunities to incrementally improve returns. The current spot margin (1.82%) is higher than 2H (1.77%) with management guiding to a flat margin outlook. This bodes well for FY13 margins, with all the normal caveats of rational deposit competition and repricing. Management lifted synergy expectations from the BOCA acquisition in FY13 to A$2.5m from A$1.8m. Finally, we anticipate that the A$4m drag from the change in assumptions around long-term bond rates is unlikely to be repeated in FY13. Fig 9 8% earnings increase possible in FY FY12 Cash Profit Margin Uplift BOCA synergies Long bond won't reoccur FY13 "Baked in" increase Asset growth FY13 likely upside Source: Macquarie Research, August August

7 Year Ending 30 June 1H12 2H H13 2H PER SHARE DATA Cash EPS (AUD) - Macq basis Growth Rate - Cash EPS (%) DPS (AUD) Neutral BVPS (stated) (AUD) NTA PS (AUD) Average Mkt Cap (AUD m) 3,216 3,442 3,329 3,503 3,527 3,515 3,564 3,613 Current Price Target Price Shares in issue (m) A$8.68 TSR = 14% Reuters: BEN.AX A$9.28 Bloomberg: BEN AU VALUATION METRICS & PROFITABILITY P/E (Cash) P/B (stated) P/NTA ROE (stated) (%) ROA (stated) (%) Dividend yield (%) Dividend payout (%) Profitability & Leverage H13 2H Leverage (x) ROE (%) ROA (RHS, %) Capital Adequacy & RWA Growth H13 2H RWA Growth (RHS, %) Tier 1 ratio (%) Asset Quality H13 2H Prov./ NPL's (RHS) (%) Bad debt exp/ Loans (bp) Net Interest Margin H13 2H NIM (%, LHS) Source: Company data, Macquarie Research, August PROFIT & LOSS (AUD m) Net interest revenue ,026 1,102 1,190 Non-interest income Fees Income Commission income Other Revenue Total Operating Income , ,343 1,446 1,563 Total Operating Costs Employee costs Other costs Net Operating Income Bad debt expense Goodwill Pre-tax profit Tax Minority shareholders Other post tax items Stated net profit Extraordinary & Other items Hybrids distributions Movement in GRCL Goodwill Macquarie 'Cash' Earnings BALANCE SHEET AND CAPITAL ADEQUACY (AUD m) Risk weighted assets 26,556 28,310 28,310 28,922 29,784 29,784 32,179 34,768 Interest-earnings assets 52,743 54,145 53,444 55,306 56,941 56,124 60,327 65,144 Total loans 47,234 49,234 49,234 50,289 51,776 51,776 55,908 60,373 Total Assets 56,277 57,639 57,639 59,649 60,462 60,462 64,892 69,670 Stated Shareholder Equity 4,093 4,218 4,218 4,319 4,402 4,402 4,595 4,831 Tier 1 capital 2,286 2,375 2,375 2,461 2,536 2,536 2,721 2,919 Tier 1 ratio (%) ASSET QUALITY Impaired Asset / Total Loans (%) Coverage (%) Bad debt chg / Avg loans (%) KEY RATIOS AND GROWTH Growth in revenues (%) Growth in costs (%) Growth in Operating Income (%) Growth in RWA (%) Growth in loans (%) Net interest margin (%) Cost income ratio (%) DU PONT STYLE ANALYSIS (ROA vs ROE) Net interest income Non-interest income Total Operating Income Operating Expense Net Operating Income Impairment Charge Pre-tax Profit Tax & Adjustments Cash Profit (ROA) Leverage (x) Cash Profit (ROE) August

8 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Macquarie Bank Limited makes a market in the securities in respect of Limited. The Macquarie Group acted as Joint Lead Manager and Underwriter (together with UBS) to Limited for a $120m placement to fund the acquisition of the Bank of Cyprus Australia, as announced on 16 December The Macquarie Group will receive compensation for investment advisory services from Limited. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. 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