AUSTRALIA AU Price (at 06:17, 30 Mar 2017 GMT) Underperform A$12.03 Valuation A$ 11.48- - Sum of Parts/GG 11.71 12-month target A$ 11.50 12-month TSR % +1.2 Volatility Index Low/Medium GICS sector Banks Market cap A$m 5,687 30-day avg turnover A$m 25.0 Number shares on issue m 472.7 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Net interest Inc m 1,172.3 1,224.8 1,298.4 1,364.5 Non interest Inc m 376.3 378.7 333.5 340.6 Underlying profit m 676.3 728.1 731.9 776.9 Reported profit m 415.6 434.8 451.3 475.3 Adjusted profit m 439.3 456.9 464.1 488.1 EPS adj 85.6 87.9 88.1 91.4 EPS adj growth % -4.1 2.6 0.3 3.7 PER adj x 14.1 13.7 13.6 13.2 PER rel x 0.72 0.86 0.86 0.84 Total DPS 68.0 68.0 68.0 68.0 Total div yield % 5.7 5.7 5.7 5.7 Franking % 100 100 100 100 ROA % 0.7 0.6 0.6 0.6 ROE % 8.9 8.8 8.5 8.6 Equity to assets % 7.5 7.4 7.4 7.3 P/BV x 1.1 1.1 1.1 1.0 AU vs ASX 100, & rec history Taking another opportunity Event has followed the majors and repriced its investor loans by 25bps. We estimate on a full-year basis this will add ~$26m of revenue, ~4bps to margins and ~4% to earnings. While positive for earnings in the near term the widening price differential between and the majors is likely to put pressure on volume growth and limit repricing future opportunities. Additionally, we estimate that SVR convergence to the majors would take ~5% off s earnings and be a drag on margins over the medium term. Impact Repricing boosts full-year earnings by ~4%. We estimate this round of repricing will boost earnings by ~4% on a full-year basis. We note that we had already incorporated some investor repricing in our numbers for the first calendar half of 2017, hence our earnings upgrades are smaller. Back-book pricing differential remains elevated for the regionals. In recent periods the regionals have been repricing their back-book more aggressively than the majors. In that respect, we believe the regionals are currently over-earning on mortgages and we believe it will be difficult for the regionals to continue to reprice in line with the majors without impacting volume growth. If was to normalise its SVRs to the average of the majors we estimate this would impact earnings by ~5% over time. Standard variable rates across the four pricing categories % 5.7 % 6.2 5.6 6.1 5.5 6.0 5.4 5.9 5.3 5.8 5.2 5.7 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, March 2017 (all figures in AUD unless noted) 5.1 5.0 P&I Owner occupier I-O Owner occupier 5.6 5.5 P&I Investor I-O Investor *Note: BOQ and Bankwest have not announced repricing measures since Dec-16 Source: Macquarie Research, March 2017 Earnings and target price revision 30 March 2017 Macquarie Securities (Australia) Limited We upgrade cash EPS by 0.5% in FY17 and 1.5% in FY18. Our target price is unchanged at $11.50. Price catalyst 12-month price target: A$11.50 based on a Sum of Parts/GG methodology. Catalyst: 2H17 Result, August 17 and potential Advanced Accreditation. Action and recommendation Maintain Underperform. Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Valuation and risks Our target price is unchanged at $11.50/share using our SOTP ($11.48/share) and GG ($11.71/share) based valuations. SOTP (sum of the parts) valuation $11.48/share Our SOTP valuation attributes a peer-based multiple to normalised bank earnings. We apply a 13.0x FY18F P/E multiple to our banking earnings, which is representative of the peer average banking P/E multiple after adjusting each bank s multiple to exclude the funds management business. We assume that should trade at a 7.5% discount to the sector PE and have used FY18 earnings as we have the Homesafe income contribution normalising from this point. Fig 1 Segment valuation Division Cash Earnings (EPS) PE Multiple (x) Adj. PE Multiple (x) 2.39 13.5 13.5 5.89 14.7 14.8 2.42 13.9 13.9 2.52 14.0 14.1 Average 13.5 14.1 LT premium to sector -7.5% Implied multiple 13.0 Valuation 0.88 13.0 11.48 Source: Macquarie Research, March 2017 Note: Wealth Management multiple is based on AMP FY18 multiple. Bank multiple is based on the average of peers adjusted for their respective WM contributions. Gordon Growth (GG) valuation $11.71/share We have derived a GG valuation of $11.71, based on s estimated return on tangible equity of ~11.9% in 2H18. Based on this methodology is currently trading at a ~3% premium to its fundamental valuation. Fig 2 Gordon Growth valuation P/NTA (x) 3.5 3.0 2.5 2.0 1.5 BOQ 1.0 0.5 8 10 12 14 16 18 20 22 RoTE (%) Source: Macquarie Research, March 2017 Risks Key downside risks stem from a reduction in property values, more aggressive competition in deposits/mortgages and a seemingly stretched payout ratio. Key upside for is the potential for additional mortgage repricing and achieving Advanced Accreditation. 30 March 2017 2
Fig 3 Financial Summary Bendigo & Adelaide Bank Year Ending 30 June 1H16 2H16 2016 1H17 2H17 2017 2018 2019 Underperform PER SHARE DATA Cash EPS (AUD) - Macquarie Diluted Basis 44 41 86 43 45 88 88 91 Current Price Target Price Cash EPS Growth (%) 0% -6% -5% 5% 3% 3% 0% 4% A$12.03 $11.50 DPS (AUD) 34 34 68 34 34 68 68 68 Total Shareholder Return 1.2% BVPS (AUD) $10.97 $11.03 $11.03 $11.18 $11.30 $11.30 $11.54 $11.82 NTA PS (AUD) $7.42 $7.51 $7.51 $7.70 $7.86 $7.86 $8.18 $8.52 Bloomberg: AU Shares on issue (m) 459 464 464 474 480 480 490 500 Reuters:.AX VALUATION METRICS Macquarie Equities Australian Banks P/E (Cash) 13.6x 14.5x 14.1x 13.9x 13.5x 13.7x 13.6x 13.2x Analyst(s) Contact(s) P/B (Stated) 1.1x 1.1x 1.1x 1.1x 1.1x 1.1x 1.0x 1.0x Victor German +61 2 8232 6089 P/NTA 1.6x 1.6x 1.6x 1.6x 1.5x 1.5x 1.5x 1.4x Anita Stanley +61 2 8232 9869 RoE (%) 9.0% 8.6% 8.8% 8.7% 8.7% 8.7% 8.4% 8.4% Brendan Carrig +61 2 8237 6043 RoA (%) 0.7% 0.6% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% Dividend Yield (%) 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% Volumes and margins 1.85% 9% Dividend Payout (%) 77% 82% 79% 78% 76% 77% 77% 74% 8% Cost of Equity (%) 9% 9% 9% 9% 9% 9% 9% 9% 1.80% 1.75% 1.70% 56.0% 55.8% 55.6% 55.4% 55.2% 55.0% 54.8% 8.50% 8.40% 8.30% 8.20% 7% 6% 5% 4% 3% 2% 1% 0% 1H17 2H17 2017 2018 2019 Net Interest Margin (%) GLAA growth (%) Efficiency and Costs 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% 1H16 2H16 2016 1H17 2H17 Cost / Income Ratio (%) Cost growth (%) CET1 ratio and BDD/GLA 14 13 12 11 PROFIT & LOSS (AUDm) Net Interest Income 587 585 1,172 597 627 1,225 1,298 1,364 Non-Interest Income 196 180 376 207 172 379 334 341 Fees 80 78 158 80 80 160 162 164 Commissions 51 67 118 58 58 116 117 119 Other 65 35 100 69 34 102 55 57 Total Operating Income 784 765 1,549 804 799 1,604 1,632 1,705 Total Operating Costs 446 440 886 446 442 888 913 941 Employee Costs 242 237 479 243 240 483 495 510 Other Costs 204 203 407 203 203 405 418 431 Pre-Provision Operating Profit 338 325 663 358 357 715 719 764 Impairment Charge 21 24 44 40 31 71 64 75 Pre-Tax Profit 317 302 619 319 326 644 655 690 Tax Expense 100 93 193 100 100 200 204 214 Minority Shareholders 0 0 0 0 0 0 0 0 Other Post Tax Items 8 2 10 9 0 9 0 0 Stated Net Profit 209 207 416 209 226 435 451 475 Extraordinary & Other Items -15-9 -24-16 -6-22 -13-13 Preference shares 0 0 0 0 0 0 0 0 Macquarie Cash Profit 224 216 439 225 232 457 464 488 4.0% BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets 34,527 36,486 36,486 38,312 39,395 39,395 40,977 43,502 Interest Earning Assets 63,425 64,296 63,860 67,166 69,769 68,468 72,091 75,998 Gross Loans, Advances & Acceptances 55,545 57,472 57,472 60,102 62,011 62,011 64,983 68,776 Total Deposits 54,198 57,055 57,055 59,229 61,109 61,109 64,037 67,775 Total Assets 65,723 68,581 68,581 70,949 73,148 73,148 76,574 80,949 Shareholders Equity 5,035 5,116 5,116 5,302 5,421 5,421 5,659 5,912 Tier 1 Capital 3,687 3,795 3,795 3,895 4,023 4,023 4,262 4,515 Tier 1 Ratio (%) 10.7% 10.4% 10.4% 10.2% 10.2% 10.2% 10.4% 10.4% CET 1 Ratio (%) 8.24% 8.09% 8.1% 7.97% 8.07% 8.1% 8.3% 8.4% ASSET QUALITY Impairment Charge / GLAA (bp) 7 8 8 14 10 12 10 11 Impairment Charge / NHL (bp) 24 27 25 45 35 40 35 39 Provisions / NPLs (%) 19.5% 19.6% 19.6% 19.4% 19.4% 19.4% 19.4% 19.4% 8.10% 8.00% 7.90% 7.80% 7.70% 1H17 2H17 2017 2018 2019 CET 1 Ratio (%) Impairment Charge / GLAA (bp) Source: Company data, Macquarie Research, March 2017 10 9 8 7 6 KEY RATIOS & GROWTH Net Interest Income growth (%) 1.3% -0.4% -1.0% 2.1% 5.0% 4.5% 6.0% 5.1% Non-Interest Income growth (%) 4.6% -8.1% 3.0% 14.7% -16.8% 0.6% -11.9% 2.1% Total Revenue growth (%) 2.1% -2.3% -0.1% 5.1% -0.6% 3.5% 1.8% 4.5% Cost growth (%) 3.3% -1.3% 1.0% 1.3% -0.7% 0.2% 2.8% 3.1% Pre-Provision Profit growth (%) 0.5% -3.7% -1.4% 10.3% -0.4% 8.0% 0.5% 6.3% RWA growth (%) -0.5% 5.7% 5.1% 5.0% 2.8% 8.0% 4.0% 6.2% GLAA growth (%) -0.3% 3.5% 3.1% 4.6% 3.2% 7.9% 4.8% 5.8% Deposit growth (%) 1.3% 5.3% 6.6% 3.8% 3.2% 7.1% 4.8% 5.8% Net Interest Margin (%) 1.84% 1.83% 1.84% 1.76% 1.81% 1.79% 1.80% 1.80% Cost / Income Ratio (%) 56.9% 57.5% 57.2% 55.4% 55.4% 55.4% 55.9% 55.2% 30 March 2017 3
Macquarie Quant View The quant model currently holds a strong positive view on Bendigo and Adelaide Bank. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Growth, indicating this stock has weak historic and/or forecast growth. Growth metrics focus on both top and bottom line items. 134/747 Global rank in Banks % of BUY recommendations 7% (1/15) Number of Price Target downgrades 0 Number of Price Target upgrades 2 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Banks) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 2.1 Bank 1.6 1.6 1.4 1.0 0.7 0.6 Bank -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Bank 0.2 0.1 0.4 0.4 0.1-0.8-0.9 Bank -3.0-2.0-1.0 0.0 1.0 2.0 3.0-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Book LTM Dividend Yield NTM Dividend Yield FY1 EV/EBITDA FY1 Asset Growth Return on Assets NTM Net Income Margin NTM Return on Equity NTM Negatives Positives -24% -25% -25% -27% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 1.01 0.58-0.20-0.17 0.22-0.09 0.04 0.07-0.69 0.03 0.35 Percentile relative to sector(/747) Percentile relative to market(/422) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 30 March 2017 4
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 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 60 100% 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 Asia/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 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) AU vs ASX 100, & rec history (all figures in AUD currency unless noted) 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, March 2017 12-month target price methodology AU: A$11.50 based on a Sum of Parts/GG methodology Company-specific disclosures: AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 14-Mar-2017 AU Underperform A$11.50 19-Jan-2017 AU Underperform A$11.00 16-Dec-2016 AU Underperform A$10.50 29-Jul-2016 AU Underperform A$9.25 16-Feb-2016 AU Neutral A$9.50 21-Jan-2016 AU Neutral A$11.25 10-Aug-2015 AU Neutral A$13.09 08-Apr-2015 AU Neutral A$13.35 16-Feb-2015 AU Neutral A$13.92 19-Dec-2014 AU Neutral A$12.39 09-Dec-2014 AU Neutral A$13.18 11-Aug-2014 AU Outperform A$13.18 05-Jun-2014 AU Outperform A$12.52 21-May-2014 AU Neutral A$11.68 Target price risk disclosures: AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views 30 March 2017 5
This publication was disseminated on 30 March 2017 at 08:51 UTC. Macquarie Wealth Management expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("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 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 30 March 2017 6