While there has been no deterioration observed in credit quality, Bendigo and Adelaide Bank ((BEN)) has raised its pandemic-related provisioning to $148.3m. The increase has reduced the bank’s CET1 ratio by -40 basis points, resulting in a pro forma March 2020 ratio of 9.3%.
Brokers adjust forecasts to reflect the higher-than-expected collective provisioning, although the extra outlay more closely aligns the bank with its regional peer Bank of Queensland ((BOQ)), Goldman Sachs points out.
The provisioning includes $127.7m in collective provisioning and a top up of $20.6m to the general reserve for credit losses. In determining the provisions, the bank has provided a 50% weighting to its base scenario, which assumes unemployment increases to 10% next month and then declines to 7% by the end of 2022.
GDP is also forecast to fall by -10% next month before recovering a year later, with house prices and commercial property prices dropping by -10% and -20%, respectively, over the next year.
Credit Suisse suspects the market may be surprised by the amount of extra provisioning but welcomes the fact Bendigo & Adelaide has been more granular with its approach, including additional overlays for specific sectors that are likely to be affected.
The provisioning appears comprehensive, Citi agrees, and a strong surplus capital position leaves the bank well-placed to adapt to the pandemic-induced slowdown. The broker notes the bank made a well-timed capital raising in February, which meant it was substantially ahead of APRA’s “unquestionably strong” requirements.
Dividend
Valuation support should stem from a resumption of dividends in FY21 and Citi removes a dividend for the second half of FY20 from its forecast, suspecting visibility will not improve by August when the company reports.
UBS agrees the bank should be able to pay a dividend of around $0.34 per share in FY21, provided the economy continues to recover, assessing regional banks are more leveraged to the deterioration in the economic environment during this cycle as it is more broad based compared with the GFC.
Shaw & Partners warns that, although forecasts for provisions have increased materially, they may still be inadequate. This is because a larger decline in the housing market could ensue amid a further worsening of business conditions and unemployment.
Sector margin pressures appear to be less evident and mortgage arrears remain relatively easy, with trends actually improving in April. Still, the bank has temporarily suspended collection activities and directed resources to support customers throughout the pandemic, acknowledging a “slower recovery with probabilities biased to the downside”.
The stock has underperformed the market by around -20% over the past quarter and Credit Suisse upgrades to Neutral from Underperform, envisaging less downside risk now. Macquarie, however, is more cautious, assessing a 19% normalised PE (price/earnings ratio) premium to the majors and expecting limited relative upside from current levels.
The broker acknowledges the bank’s business is skewed to mortgages and agribusiness, with no institutional/wholesale book, and these areas are likely to be less affected by the pandemic. Consumer arrears were seasonally higher throughout the third quarter and business arrears increased, although impaired loans from business reduced.
Credit Environment
Shaw finds few details regarding the impact of the worsening credit environment on risk wegithed asset inflation and assumes that this increases 5% faster than loan balances over the next 18 months.
The broker points out there was only been a small increase in arrears on credit cards and personal loans in April, yet credit risk remains the the most significant risk the bank faces because of the pandemic and resultant recession. Weaker asset quality, the broker asserts, not only adversely affects profits but also the ability to pay dividends and retain capital.
Bell Potter assesses there is a high level of uncertainty assumed in the update and notes a shift away from real estate construction and development lending over the last two years which has improved the overall credit risk profile.
Both Bell Potter and Shaw & Partners, not among the seven stockbrokers monitored daily on the FNArena database, have a Hold rating and $6.70 target, while Goldman Sachs has a Neutral rating and $6.53 target.
The database has one Buy rating (Citi), four Hold and one Sell (Morgan Stanley). The consensus target is $6.54, signalling 3.2% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.9% and 5.5%, respectively.
