Bendigo and Adelaide Bank expect some easing of pressure on margins – Interview
By Alice Uribe
SYDNEY– Australian bank margins will continue to come under pressure in an environment of extremely low interest rates and continued competition in the mortgage market, but Bendigo and Adelaide Bank Ltd. believes increases in cash rates could give them some relief.
The Australian regional lender said on Monday that its half-year net income rose 32% to AUD 321.3 million ($229.3 million) in the six months to December as its home loan book grew at a faster pace than that of its competitors.
But its net interest margin, a measure of the difference between what a bank pays to receive deposits and funds and the fees it charges for lending money, was 2.09%, 14 basis points lower than in the second half of fiscal year 2021.
Bendigo said the decline reflected the increase in its liquidity position, stiff competition in most loan categories and continued strong consumer preference for fixed-rate loans.
Bendigo Chief Executive Marnie Baker told The Wall Street Journal that the outlook for NIMs is “absolutely challenging” but the potential for the Reserve Bank of Australia to raise its policy rate earlier than expected could help the lender’s balance sheet .
“We’ve seen NIMs come under pressure across the sector in recent years. I think what we are seeing now are signs that the rate environment is changing. That will actually provide an opportunity to improve this NIM in the future.” she said.
“We’re already seeing signs of customers moving from fixed to variable rates.”
For the second half of fiscal 2022, Bendigo expects continued margin pressure, with headwinds expected to ease through the end of the second half of fiscal 2022.
Australian bank NIMs were hurt by the low interest rate environment, which fueled a surge in house prices. This fueled competition for mortgage market share among lenders while simultaneously squeezing margins.
In the current earnings season, Westpac Banking Corp. reported that its NIM declined eight basis points to 1.91% from the quarterly average for the second half of fiscal 2021.
The country’s largest lender, the Commonwealth Bank of Australia, said its NIM for the first half of fiscal 2022 was 1.92%, down 14 basis points year-on-year. CBA said this was partly due to increased conversion to fixed-rate home loans with lower margins, market expectations of higher interest rates and ongoing home loan competition.
Ms Baker said that Bendigo’s plans to bolster its commercial banking business were an opportunity for growth after business lending was questioned in the first half, with the focus on promoting “growth and higher-margin profits”.
While home loans grew 1.1 times the system rate and rose 8.4% on an annualized basis in the first half, corporate loans fell 8.3%. As a result, total lending to Bendigo grew 4.3%, compared to the system’s 8.3% growth.
“We already have a pretty unique opportunity from a commercial banking perspective, we’re playing in the small and medium sized business market,” Ms Baker said.
“It’s not a part of the market that tends to be overly serviced by financial institutions and the fact that we have a presence in over 500 communities across Australia gives us the opportunity with our relationship style of banking to most not just small to be medium-sized businesses in the communities where we operate.”
After announcing this month that it was merging its commercial banking and agribusiness businesses with a clear focus on growth, Bendigo said it expects its agribusiness loan growth to pick up seasonally in the second half of fiscal 2022. This would drive near-term credit growth, while residential credit growth would continue to outpace systemic growth.
Write to Alice Uribe at [email protected]