Current Price: $11.50 | Target Price: $15.35 | May 3, 2025
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★★★★ 90% | ★★★ 70% | ★★ 50% | ★★★ 65% | ★★★★ 80% |
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
Latest Update - 1H25 Key Takeaways
- Cash earnings decreased 1.1% YoY to $265.2m while statutory profit declined 23.2% to $216.8m
- Residential lending grew 5.3% for the half to $65.2b, outperforming the market with share increasing 9bps YoY to 2.79%
- Consumer segment was the standout performer with cash earnings rising 6.0% YoY to $268.5m
- Business & Agribusiness earnings declined 7.8% YoY to $192.2m as segment faces continued challenges
- Digital banking growth accelerated with Up customer base exceeding 1 million (13.2% growth)
- Cost-to-income ratio deteriorated 370bps YoY to 61.5%, far above the 50% medium-term target
What's Changed?
- Leadership Transition: Richard Fennell appointed CEO in August 2024, bringing fresh focus on transformation completion
- Digital Acceleration: Up platform customer base grew 13.2% to exceed 1 million customers
- Margin Dynamics: NIM improved 5bps YoY to 1.88%, but normalized margins declined 6bps from prior half
- Cost Trajectory: Operating expenses increased 8.3% YoY to $598.4m despite "inflation-level" growth target
- Segment Divergence: Consumer earnings growth (+6.0%) contrasting with B&A decline (-7.8%)
- Transformation Progress: Core banking system consolidation on track for end-2025 completion
Executive Summary
Bendigo and Adelaide Bank delivered mixed results in 1H25, balancing above-system residential lending growth and digital acceleration against cost management challenges and Business & Agribusiness weakness. Cash earnings declined marginally by 1.1% to $265.2m, while statutory profit fell more significantly by 23.2% to $216.8m. The divergence between segments was striking, with Consumer earnings growing 6.0% while Business & Agribusiness declined 7.8%.
The bank's transformation program remains on track for completion by end-2025, with the Bendigo lending platform rolled out to broker partners and trial implementation in the retail network. Digital capabilities continue to advance, with Up's customer base exceeding 1 million and digital deposits growing 27% for the half, representing over 25% of total deposit growth. This digital acceleration aligns with the bank's strategy of being "digital by design and human when it matters."
Cost management presents the most significant challenge, with operating expenses increasing 8.3% year-on-year despite management's target of "business-as-usual cost growth at no higher than inflation." This has pushed the cost-to-income ratio to 61.5%, significantly above the medium-term target of 50%. Credit quality remains sound with a $10.5m provision write-back, though management expects "residential arrears to gradually increase and bad debts to move toward longer-term averages" as high interest rates persist.
The bank's outlook will be shaped by several key factors: completion of its transformation program by end-2025, interest rate normalization expected from mid-2025, continued digital banking momentum, and the targeted return to growth for the Business & Agribusiness segment in FY26. Successful execution of these strategic priorities will be critical to achieving the bank's medium-term profitability objectives and closing the performance gap with major bank peers.
Financial Highlights
| Key Metric | 1H25 | 1H24 | Change |
|---|---|---|---|
| Cash earnings ($m) | 265.2 | 268.2 | -1.1% |
| Statutory profit ($m) | 216.8 | 282.3 | -23.2% |
| Total income ($m) | 972.4 | 956.8 | +1.6% |
| Operating expenses ($m) | 598.4 | 552.7 | +8.3% |
| Credit expenses ($m) | -10.5 | 10.8 | n/m |
| Net interest margin (%) | 1.88 | 1.83 | +5bps |
| Cost-to-income ratio (%) | 61.5 | 57.8 | +370bps |
| Return on equity (%) | 7.55 | 7.67 | -12bps |
| Dividend per share (¢) | 30.0 | 30.0 | 0.0% |
| CET1 ratio (%) | 11.17 | 11.23 | -6bps |
Segment Performance
| Segment | QoQ | YoY | Key Developments |
|---|---|---|---|
| Consumer | +3.2% | +6.0% | Residential lending growth of 8.9% YoY; Up platform exceeding 1M customers |
| Business & Agribusiness | -4.5% | -7.8% | NIM down 14bps to 3.02%; business lending -0.9%, agribusiness -4.9% |
| Corporate | -1.5% | -1.1% | Operating expenses +9.4% YoY; technology and cyber investment |
Key Outlook Points
| Category | Current/Near-Term | Medium-Term | Long-Term |
|---|---|---|---|
| Transformation Progress | 🟨 Core banking consolidation continuing | 🟩 Completion by end-2025 | 🟩 Efficiency benefits materializing |
| Cost-to-Income Ratio | 🟥 61.5%, deteriorating 370bps YoY | 🟨 Gradual improvement expected | 🟨 Target of 50% remains challenging |
| Net Interest Margin | 🟨 1.88%, +5bps YoY but normalized -6bps | 🟨 Pressure until rate cuts begin mid-2025 | 🟩 Expansion to 1.94% by FY30 |
| Residential Lending | 🟩 5.3% growth for half, +9bps market share | 🟩 Continued above-system growth | 🟩 Sustained market share gains |
| Business & Agribusiness | 🟥 Declining volumes and earnings | 🟨 Return to growth targeted FY26 | 🟩 5-6% annual growth in outer years |
| Digital Banking | 🟩 Up exceeds 1 million customers | 🟩 Continued strong growth | 🟩 Digital becoming dominant channel |
| Credit Quality | 🟩 $10.5m provision write-back | 🟨 Normalization expected | 🟨 Moving toward longer-term averages |
Color Key: 🟩 Positive for the company 🟨 Neutral or moderate 🟥 Challenging or negative
Valuation Summary
Our analysis derives a base case valuation of $15.35 per share, representing 33.5% upside to the current price of $11.50. This valuation is primarily based on a dividend discount model (DDM), reflecting Bendigo's consistent dividend payout history, supplemented with DCF analysis to capture transformation benefits.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $15.25 |
| DCF - Bull Case | $18.75 |
| DCF - Bear Case | $12.25 |
| EV/EBITDA Multiple - NTM | $17.33 |
| P/E Multiple - NTM | $11.64 |
| P/B Multiple | $13.72 |
| PEG Ratio (P/E to Growth) | $10.19 |
| Precedent Transactions | $15.59 |
| Implied Valuation Range | $12.25 - $15.75 |
| Current Share Price | $11.50 |
| Up/Downside to Base Case | +33.5% |
Our Bottom Line
Bendigo and Adelaide Bank is at a pivotal point in its transformation journey, with promising digital growth and above-system residential lending expansion offset by efficiency challenges and segment performance divergence. The successful completion of core banking system consolidation by the end of 2025 represents a critical inflection point that should unlock significant operational efficiencies and support margin improvement.
While the cost-to-income ratio of 61.5% remains well above the 50% medium-term target, we see a credible path to improvement as transformation benefits materialize and digital scale increases. The bank's unique community banking model and highest industry trust ratings provide a sustainable competitive advantage, while the growing Up platform demonstrates successful digital innovation.
We believe the market is undervaluing Bendigo's transformation potential and the strategic value of its trusted brand and community presence. As execution risks diminish with visible progress toward system consolidation and Business & Agribusiness recovery materializes in FY26, we expect a significant re-rating of the stock toward our $15.35 valuation.
What to Watch
- Core Banking Consolidation: Progress toward end-2025 completion target
- Cost-to-Income Ratio: Trajectory toward 50% medium-term target
- Business & Agribusiness: Signs of recovery ahead of FY26 growth target
- Up Platform Growth: Continuation of customer acquisition momentum
- Interest Rate Cuts: Timing and pace of RBA easing from mid-2025
- Credit Quality: Early indicators of normalization from current benign environment
Project Timeline
- Core Banking Consolidation
- Now: Bendigo lending platform rolled out to broker partners, retail network trials
- Q4 2025: Targeted completion of system consolidation
- Impact: Critical to achieving efficiency targets and margin improvement
- Digital Transformation
- Now: Up exceeds 1 million customers, digital mortgages at 19.1% of settlements
- 2025-2026: Continued digital channel expansion
- Impact: Improving acquisition economics and customer engagement
- Business & Agribusiness Recovery
- Now: Implementing Operating Model Efficiencies project
- FY26: Targeted return to positive growth
- Impact: Diversification of earnings and higher-margin contribution
Tailwinds
- Digital Banking Momentum:
- Up platform grew 13.2% to exceed 1 million customers
- Digital deposits grew 27%, representing 25% of total deposit growth
- Digital mortgages reached 19.1% of settlements
- Improving acquisition economics and efficiency
- Trust Advantage:
- Highest industry trust ratings (NPS 22.0, 31.1 points above average)
- Community Bank model returned $366 million to communities
- Customer numbers grew 8% YoY to 2.7 million
- Sustainable competitive advantage
- Above-System Residential Growth:
- 5.3% growth for the half, market share increased 9bps YoY to 2.79%
- Consumer segment delivered 8.9% YoY lending growth
- Creates operating leverage potential once transformation completes
- Broker relationships and improved processing supporting growth
- Rate Normalization Benefits:
- Interest rate cuts expected from mid-2025
- High deposit reliance (76.5% of funding) means greater benefit vs peers
- NIM projected to reach 1.94% by FY30
- Meaningful upside across $102.2 billion asset base
Headwinds
- Cost Efficiency Challenges:
- Cost-to-income ratio deteriorated to 61.5% (up 370bps YoY)
- Expenses increased 8.3% despite "no higher than inflation" target
- ROE declining to 7.55%, well below major bank peers
- Core banking consolidation is primary remedy
- Business & Agribusiness Weakness:
- Segment earnings fell 7.8% YoY to $192.2 million
- Business lending down 0.9%, agribusiness down 4.9%
- Margin compression with NIM down 14bps to 3.02%
- Growth targeted only from FY26
- Credit Normalization Headwind:
- Management expects "residential arrears will gradually increase and bad debts move toward longer-term averages"
- High rates until mid-2025 will continue testing borrowers
- Earnings headwind offsetting efficiency improvements
- Prudent underwriting and strong provisioning provide some protection
- Deposit Competition:
- High rates have intensified deposit competition
- Greater deposit reliance (76.5% of funding vs. majors' 60-70%)
- Deposit costs rose faster than lending yields
- Mitigation relies on trust advantage and accelerating digital deposits
Discussion