The regional banks have not been impressing analysts for a while now. It is an interesting demonstration about what analysts do. They assess relative value, mainly for the purposes of arbitrage plays by institutions. So in relative terms, the regional banks do not look great, they argue. Whereas if one takes Deep T’s analysis to heart, the big banks are not a great cause for enthusiasm either. But conventional analysis will tend not to pick that up because the conventional approaches tend to identify relative value, but not any big problems, which are, after all, where the big value questions are decided.
Deutsche Bank has a hold on Bendigo & Adelaide Bank and a price target of $8.50. It is far from an enthusiastic recommendation, but Deutsche does think margin pressure will ease:
The key area of negativity for BEN in 1H12 was 7bps of margin decline driven by a spike in deposit competition and a reduction in the margin lending book. Nonetheless, the recent 15bps out-of-cycle repricing in mortgages should provide a full-year benefit of ~8bps to the margin, with the majority flowing through in 2H12. Longer term, further relaxation of deposit competition is necessary for a return to satisfactory economics for BEN’s very large deposit base.
RBS also has a hold (upgraded from a sell) and a price target of $7.99. RBS does not think the bank’s problems are fully resolved, but thinks the trouble may be priced in:
After guiding forecasts lower in December last year, BEN’s 1H12 cash EPS of A$0.439/share was still 3.6% weaker than our estimate. Despite adding the margin uplift from last week’s 15bp reprice of variable rate mortgages, we have cut our BEN earnings forecasts by 1.6% in FY12 and 2.5% in FY13. The bank remains ‘ROE-challenged’, with little scope for improved returns from the bad debt charge or costs, in our view. However, after recent share price falls, we think these issues are more adequately captured given it is trading on 0.8x price/book. We move to a Hold rating based on improved capital but continue to prefer BOQ among the regional banks.
Funding pressure, as with all the banks, is the main uncertainty here. Bendigo has a relatively high proportion of customer deposits at 77%, but the question is where is the rest of the funding going to come and at what cost? Perhaps the best argument in favour is the forecast dividend yield of over 7%, but it definitely comes with risk.