Earnings Risk Remains At Bendigo And Adelaide Bank

This story features BENDIGO & ADELAIDE BANK LIMITED.
For more info SHARE ANALYSIS: BEN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Yesterday Bendigo And Adelaide Bank ((BEN)) revised down guidance for cash earnings per share (EPS) from a range of 70-75c to a result of around 63c, the cut coming as a result of the regional bank having to make additional provisions for its exposure to Great Southern Managed Investment Scheme loans and commercial property exposures.

As Credit Suisse points out, the downgrade to guidance was the second since the bank’s interim result back in February and so is clearly a disappointment, even if it appears to be confined to a couple of problem areas, while the magnitude of any recurring losses are unlikely to be similar to yesterday’s cuts.

To reflect the change, the broker has cut its FY09 earnings forecast by about 12%, though it notes later year estimates are largely unchanged. In EPS terms, the changes leave the broker forecasting 63c for FY09, 67c in FY10 and 75c in FY11. This leaves the broker higher than the market this year but below with respect to FY10 estimates, the FNArena database showing consensus forecasts of 60.7c and 70c respectively.

While earnings forecasts are not too different, there remain differing perceptions among analysts with respect to the Great Southern Exposure as the likes of Macquarie take the view the bank’s provisions are adequate, so the current trend towards improved credit quality and a shift to a business based more on deposits should leave the bank in a healthy enough position.

While Macquarie has a Neutral rating on the stock, JP Morgan is less bullish and post the latest guidance retains its Underweight rating. JPM expects further growth in provisions and sees this as enough of a drag to limit any potential outperformance of the share price.

Deutsche Bank agrees as it too see scope for further write-downs related to Great Southern, while it also questions whether the bank has enough provision coverage and capital given such an outlook. It all adds up to further downside risk to earnings in its view and so Deutsche also has a Sell on the stock. So too does RBS Australia, who downgraded the stock from Hold to Sell today given what it sees as ongoing downside earnings risk.

Credit Suisse however, prefers to assess the stock from a valuation perspective and on this basis it sees enough relative value to retain its Outperform rating. On the broker’s numbers the stock is currently trading on 12.3x expected 12-month earnings, which is a 21% discount to the average multiple on which the major banks are trading. This compares to a historical average premium of 12% for the stock, implying it is underpriced in relative terms.

Bank of America Merrill Lynch also rates the stock as a Buy as it notes while the Great Southern exposure is causing problems, the bank’s core business continues to meet expectations with margins improving and overall credit quality remaining fairly solid.

While BA-ML acknowledges further write-downs are possible, the broker agrees there is vaue on offer as it points out the stock is on a lower P/E than the banking sector overall while offering a higher yield. As well, on a price to book basis the bank is the cheapest of the listed Australian banks on the broker’s numbers.

Overall the FNArena database shows Bendigo And Adelaide Bank is rated as Buy twice, Hold four times, Reduce once and Sell three times, with an average price target of $7.96. This is up slightly from $7.81 prior to the latest cut to earnings guidance, largely on the back of Bank of America Merrill Lynch lifting its target to reflect lower risk surrounding the Great Southern provisions post the update.

Shares in the bank today are little changed and as at 12.30pm the stock was up 3c at $8.38. This compares to a trading range over the past year of $5.80 to $13.99.

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