Bendigo and Adelaide Bank's decision to pre-fund a repayment of the Australian central bank's pandemic-era lending program may have impacted key profit indicators, but will provide more certainty on funding costs in the future, said its chief executive.
The Bendigo TFF Repayment Australian regional bank said its net interest margin (NIM), a key profitability measure that compares funding costs with what is charged for loans, for six months to December was 1.83%, which was a 15-basis-point drop from the second-half of fiscal 2023. A little under half of that decline related to the early repayment of the Reserve Bank of Australia's term funding facility, said Bendigo chief executive Marnie Baker, with the lender making a conscious decision to pre-fund early to get ahead of potential future competition in the wholesale market for funding.
"When you've got a lot of people in the market, then what that does to pricing is a bit uncertain…we took a prudent approach and went out early. So we're in a really good position now. We've got a strong balance sheet," she said.
At the same time, Baker pointed to growing NIM strength. While Bendigo doesn't give guidance on NIM, there was some improvement in the December quarter, she said.
Deposits and diversifying funding bases are a key battleground for Australian banks, as financial institutions continue to repay the RBA's TFF. This pandemic stimulus measure provided 188 billion Australian dollars to the country's authorized deposit-taking institutions. According to the RBA, most scheduled TFF maturities were due in the September 2023 and the upcoming June 2024 quarters. Bendigo had repaid A$1.8 billion of the TFF, as at end-December. The remainder of around A$2.9 billion had been pre-funded as at Dec. 31. It has no other long-term wholesale maturities in FY 2024.
By comparison, major lender ANZ Group Holdings said in its first-quarter disclosures for fiscal 2024 that it had around A$8 billion of TFF maturities in the second-half, for which it said it was "well-prepared." Still, it said it expected its fiscal 2024 term funding needs would be as much as A$35 billion. Westpac Banking Corp said it had A$12 billion of maturities due in fiscal 2024. Commonwealth Bank of Australia disclosed that it had repaid A$19 billion to the TFF in the first-half of fiscal 2024. It still has A$32 billion left to pay by June. Alan Docherty, Commonwealth Bank's chief financial officer, said that short-term wholesale funding remained at a historically low proportion of total funding at the lender, but that this would increase over the year ahead in part due to the need to fund the final round of TFF maturities over the next four months.
For Bendigo, having pre-funded its TFF repayment meant it had the capital and liquidity strength to invest in productivity and grow the business. But with respect to residential lending, it had made a decision to step back from that competitive market, with lending volumes down 0.1% for the fiscal first half. "Where we have concentrated on is in areas where we think we've got a really good advantage and our digital channels are showing that," she said. Digital mortgage settlements accounted for a little over 16% of all residential lending settlements at Bendigo for the first half. "We've got an opportunity there that we can take advantage of a channel that's not really too crowded at this particular point in time," said Baker.
Analyst comment
Positive news: Bendigo and Adelaide Bank’s decision to pre-fund the repayment of the Australian central bank’s lending program will provide more certainty on funding costs in the future and strengthen their balance sheet. They are also seeing improvement in their net interest margin. They have stepped back from the competitive residential lending market and are focusing on areas where they have an advantage, such as digital channels. This strategic shift could benefit the bank in the long run.
