-Valuation support likely from a resumption of dividends in FY21
-Mortgage and agribusiness likely less affected by the pandemic
-Credit risk remains the most significant risk the bank faces
While there has been no deterioration observed in credit quality,
Brokers adjust forecasts to reflect the higher-than-expected collective provisioning, although the extra outlay more closely aligns the bank with its regional peer
The provisioning includes
GDP is also forecast to fall by -10% next month before recovering a year later, with house prices and commercial property prices dropping by -10% and -20%, respectively, over the next year.
Credit Suisse suspects the market may be surprised by the amount of extra provisioning but welcomes the fact Bendigo & Adelaide has been more granular with its approach, including additional overlays for specific sectors that are likely to be affected.
The provisioning appears comprehensive, Citi agrees, and a strong surplus capital position leaves the bank well-placed to adapt to the pandemic-induced slowdown. The broker notes the bank made a well-timed capital raising in February, which meant it was substantially ahead of
Dividend
Valuation support should stem from a resumption of dividends in FY21 and Citi removes a dividend for the second half of FY20 from its forecast, suspecting visibility will not improve by August when the company reports.
Sector margin pressures appear to be less evident and mortgage arrears remain relatively easy, with trends actually improving in April. Still, the bank has temporarily suspended collection activities and directed resources to support customers throughout the pandemic, acknowledging a "slower recovery with probabilities biased to the downside".
The stock has underperformed the market by around -20% over the past quarter and Credit Suisse upgrades to Neutral from Underperform, envisaging less downside risk now. Macquarie, however, is more cautious, assessing a 19% normalised PE (price/earnings ratio) premium to the majors and expecting limited relative upside from current levels.
The broker acknowledges the bank's business is skewed to mortgages and agribusiness, with no institutional/wholesale book, and these areas are likely to be less affected by the pandemic. Consumer arrears were seasonally higher throughout the third quarter and business arrears increased, although impaired loans from business reduced.
Credit Environment
Shaw finds few details regarding the impact of the worsening credit environment on risk wegithed asset inflation and assumes that this increases 5% faster than loan balances over the next 18 months.
The broker points out there was only been a small increase in arrears on credit cards and personal loans in April, yet credit risk remains the the most significant risk the bank faces because of the pandemic and resultant recession. Weaker asset quality, the broker asserts, not only adversely affects profits but also the ability to pay dividends and retain capital.
Both
The database has one Buy rating (Citi), four Hold and one Sell (Morgan Stanley). The consensus target is
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