Closure Of The Homesafe Portfolio Will Reduce Long-Term Revenue Streams

Key Takeaways

• Rising costs and economic headwinds may hinder lending growth, reduce loan demand, and compress net margins due to increased operational expenses.
  
• Investments in digital platforms and capabilities could temporarily raise expenses and depress earnings, while closure of Homesafe may reduce long-term revenues.
  
• Significant digital growth, strong capital, and strategic financial initiatives position Bendigo and Adelaide Bank for increased revenue, resilience, and sustainable customer engagement.

Catalysts

Engages in the provision of banking and other financial services to retail customers and small to medium sized businesses in Australia.

• The bank's cash earnings for the Business and Agribusiness division increased by 13.4% year-on-year, and agribusiness lending grew by 7.4%, yet this growth may not be sustained over time due to expected headwinds from the economic environment affecting the broader lending market. This could impact future revenue.
  
• Rising cost of living pressures may hinder customer spending capacity, potentially reducing loan demand and affecting revenue growth, which could in turn compress net margins as operational costs increase in proportion to revenue.
  
• The company's investment in new digital mortgage and deposit platforms, while promising for long-term efficiency, incurs significant upfront costs. This could temporarily inflate operating expenses and depress earnings in the short term.
  
• The closure of the Homesafe portfolio will result in reduced income over time, as the completion of existing contracts will eventually dwindle without new additions to the portfolio. This indicates a potential reduction in long-term revenue streams.
  
• Plans to increase investment in digital capabilities and offerings by $30-$40 million over FY '24 levels for FY '25 and '26 may elevate operational expenses without guaranteed short-term returns, potentially impacting net margins and earnings.

Bendigo and Adelaide Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bendigo and Adelaide Bank's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.3% today to 27.2% in 3 years time.
• Analysts expect earnings to reach A$575.5 million (and earnings per share of A$0.94) by about February 2028, up from A$545.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$644.3 million in earnings, and the most bearish expecting A$488 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the AU Banks industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Bendigo and Adelaide Bank Future Earnings Per Share Growth

Risks

• The company has demonstrated significant growth in customer numbers and engagement, particularly with its digital offerings, suggesting potential future increases in revenue and market share.
  
• Bendigo and Adelaide Bank has a strong capital position, with an improving return on equity, which could positively impact earnings and make the company more resilient to economic fluctuations.
  
• The bank's investment in digital transformation and streamlined operations is designed to reduce costs and improve efficiency, potentially leading to better net margins over time.
  
• Initiatives like the Bendigo EasySaver product and a focus on optimizing deposit mix indicate a strategic approach to lowering funding costs, which could benefit profit margins.
  
• The company's positioning as a challenger to major banks, along with its strong Net Promoter Score and community-focused model, suggests the potential for sustainable growth in revenue and customer loyalty.

Valuation

• The analysts have a consensus price target of A$11.517 for Bendigo and Adelaide Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$14.5, and the most bearish reporting a price target of just A$9.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.1 billion, earnings will come to A$575.5 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$13.5, the analyst price target of A$11.52 is 17.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.