A Morningstar equities research report on Bendigo and Adelaide Bank said although the regional bank competes successfully in terms of its service, customer loyalty and its unique community branch distribution model, it “struggles to compete on price because of higher funding costs and strong competition across the industry”.
The report said these higher funding costs stem from “less diversified sources of funding, the regulatory need to increase customer deposits and tough market competition for term deposits”.
Morningstar also said an “inability to access wholesale credit markets at reasonable prices creates greater reliance on retail term deposits” at the expense of lower margins.
A smaller customer base and a lower credit rating have also led to higher funding costs, according to the report.
The report said Bendigo Bank lacks the scale, cost advantages and pricing power of the major banks and has a “less diverse business mix” amplifying its exposure to the business cycle.
“Bendigo’s high-cost business model, lower net interest margin combined with the expanded capital base are delivering net returns below our cost of equity estimate,” said the report.
“We expect the underperformance to continue, and banks in general are highly geared and susceptible to lapses in risk management.”
