Cooling property market a ‘key risk’ for regional bank

Bendigo and Adelaide Bank this week followed its competitors BOQ and Suncorp (and several others) by raising rates in response to higher funding costs.

In a research note, Morningstar analyst John Likos highlighted that the 90-day bank bill swap rate (BBSW) has increased by 22 basis points since January 2018 to 2.02 per cent, squeezing interest margins and denting profitability.

“Bendigo exited first-half fiscal 2018 with a net interest margin of 1.98 per cent and we forecast a much weaker second-half to bring the full-year fiscal 2018 net interest margin to 1.85 per cent,” Mr Likos said.

“Although asset quality remains strong, Bendigo’s concentration remains a key risk should the Victorian property market sharply correct. With about 40 per cent of business and housing loans located in Victoria, this risk has been largely offset in recent years by the strong performance of this market.”

However, property price growth has slowed steadily in the last year as new supply has come into the Victorian housing market and tighter lending standards curb demand.

“As such, house prices in Melbourne have fallen [by] 1.9 per cent calendar year to date,” Mr Likos said.

“The potential acceleration of this slowdown presents a key risk to Bendigo, although at this stage, the slowdown looks rather orderly, which remains our best-case scenario.”

Morningstar is forecasting the bank’s profitability to come under pressure in the coming years as credit growth slows on the back of tighter lending standards and a slowing property market.

“Home loan growth is inevitably tied to the health of the property market, with a strong housing market encouraging new home creation and positive sentiment spurring on auction activity,” Mr Likos said.

[Related: Non-bank share on the rise as banks lift rates]