Australian investors love to buy bank stocks. For example, there are almost 800,000 separate shareholders of Commonwealth Bank of Australia (ASX: CBA) shares. If you consider that almost every superannuation fund holds at least some Commonwealth Bank shares, it's fair to say that many Australians are at least a little exposed to the fortunes of Commonwealth Bank. By way of comparison, Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Limited (ASX: BEN) have under 90,000 shareholders each.
Yet both the smaller banks appear to be growing. In April, Bank of Queensland announced a $400 million entitlement offer to support the $440 million acquisition of Investec Bank's Professional Finance and Asset Finance & Leasing businesses. The purchase price includes the some funds set aside to capitalise the business. The acquisition will add a $2.4 billion loan portfolio, with relatively low risk borrowers.
Similarly, Bendigo and Adelaide Bank announced today that it would acquire the business and assets of Rural Finance Corporation of Victoria. The purchase will bring in a loan book of more than $2.4 billion, but will cost the bank "approximately $1.78 billion," according to today's announcement. The managing director of Bendigo and Adelaide Bank, Mike Hirst, said that the acquisition, "will result in a broader and more dynamic offering to Victorian farmers, and we look forward to continuing to invest in the agricultural sector and our regional communities."
To my mind, Bendigo and Adelaide Bank's exposure to farmers is both a weakness and a strength. I expect that Australia will continue to be amongst the more efficient producer countries, and overall, I expect that the stressed environment will make food increasingly difficult to produce. On the other hand, it seems that Victoria in particular is vulnerable to drought.
At any rate, both Bank of Queensland and Bendigo and Adelaide Bank were able to boast in their 2013 Annual Reports that Net Interest Margins (NIM) were improving. To me, that implies that the businesses may be getting more profitable, or at least holding up well despite competition from the big four banks. At any rate, the smaller banks might find it a lot easier to grow than the big banks.
Australia and New Zealand Banking Group (ASX: ANZ) has a market capitalisation of $94 billion, Westpac Banking Corp's (ASX: WBC) has a market capitalisation of $108 billion, National Australia Bank Ltd (ASX: NAB) has a market cap of $81 billion and Commonwealth Bank has a massive market capitalisation of $128 billion. The kind of acquisitions announced recently by Bank of Queensland and Bendigo and Adelaide Bank, simply would not make any meaningful difference to the profits of the big four.
Foolish takeaway
With market capitalizations of $4.7 billion and $4.1 billion respectively, Bendigo and Adelaide Bank and Bank of Queensland can achieve meaningful growth via acquisitions. While it is true that the bigger banks have significant advantages as a result of their size, the smaller banks have proven that they can compete for customers. These two smaller regional banks may not be as popular as the bigger banks, but they both trade on a trailing yield of over 5%, fully franked. Would be investors in bank shares should make sure these smaller banks are on their watchlist: one day, they might even join the A-League.
