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Forget the “big four” banks to buy Bendigo and Adelaide Bank Ltd shares

Last week the chairman of the Australian Prudential Regulation Authority, Wayne Byers, once again warned Australia’s banks that they would face higher capital buffer requirements. This has led many analysts to again caution that the major banks will have to end their generous dividends in order to offset the need to raise billions of dollars of extra capital.

With the big four banks all carrying that extra element of risk, one bank that investors could consider in the sector is regional lender Bendigo and Adelaide Bank Ltd (ASX: BEN).

Late last year the chief executive Mike Hirst of Bendigo and Adelaide Bank stated that the bank has a higher capital ratio than the major banks and would have no need to raise funds. Even though the big four banks now have to hold more capital against their mortgages, they are still holding less than the 65% of capital required by banks like Bendigo and Adelaide Bank for the same assets. For this reason, I believe the company can offer a secure and growing dividend.

At market close yesterday, sitting 65 cents off their 52-week low, the company’s shares were down 12.5% year to date. This for me is the making of a good entry point, especially considering at this price the yield on the dividend is a fully-franked 6.4%. Furthermore, trading on a price-to-earnings ratio of 11.4 puts it at a level below all the other big banks, other than the troubled Australia and New Zealand Banking Group (ASX: ANZ).

In a bank satisfaction survey of almost 26,000 people that was released by Roy Morgan Research recently, Bendigo and Adelaide Bank, along with a selection of other small banks came out on top with the metric ‘Percentage Very or Fairly Satisfied’. They received a positive rating of 87%, far ahead of the nearest big four best performer Commonwealth Bank of Australia (ASX: CBA), which achieved a rating of 82.4%. National Australia Bank Ltd (ASX: NAB) was the next best with 80.2%, Westpac Banking Corp (ASX: WBC) was rated 80.1%, and finally ANZ finished lowest with a disappointing 78.9%. I see this high level of customer satisfaction as being very positive and a potential competitive advantage.

I feel this lends support to the view of analysts that Bendigo and Adelaide Bank will grow earnings by 4.7% per annum for the next couple of years. This should provide investors with good share price gains as well as a great income from its dividend.

Foolish takeaway

Bendigo and Adelaide Bank is in my opinion a great alternative to the big banks. Investing in banks is not without risk though. Housing prices could drop, increasing bad debts, and regulations could change as they did last year. It would be prudent to weigh up these risks before considering an investment in the sector.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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