Shares in regional heavyweight Bendigo and Adelaide Bank Ltd (ASX: BEN) have soared to 52-week highs following a $60 million capital raising to fund the acquisition of residential loans from the Keystart Housing Scheme Trust of the West Australian government.
With Bendigo Bank's shares trading at a price-earnings premium to competitor Bank of Queensland Limited (ASX: BOQ), and industry wide pressures creating headwinds to growth, I believe investors should take advantage of Bendigo Bank's elevated share price and look to sell some of their shares.
Here's why.
About Bendigo Bank
Bendigo Bank is a community-focused lender which formed following a $4 billion merger between the then separate Bendigo Bank and Adelaide Bank (hence today's name).
From its humble beginnings as an independent community-owned building society, today's Bendigo Bank has grown to a $5.7 billion behemoth and offers customers a legitimate alternative to its big four peers Australian and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).
However, with Bendigo Bank's shares currently trading at an above-average price-earnings of 12.5x, I question whether it can live up to expectations in the current regulatory environment.
Low growth environment
Like all other players in the sector, Bendigo Bank faces regulatory headwinds from the banking and financial watchdog APRA.
Requirements of higher capital and low credit growth means banks are struggling to lift headline earnings. As a result many are organically growing through acquisitions. Bendigo Bank is no exception.
Keystart acquisition
On 29 September, Bendigo Bank announced it was acquiring $1.35 billion of residential loans from the West Australian government issued under WA's Keystart scheme.
Under the acquisition terms, Bendigo Bank will acquire the loans of approximately 6,000 Keystart customers to increase the bank's Western Australian loan book exposure to around 13%.
Management regards these loans as highly complementary to Bendigo Bank's existing portfolio, given their limited exposure to mining towns and weighted average LVR of 84%. As such, management believes the transaction will be ROE (return on equity) and EPS (earnings per share) accretive.
Foolish takeaway
Whilst EPS accretion is positive for shareholders, I believe the upside from the acquisition has been priced in following the shares 12% rally from the share purchase plan's placement price of $10.75.
Accordingly, as Vocus Communications Limited (ASX: VOC) can attest to from yesterday, any near miss in earnings from the acquisition could result in Bendigo Bank's share price being punished.
Therefore, whilst I am cautiously optimistic about Bendigo Bank's growth prospects from the new acquisition, I believe investors should look to take some profits off the table and sell some of their shares at current prices.
