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Bendigo and Adelaide Bank Ltd has just done what the Big Banks could not

The interim results of Bendigo and Adelaide Bank Ltd (ASX: BEN) stands in contrast to those of the Big Banks as the second-tier lender has managed to deliver on some areas that its much larger and better resourced rivals could not.

The regional bank reported a 10.7% increase in underlying cash earnings to $225.3 million, a 1 cent increase in its interim dividend of 35 cents a share and a 13% uplift in its owner-occupier principal plus interest (P&I) loan book, which is well ahead of the overall market.

What’s more, its net interest margin (NIM) jumped an impressive 18 basis points to 2.36% thanks to good cost control with cash operating expenses increasing a modest 2% to $445.5 million.

Bendigo also took a swipe at the Big Four, which includes Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

The smaller bank said that its growth is largely driven from trust and its reputation at a time when the Big Four are facing a Royal Commission on unfair practices and as Commonwealth Bank suffered a large blow to its reputation from recent scandals, which includes being a conduit for money laundering.

Bendigo also was at pains to stress that 79.6% of its required funding comes from domestic deposits. The Big Four are heavily reliant on international markets to fund their operations and these markets are facing increasing stress from the threat of higher global interest rates.

Bendigo’s results also present an interesting contrast to Commonwealth Bank. Australia’s largest mortgage lender reported a 1.9% drop in its first-half cash net profit to $4.74 billion last week, although it was quick to point out that if you excluded the large provision it has made for the AUSTRAC fine, cash profit would be up 5.8%.

That is still below Bendigo, which also delivered a NIM increase that is well ahead of Commonwealth Bank’s six basis point increase to its margin of 2.16%.

Meanwhile, NAB provided a quarterly earnings update that showed a 3% increase in cash earnings, a decrease in NIM and a 4% uplift in expenses.

The other two banks won’t turn in their results till May.

While Bendigo seems to be holding its own, that didn’t save the stock from a 2.7% drop to $10.92 during lunch time trade.

The stock is underperforming the Big Four and the broader S&P/ASX 200 (Index:^AXJO) (ASX:XJO) Index, although to be fair Bendigo is trading more or less in line with the Big Four over the past 12-months.

Further, Bendigo will also be affected by the headwinds building in the sector, such as record household debt and the prospects of a big slowdown in the housing market.

Its asset quality is also not as strong as the Big Four as it has a CET-1 ratio of 8.61%. The banking regulator requires banks to lift that ratio to 10.5% by 2020.

Bendigo still has time to achieve this but this will make it more challenging for the bank to deliver profits above the Big Four as the big banks are very much closer to that ratio or have already achieved it.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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