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Top broker warns Bendigo and Adelaide Bank Ltd has further to fall

Bendigo and Adelaide Bank Ltd’s (ASX: BEN) 9% fall from grace this month may have more to go with Morgan Stanley tipping the stock to underperform the broader market over the next 60 days.

The bank’s poorly received interim result that was released on Monday is adding pressure on its share price with the broker commenting that the profit announcement has only reinforced its concerns about Bendigo Bank’s short-to-medium-term outlook.

I thought management had delivered a respectable result given the headwinds buffeting the sector but the broker believes this is as good as it gets for Bendigo Bank – at least for the foreseeable future.

“We saw increasing front book margin pressure, a growing question mark over volumes in both mortgages and non-housing, and less confidence on costs as BEN would not commit to positive jaws in the short term,” said the broker who has an “underweight” rating on the stock with a price target of $10.20 a share.

“We think the stock is fully valued on ~12x FY19 P/E [price-earnings] or ~1.3x P/NTA [price to net tangible asset] for a RoNTA [return on NTA] of ~11%, while offering limited EPS [earnings per share] growth and no dividend growth into FY20.”

I actually think this description also generally fits with the Big Four banks, which include 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).

There are far more negative than positive catalysts for the sector given the slowdown in loans, rising interest rates and the potential housing market correction.

The Big Banks have also the Royal Commission to contend with over the next 12 months, which is likely to drag more skeletons out of their closets.

Coming back to Bendigo Bank, the only real positive surprise from its result was its stronger capital position, according to Morgan Stanley.

The stock has lost close to 10% of its value over the past 12 months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 1.5%.

Bendigo Bank’s performance (or lack of) isn’t quite so bad on a relative basis. Commonwealth Bank is actually worse off with a 10.5% loss on the back of last week’s profit miss, although the other big three banks are down between 6% and 8%.

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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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