Why this top broker says “sell” Bendigo Bank post results

The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price is in a trading halt after it announced its half year results and a $300 million capital raise.

The results had a few surprising good news and that’s always important to drum up support when management goes cap in hand to shareholders.

However, there’s probably more bad than good news in the results if you cared to read between the lines.

Bendigo Bank beats on earnings and margin

For this reason, Citigroup is reaffirming its “sell” recommendation on the regional bank even though Bendigo Bank’s interim cash earnings of $215.4 million was 4% above consensus.

What would be more pleasing to shareholders is its net interest margin (NIM). This key measure increased by 2 basis points over 2HFY19 to 1.99% for the six months ended December 2019.

Improving NIMs have been a common theme in bank results – at least so far. Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have also reported higher margins.

This flies in the face of market expectations that margins will continue to fall due to record low interest rates.

Good news not enough to offset bad

Improving NIMs is one reason why I think big bank stocks on the ASX will outperform in 2020. You can read more about this here.

But my optimism doesn’t extend to the smaller banks, including Bendigo Bank. Citigroup also warns investors not to bank on Bendigo Bank to repeat its NIM performance going forward.

This is because the bank’s margins were protected in part by hedging contracts. These contracts added 6 basis points to NIM in 1HFY20 but the contracts will unwind, leaving the bank exposed to further downside pressure from falling interest rates.

Expenses trending up

Adding to the broker’s bearish call on the stock, the bank’s expenses were ahead of expectations despite management making one-off adjustments.

“Despite taking material costs below the line ($87m software impairment, $21.5m other opex), costs in cash earnings were ~2.5% ahead of expectations,” said Citi.

Dividend and cap raise bite

What’s more, the bank is taking an axe to its dividend and needs to undertake a capital raise to shore up its regulatory CET-1 cash buffer.

“A messy result, with poor fee and cost trends mitigated by a strong NIM and record low bad debts. However, management has guided that the better than expected NIMs and BDDs (bad and doubtful debts) will reverse in 2H20,” said Citi.

“A material capital raising and dividend cut announced today. However, the subsequent investment and cost reduction lacks sufficient detail on potential benefits.”

You don’t have to ask this broker if it would recommend investors participate in the cap raise.

Citi’s price target on Bendigo Bank is $9.25 a share.