It’s a buy: Why did Jefferies just upgrade the Bendigo Bank (ASX:BEN) share price?

Not all brokers agree with Jefferies through…

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Shares in Bendigo and Adelaide Bank Ltd (ASX: BEN) are inching higher today after a period of turbulence just after market open.

Bendigo Bank shares traded as low as $8.43 before settling at an intraday high of $8.60 at the time of writing.

Amid a horrendous performance these past 6 months, where shares have gyrated southwards to trade at 52-week lows today, any gain is welcomed by Bendigo Bank shareholders.

Yet, despite the downward pressure, the team at leading investment firm Jefferies just upgraded Bendigo Bank to a buy in a note to clients on Friday.

What does Jefferies see in the Bendigo Bank share price that other brokers may be missing? Let’s take a closer look.

Is Bendigo Bank a buy?

It depends who you ask for this one. In its analysis, Jefferies makes note of a presentation Bendigo made on its “digital transformation roadmap” last Friday.

There, investors were treated to digital initiatives that the bank has already completed in FY20/21, as well as what it has planned for FY22/23.

For instance, the company has already partnered with Tyro Payments, reducing merchant systems from 7 to 1, and now accepts digital uploading of documents.

Moving forward, it hopes to enable Bendigo Home Loan propositions for brokers and bring the first products to market on its new product and pricing engine. In FY24, Bendigo wants its Rural Bank and Adelaide Bank integration completed.

In the note released to clients, Jefferies acknowledges that Bendigo Bank’s digital transformation initiatives are impressive, and align with a modern offering of banking services.

It likes the bank’s move and reflected this sentiment in its commentary on Friday. However, the broker also notes that returns from the bank’s efforts may be a few years in the waiting.

The broker cautioned investors that Bendigo “does not seem to have a pathway to earn its cost of capital” and “may lack the scale to value accretively and fund its ambitions”, but is bullish on the bank’s share price nonetheless.

As a result of its analysis, Jefferies raised Bendigo to a buy from hold, increasing its price target to $10 a share whilst doing so.

But if you ask other experts…

Not all experts familiar with Bendigo Bank’s share price agree with this sentiment, however. Analysts Citi and JP Morgan both agree that the bank is a hold right now, even with its digital transformation.

Citi notes that investors might be feeling disappointed that Bendigo didn’t outline a more extensive rationale for its digital transformation investment.

The broker reckons that Bendigo must outline its plans in further detail to highlight cost efficiencies, plus exhibit how it intends to source a return on the investment.

JP Morgan agreed with this tone and added that Bendigo’s presentation lacked substance on financials, instead focused on bold targets.

The investment bank stated that it is “sceptical on the extent of cost savings and revenue growth required to reach this goal, and we forecast only slight improvements in cost to income to 59.5% in FY24”.

JP Morgan is also neutral on the direction of Bendigo Bank’s share price. Each of Citi and JP Morgan has slashed their price targets on Friday by 4% and 12% to $9.60 and $9.25 respectively.

Picking the direction of Bendigo Bank has turned out to be a difficult task as well, as the track record of analysts covering the bank shows mixed results.

For instance, analysis from Bloomberg Intelligence highlights that investors “who followed [Jefferies] recommendation [on Bendigo] received a negative 15% return in the past year, compared with a negative 1.2% return on the shares”.

It notes Jefferies has rated Bendigo Bank twice as a hold and an underperform once. With these ratings, shares “fell an average 5.9% in the periods rated hold and rose 71% in the periods rated underperform”.

Bendigo Bank share price snapshot

In the past 12 months, the Bendigo Bank share price has slipped over 6% in the red, after posting a loss of 8.5% this year to date.

In the last month alone, Bendigo Bank shares are down almost 10% and are behind a further 3% in the last week of trading.

Should you invest $1,000 in Bendigo and Adelaide Bank right now?

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bendigo and Adelaide Bank Limited. 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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