There are many different ways to judge Bendigo and Adelaide Bank Ltd (ASX: BEN) shares. One is to look at its profitability compared to an ASX bank share peer like Bank of Queensland Ltd (ASX: BOQ).
For readers who didn't notice, BOQ just released its 2022 financial year result today for the 12 months to 31 August 2022.
I'm not saying to compare the banks' market capitalisations or dividend yields. But I think it could be interesting to look at their net interest margins (NIMs).
What is a NIM?
A NIM could be the most important profitability metric for banks. Why? Because it measures the lending profitability of a bank. It tells investors what profit margin a bank is making on its loans.
There are two parts to how much of a net interest margin a bank achieves. This can have a major influence on both Bendigo Bank shares and BOQ shares.
The first part is the overall rate the bank is lending money at. For example, it could have lent $100,000 at an interest rate of 4%.
The other side of the equation is how much it is costing the bank to fund that loan. For example, it could be using $100,000 from a savings account and paying the saver an interest rate of 2%.
Readers may be able to quickly tell that the bank's NIM for this is 2% — that's the 4% lending rate, compared to the 2% rate on the savings account.
Banks need to attract savers, or pay for other sources of income, so that they can then lend out that money. If it doesn't pay a good rate, then it won't attract a lot of money.
Banks also need to offer an attractive interest rate so that they are competitive with their peers and can win over potential borrowers.
In recent times, competition has been pulling down on bank NIMs.
How do Bendigo Bank shares compare to BOQ shares?
A NIM doesn't ultimately define which bank is better. But, I think it can show the competitive strength of a bank.
Let's look at the NIMs reported in the FY22 results from both regional banks.
For the 12 months to 30 June 2022, Bendigo Bank reported that its NIM was 1.74% (down 21 basis points). I think it's important to recognise that this result barely includes any effect of the Reserve Bank of Australia (RBA) raising interest rates.
Meanwhile, the result BOQ just released had a year-end date of the end of August, so it had a little more time for the RBA rate effect to flow through. Even so, BOQ's full-year NIM was 1.74%, down 12 basis points for the financial year
When looking at the two, we can see that their NIMs were identical. It's possible that if Bendigo Bank shares had the same year-end date as BOQ that its NIM may have been slightly higher.
It will be interesting to see what happens next with NIMs.
The market is expecting bank NIMs are going to rise because the RBA has been increasing the official interest rate. This is enabling banks to hike borrower rates quickly but take things a bit slower for savers.
I'm not sure which of these two ASX bank shares will see a stronger rise in their NIM in FY23. But, BOQ said today it has good momentum going into the new financial year and all three of its divisions are seeing lending growth.
