The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price has suffered amid the volatility for bank shares around the world. But, the regional bank does offer a very high dividend yield, so does this make it a buy?
There has been a lot of banking pain in the northern hemisphere with the collapse of Silicon Valley Bank (SVB), as well as all the troubles faced by Credit Suisse.
Compared to ASX bank shares, SVB would be considered a huge player. But, in the US it's just a mid-tier, 'regional' bank. With investor concerns about what that could mean for regional banks here, the Bendigo Bank share price has been falling – it's down 12% from 27 January 2023.
For SVB, there was a 'duration' problem, meaning it had short-term, at-call deposits, which it then invested in longer-duration bonds. However, what's going on in the US and Europe is a different situation to Bendigo Bank's setup. The ASX bank share has a different, local client base, and it's not focused on businesses.
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Dividend projection
The last two dividends from Bendigo Bank amount to a grossed-up dividend yield of around 9%.
But, in terms of what it's expected to pay in FY23, Commsec numbers suggest that the regional ASX bank share is forecast to pay an annual dividend per share of 60 cents per.
At the current Bendigo Bank share price, this could translate into an FY23 grossed-up dividend yield of 9.6%.
That's certainly stronger than what people can achieve from a bank account, or what most ASX dividend shares are expected to pay in this financial year.
Is the Bendigo Bank share price a buy?
Specifically, on Bendigo Bank, I'm not worried about the regional bank collapsing. I believe that FY23 could prove to be a solid year considering interest rates have gone higher and the regional player is able to earn a bigger profit on its lending.
In the FY23 half-year result, it saw cash earnings after tax increase by 22.9% to $294.7 million, while the net interest margin (NIM) improved 19 basis points to 1.88% (the lending profit margin improved noticeably). The cost-to-income ratio improved by 500 basis points to 54.6%, showing it has done well at keeping costs under control. Customer numbers rose 5% to 2.3 million.
But, what does worry me a bit is that credit provisions/bad debt expenses are "likely to come under pressure as the tightening cycle continues and move closer toward historical averages for the bank, which are low by industry standards".
In other words, the attractive combination of higher lending profits and low bad debts is unlikely to last forever.
I believe that Bendigo Bank is in a good position, with a common equity tier 1 (CET1) ratio of 10.13% at the end of the first half. Its balance sheet is in good shape.
However, if I were looking for passive dividend income, I think there are other areas that aren't as competitive and commodity-like as banking. If I wanted to buy Bendigo Bank shares, I think this is a decent time to consider the regional bank, but it wouldn't be at the top of my income stock wishlist.
