With the Reserve Bank of Australia (RBA) cutting interest rates again in May, the requirement for yield has never been stronger. Despite this, since the RBA cut cash rates to a record low 2%, the ASX 200 Index (ASX: XJO) has fallen over 250 points and is currently sitting at levels last seen at the start of the year.
The main contributors to the market's reversal were the big banks – Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corporation Corp (ASX: WBC) – which all fell between 10-15%.
One of the casualties from the banking sell-off was Bendigo and Adelaide Bank Ltd (ASX: BEN), which reported results in March and is currently trading at a 10% discount to its recent high this year, despite posting robust results.
Results show strong tailwinds
Bendigo and Adelaide Bank's results were as expected, but the market seemed to have priced in better than expected results, hence the fall when it didn't beat expectations. However, in the current interest rate environment, the expected dividend yield of approximately 5.4% (totalling 7.6% after franking credits), should prove very appealing to investors and provide a baseline moving into the second half of this year.
On a fundamental level, Bendigo and Adelaide Bank is relatively cheap as it currently trades at a price-to-book value of 1 and a price-to-earnings ratio (P/E) of approximately 13. This compares favourably to banking behemoth Commonwealth Bank, which trades at almost three times its book value and a P/E of 16.2. As Bendigo and Adelaide Bank is also expected to grow its earnings by 7.1%, it's poised to outgrow the big banks which should provide share price support in the medium term.
Limited impact from new changes
The current weakness in the banking sector comes from uncertainty surrounding proposed changes by the RBA and the Australian Prudential Regulatory Authority (APRA). Bendigo and Adelaide Bank's target market, rural and agricultural banking, is quite niche and so is not as exposed to housing. This means that if the RBA imposes any 'macroprudential measures' to curb rampant housing prices, Bendigo and Adelaide Bank's shares should go largely unaffected by the changes, making it oversold at current prices.
Finally, because Bendigo and Adelaide is a relatively small bank, any new capital restrictions imposed on the banking sector by APRA would see it benefit at the expense of others. That's because any requirements of increased capital ratios would be much easier to meet given its relative size. Furthermore, if APRA imposed a limit on certain forms of lending growth, such as limiting investment housing loans to 10%, Bendigo and Adelaide Bank would benefit from increased competition in the sector.
Foolish takeaway
While an investment in Bendigo and Adelaide Bank obviously carries certain risks, I think the bank should continue to outperform its bigger rivals and is a worthwhile choice for any investor seeking exposure to this sector.
