Bendigo and Adelaide Bank Ltd's (ASX: BEN) share price crumbled on Monday as investors headed for the exits after the community-based lender posted weaker-than-expected half-year results. Shares in Australia's fifth-largest lender slumped almost 5% as a rise in bad debts and margin pressures eroded earnings.
Although Bendigo Bank's results indicate intensifying competition in the banking sector, I believe the situation is not as dire as it seems. Accordingly, with Commonwealth Bank of Australia (ASX: CBA) slated to announce 2017 half-year earnings on Wednesday, I think the banking sector is worth revisiting today.
Bendigo's results
Bendigo Bank reported its net profit after tax (NPAT) was largely flat on the prior period in growing a measly 0.1% to $209 million. The bank's net interest margin – a key indicator of future profitability – dropped 6 basis points to 1.76% (from its June 2016 results), as cash rate reductions and the need for additional liquidity impacted funding costs.
Despite reporting a 2% rise to net interest income, Bendigo reported a 1.8% decline to cash earnings per share as bad and doubtful debts expense swelled 69% to $39.8 million for the half.
This has rightly left investors in the sector weary of what's to come from bigger peers Commonwealth Bank, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC)
I, for one, think they're a better bet. Here's why.
The Big 4
Australia's big four banks collectively control more than 82% of market share in Australia and give rise to one of the most concentrated lending markets by global standards. Whilst this level of market dominance leads to some form of oligopolistic competition, overall, Australian banks arguably act interdependently to each other (i.e., they compete without undercutting/undermining the industry as a whole).
This, in my opinion, means the big four banks are likely to be affected by the same factors that inhibit smaller competitors like Bendigo Bank, Bank of Queensland Limited (ASX: BOQ) and Suncorp Group Ltd (ASX: SUN). However, given the size, strength and regulatory environment for the big four lenders, they're likely to be better insulated.
As such, whilst I am expecting to see margin attrition and a rise in bad and doubtful debts feature across the board, I still believe the big four are likely to report headline growth as their market dominance allows them to benefit at the expense of smaller lenders.
Foolish takeaway
Although a tightening credit market and anaemic global growth is unlikely to mean Australia's big four banks can deliver gangbusters growth from here on out, I do not believe they will face the same growth problems as smaller counterpart Bendigo Bank.
Whilst Wednesday's results from Commonwealth Bank will tell us for certain, I believe the big four banks have enough headroom to churn out growth (and continue to reduce costs) in the current competitive market.
Accordingly, with each of the big four paying juicy fully-franked dividends (and being well capitalised to withstand short-term market corrections), I am inclined to keep my investing dollars at work with Australia's biggest banks!
