The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price is up another 0.3% following the S&P/ASX 200 Index (ASX: XJO) bank stock's update last week.
Today's rise brings the gain over the last month to 12%, significantly outperforming the 2.5% gain for the ASX 200 over the same period.
The last five years have seen significant volatility for the Bendigo Bank share price, as seen on the chart below. Pleasingly, the stock price has just hit a four-year high of $11.04 during late trading on Tuesday. Is the bank entering a new phase of operating strength?
Investors liked the recent update for the ten months to 30 April 2024, with the Bendigo Bank share price up 10% since the update. The regional bank is scheduled to hold an investor day on 23 May 2024.
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Trading update recap
Bendigo Bank reported cash earnings after tax of approximately $464 million for the financial year to date, down 2.3% from the previous year.
The net interest margin (NIM) in the financial year to date, after revenue-sharing arrangements, is 1.87%. Before the revenue share arrangement, the year to date NIM was 2.30%. Pleasingly for shareholders, the NIM in April 2024 was higher than the year to date average, possibly suggesting the FY25 NIM could be better than FY24.
Bendigo Bank also reported that its credit expenses remain at "low levels" across all its lending portfolios.
With the update, the Bendigo and Adelaide Bank CEO and managing director Marnie Baker said:
At our half year results in February we reiterated our commitment to managing the business for long term value. We have continued our focus on disciplined growth and prudent management of our costs.
Stronger margins led to upgrades
A number of brokers upgraded their forecasts for the ASX 200 bank stock after seeing that update.
UBS increased its cash earnings per share (EPS) estimates by 7.6%, 12.1%, and 11.1% for FY24, FY25, and FY26, respectively. This was due to the "notably higher net interest margin outlook." The broker noted that competitive lending pressures and increasing funding costs continue to be offset by higher earnings on capital and deposits.
However, ongoing cost inflation and the ASX 200 bank stock's investment in digitalisation led UBS to increase its operating expenditure expectations for Bendigo Bank.
How is Bendigo Bank delivering an improving NIM performance when other ASX bank shares are reporting margin compression? UBS said it was "maybe" down to three reasons:
1) the shorted duration of their capital hedge, 2) liquid asset unwind and 3) higher % of business originated through digital and prop channels. We would need more details on the sustainability of this performance, especially in the context of industry trends, but for now drive some of these changes into our NIM forecasts.
According to UBS's numbers, the Bendigo Bank share price is now valued at 13.5x FY24's estimated earnings.
Rating on Bendigo Bank shares
UBS increased its price target on the regional bank from $8 to $8.75, an increase of 9.4%.
However, the broker still rates the ASX 200 bank stock a sell because it's trading 25% higher than its price target. Plus, the company is trading at "slightly above long-term historical averages" in terms of the price/earnings (P/E) ratio.
