Bendigo Bank is set to report full-year fiscal 2013 results on 19 August. Analysts are forecasting 2013 earnings per share of AUD 88.4 cents, up 5% from 2012. Underpinning our optimism, is an expected decline in bad debts and a rosier outlook within both wholesale and retail funding markets. Morningstar is forecasting full-year dividends of AUD 60 cents per share (100% franked). Notwithstanding positive fundamentals, most analysts preferred sector exposures remain the big four banks due to their strong competitive advantages.

Earlier in the year, analysts foreshadowed that the decline in wholesale funding costs would have industry-wide implications. While Bendigo is a clear beneficiary of improving wholesale funding markets, we believe declining retail funding costs due to sustained low interest rates will have an even greater impact on the bank’s performance. Analysts forecast a growth rate of 8% in customer deposits and 10% growth in wholesale funding. Solid growth in both funding sources reflects improved credit growth and reducing competitive pressure on high-yielding customer deposit rates.

Bendigo’s bad debt expense to average loans is among the lowest in the industry, reflective of a lower-risk customer base and a high proportion of high-quality home loans. Many expect loan arrears to follow their current trend downwards, on the back of moderate economic improvement in key markets. Importantly, housing appears to be showing strong signs of growth, with housing finance figures for the year to June up 13% and house prices rising approximately 5% year-on-year. An improving outlook in the residential housing market bodes well for the banking industry as a whole.

Despite encouraging elements, analysts do not think Bendigo has a moat rating. Its strengths lie in intangibles, such as brand loyalty and its unique community branch business model, we view the scale and the cost advantages possessed by the major banks as overwhelming. While analysts forecast an improving return on equity, it isn’t enough to breach Bendigo’s cost of capital.