Bendigo and Adelaide Bank, most commonly referred to Bendigo Bank, was formed following the merger of the Bendigo and Adelaide Banks in November 2007 (right at the peak of credit markets!). BEN operates primarily within the retail banking space via a network of more than 500 ‘community branches’ and agencies. These are commonly found along the East Coast and South Australia.

BEN share price

HR matters

For long-term investors looking to invest in great companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and staff culture can lead to improved retention of high-quality personnel and, in turn, long-term financial success of a company.

One way Aussie investors can take a ‘look inside’ a company like Bendigo & Adelaide Bank Ltd or Macquarie Group Ltd is to use a HR/jobs websites such as Seek. Seek’s website includes data on the HR of companies, including things like employee reviews. According to the most recent data we pulled on BEN, for example, the company’s overall workplace culture rating of 2.8/5 was less than the sector average of 3.13.

BEN’s profits on loans

ASX bank shares such as BEN need debt and good profit margins to make their business profitable. Meaning, a bank gets money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank pays to savers and what it makes from mortgage holders (for example) is the net interest margin or NIM. Remember: when it comes to NIMs, the wider the margin the better.

If you are planning to guesstimate the profits of a bank like BEN or Bank of Queensland Limited (ASX: BOQ), knowing how much money the bank lends and what it makes per dollar lent to borrowers is important. That’s why the NIM is arguably the most important measure of BEN’s profitability. Across the ASX’s major bank shares, we calculated the average NIM to be 1.92% whereas Bendigo & Adelaide Bank Ltd bank’s lending margin was 2.3%, meaning the bank produced a better-than-average return from lending money to customers versus its peers.

The reason analysts study the NIM so closely is because Bendigo & Adelaide Bank Ltd earned 85% of its total income (akin to revenue) just from lending last year.

ROE: the measure of bank quality

Return on shareholder equity or just ‘ROE’ helps you compare the profit of a bank against its total shareholder equity, as shown on its balance sheet. The higher the ROE the better. Bendigo & Adelaide Bank Ltd’s ROE in the latest full year stood at 8.6%, meaning for every $100 of shareholder equity in the bank it produced $8.60 in yearly profit. This was not as much as the sector average of 11.74%.

Balance sheet protection

For Australia’s banks the CET1 ratio (aka ‘common equity tier one’) is paramount. CET1 represents the bank’s capital buffer which can go towards protecting it against financial collapse. According to our numbers, Bendigo & Adelaide Bank Ltd had a CET1 ratio of 9.4%. This was not as much as the sector average and not as much as the commonly accepted ‘unquestionably strong’ level of 10%.

BEN share price valuation

A dividend discount model or DDM is one of the most efficient ways to create a guesstimate of ASX bank shares. To do a DDM we have to arrive at a guesstimate of the bank’s dividends going forward (i.e. the next full-year dividend) and then apply a risk rating. Let’s assume the BEN’s dividend payment expands at a consistent rate each year into the future, somewhere between 2% and 3%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.

According to this quick and simple DDM model, a valuation of BEN shares is $10.37. However, using an ‘adjusted’ or expected dividend payment of $0.55 per share, which is the preferred measure because it uses forecast dividends, the valuation goes to $9.35. The valuation compares to BEN’s current share price of $9.53. Since the company’s dividends are fully franked, we can make a further adjustment and do a valuation based on a ‘gross’ dividend payment. Using gross dividend payments, which take into account franking credits, the valuation guesstimate to $13.35.

What this means is, although the BEN share price might seem expensive using our simple DDM model, don’t make a decision based on this article. Please go away now and consider all of the risks and ideas we presented here, including the benefit of improving dividends and the compelling impact of franking credits. Consider getting our free investment report emailed to you (keep reading).