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Company

Australasia Australia Banking & Finance

20 February 2012

Bendigo & Adelaide Bank


Reuters: BEN.AX Bloomberg: BEN AU Exchange: ASX Ticker: BEN

Results Hold
Price at 20 Feb 2012 Price target - 12mth 52 week range (AUD) ALL ORDINARIES 8.14 8.50 9.78 - 7.84 4,273

Global Markets Research

Searching for direction


Andrew Triggs
Research Analyst (+61) 2 8258-2378 andrew.triggs@db.com

Key changes

James Freeman, ACA


Research Analyst (+61) 2 8258-2492 james.freeman@db.com

James Wang
Research Analyst (+61) 2 8258-2054 james-z.wang@db.com

Price target Bad debt expense (FYE) Net int margin (FYE) Net profit (FYE)

8.30 to 8.50 51 to 42 1.83 to 1.83 344 to 344

! " ! !

2.4% -18.8% 0.1% 0.2%

Price/price relative
11.0 10.0 9.0 8.0 7.0 2/10 5/10 8/10 11/10 2/11 5/11 8/11 11/11
Bendigo & Adelaide B ALL ORDINARIES (Rebased)

Quality and predictability are falling BEN's performance in 1H12 was buffeted by margin headwinds, P&L volatility from Homesafe Solutions, and earnings dilution from balance sheet repair. While the business model is a sound one, recent acquisitions suggest the outlook for the core business is likely to remain challenged for some time. With BEN trading in line with peers despite earnings growth towards the bottom of the peer range, we continue to see better value in the majors. HOLD. Margin pressure to alleviate in 2H12 The key area of negativity for BEN in 1H12 was 7bps of margin decline driven by a spike in deposit competition and a reduction in the margin lending book. Nonetheless, the recent 15bps out-of-cycle repricing in mortgages should provide a full-year benefit of ~8bps to the margin, with the majority flowing through in 2H12. Longer term, further relaxation of deposit competition is necessary for a return to satisfactory economics for BENs very large deposit base. Acquisitions moving beyond core competency In the face of the challenging operating environment, BEN has made 2 acquisitions in the last few months. We are concerned that these acquisitions have moved outside the groups core banking competency and may distract managements attention away from its operations for little financial gain. Earnings changesforecasts now include Bank of Cyprus Following the 1H12 result we have decreased our FY12 and FY13 EPS forecasts by -3.9% and -4.2% respectively. The key driver of these downgrades was the inclusion of the Bank of Cyprus acquisition and associated capital raisings. Without these factors earnings were less than 1% down in FY12 and 2% down in FY13. Valuation and Risks Our price target has increased to $8.50/share from $8.30/share reflecting the improvement in sector rating and is based broadly on the midpoint of our DCF and PE-based valuation. Main upside risk is an improvement in funding costs. The main downside risk is a material deterioration in deposit spreads.
Forecasts and ratios
Year End Jun 30 Net Profit (AUDm) EPS (AUD) OLD EPS (AUD) % Change EPS Growth (%) PER (x) Price/book (x) DPS (net) (AUD) Yield (net) (%)
Source: Deutsche Bank estimates, company data
1 2

Performance (%) Absolute ALL ORDINARIES

1m 0.1 -0.7

3m -11.0 0.6

12m -16.9 -15.0

Stock data
Market cap (AUDm) Market cap (USDm) Shares outstanding (m) Daily volume (USDm) Free float 3,250 3,483 145.6 8.55 100.00

Key indicators (FY1)


ROE (%) ROA (%) Book value/share (AUD) Price/book (x) Expense to income ratio (%) NPL/total loans (%) Tier one capital ratio (%) 8.5 0.6 10.56 0.77 56.8 2.3 8.8

2010A 291 0.77 0.77 0.0% 30.7 11.8 0.79 0.58 6.4

2011A 336 0.87 0.87 0.0% 13.1 10.6 0.82 0.60 6.5

2012E 344 0.84 0.87 -3.9% -3.7 9.7 0.77 0.60 7.4

2013E 390 0.91 0.95 -4.2% 8.1 9.0 0.75 0.60 7.4

2014E 421 0.96 0.99 -3.0% 6.3 8.4 0.73 0.64 7.9

Pre-exceptionals/extraordinaries Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

Deutsche Bank AG/Sydney All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

M odel updated: 20 February 2012

Equity Research Asia Pacific Australia Banks

Y / E 3 0 J une D A T A P ER SH A R E

06/ 07
0.77 0.82 14.0 0.58 6.43 0.00 5.40 1,995 147 18.9 17.7 1.30 2.3 2.7 12.4 12.8 4.0 1.33 70.5

07/ 08
0.70 0.88 6.6 0.65 11.22 0.00 5.59 2,741 222 19.2 15.4 1.09 1.2 2.4 7.2 9.6 4.8 1.08 74.1

08/ 09
0.24 0.59 -32.8 0.43 9.51 0.00 4.32 2,688 300 39.6 16.2 1.19 1.0 2.2 2.4 4.8 4.5 0.56 73.0

0 9 / 10
0.67 0.77 30.7 0.58 9.81 0.00 5.33 3,152 392 13.5 11.8 0.98 0.9 1.7 6.5 10.4 6.4 1.16 75.3 855 280 243 0 38 1,135 701 335 384 434 45 389 351 91 0 -25 235 21 -35 0 291

10 / 11
0.92 0.87 13.1 0.60 10.27 0.00 5.76 3,336 401 10.0 10.6 1.01 0.9 1.6 8.5 14.5 6.5 1.53 68.9 935 301 211 0 90 1,236 725 375 373 511 44 467 425 78 0 -13 333 20 17 0 336

11/ 12 E
0.59 0.84 -3.7 0.60 10.08 0.00 6.14 3,129 425 13.8 9.7 0.87 0.8 1.3 5.5 8.5 7.4 0.98 71.6 982 267 220 0 47 1,249 808 391 438 441 42 399 359 124 0 -9 226 19 -100 0 344

12 / 13 E
0.92 0.91 8.1 0.60 10.37 0.00 6.47 3,129 444 8.8 9.0 0.92 0.8 1.3 8.6 13.2 7.4 1.54 66.2 1,050 303 238 0 65 1,353 748 409 357 605 41 564 527 145 0 -10 371 19 0 0 390

13 / 14 E
0.99 0.96 6.3 0.64 10.66 0.00 6.82 3,129 450 8.2 8.4 0.95 0.8 1.2 9.0 13.5 7.9 1.54 66.4 1,076 341 264 0 78 1,417 777 416 379 640 35 606 569 156 0 -10 402 19 0 0 421

14 / 15 E
1.04 1.01 4.7 0.66 10.99 0.00 7.21 3,129 455 7.8 8.1 0.94 0.7 1.1 9.2 13.4 8.1 1.57 65.4 1,118 383 292 0 91 1,501 812 426 403 690 48 642 605 166 0 -10 428 19 0 0 447

Bendigo and Adelaide Bank Ltd


Reut ers: BEN.AX Bloomberg: BEN AU Sedol: 6091280

EPS (stated) (A$) EPS (DB) (A$) Growth Rate - EPS (DB) (% ) DPS (A$) NAV / share (A$) Investment capital gains p. sh. (% ) Tang. NAV p. sh. (A$) M arket Capitalisation (A$m) Shares in issue (m) P/E (stated) P/E (DB) P/E Relative (DB) P/B (stated) P/Tangible equity (DB) ROE (stated) (% ) ROTE (tangible equity) (% ) Dividend yield (% ) Dividend cover (x) Payout ratio (% )

Hold
P rice as at 1 7-Feb Target price Co mpany website http://www.bendigo bank.co m.au
C o mp any d escr ip t io n Bendigo Bank Limited of fers a variety of banking and other financial services, including residential mortgages, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuat ion and trustee services.

V A LUA T IO N R A T IO S & P R O F IT A B ILIT Y M E A S UR E S

A$8.14 A$8.50

R esear ch T eam

A ndre w T riggs
+61 2 8258 2378 andrew.t riggs@db.com

J a m e s F re e m a n
+61 2 8258 2614 james.freeman@db.com

J a m e s Wa ng
+61 2 8258 2054 james-z.wang@db.com

PR O F IT & LOSS ( A $m) Net interest revenue 357 Non-interest revenue 205 Commissions 163 Trading revenue 0 Other revenue 43 Total revenue 562 Total Operating Costs 371 Employee costs 188 Other costs 187 Pre-Provision profit / (loss) 192 Bad debt expense 8 Operating Profit 183 Pre-tax prof it 178 Tax 56 Post tax associates 0 Other post t ax items -5 Stat ed net profit 117 Reconciliation to DB adjust ed core earnings Goodwill 1 Extraordinaries / significant items -7 Investment reval, cap gains / losses 0 DB adj. core earnings 125

543 272 227 0 46 815 534 256 284 281 23 258 247 75 0 -10 161 5 -35 0 201

635 239 251 0 -12 874 641 297 359 232 80 152 119 35 0 -9 74 19 -89 0 182

KEY B A LA N C E SHEET IT EM S ( A $m) & C A PIT A L R A T IOS Risk weighted asset s 9,754 19,821 24,155 Interest earning assets 14,173 41,848 39,889 Total loans 13,844 40,240 38,741 Total deposits 15,231 31,425 31,880 Stat ed Shareholder Equity 1,017 3,272 3,120 Tangible shareholders equit y 912 1,679 1,561 Tier 1 capital 757 1,493 1,794 Tier 1 ratio (% ) 7.8 7.5 7.4 ACE ratio (% ) 5.2 5.0 8.3 Tangible equity / total asset s (% ) 5.4 3.5 3.3 C R ED IT Q U A LIT Y Gross NPLs / Total Loans (% ) Risk Provisions / NPLs (% ) Bad debt chg / Avg loans (% ) GR O W T H R A T ES & KEY R A T IOS Growth in revenues (% ) Growth in costs (% ) Growth in bad debt s (% ) Growth in RWA (% ) Growth in loans (% ) Growth in deposits (% ) Net int. margin (% ) Cost income ratio (% ) Trading income / Total Rev (% ) Total loans / Total deposits (% )

25,347 44,562 43,522 37,076 3,880 2,261 2,174 8.6 8.2 4.3

26,043 47,009 46,338 40,521 3,960 2,300 2,048 7.9 8.6 4.2

27,485 49,312 48,826 44,452 4,217 2,640 2,409 8.8 9.5 4.5

28,125 51,556 51,048 46,475 4,388 2,812 2,581 9.2 9.9 4.6

29,331 54,961 54,419 49,545 4,568 2,991 2,760 9.4 10.1 4.6

30,722 58,876 58,295 53,073 4,769 3,192 2,962 9.6 10.3 4.6

Absolute Price Return (%)


-20% -15% -10% -5% 0% 0.1% -11% -17% 5%

0.59 24 0.06 8.8 9.5 17.1 13.9 11.3 12.0 2.34 64.6 0.0 91

0.55 27 0.06 45.0 44.1 181.7 103.2 190.7 106.3 1.69 59.6 0.0 128

1.44 20 0.21 7.2 20.1 247.6 21.9 -3.7 1.4 1.40 61.8 0.0 122

1.93 15 0.10 29.9 9.4 -44.3 4.9 12.3 16.3 1.80 57.3 0.0 117

2.35 12 0.10 8.9 3.3 -1.1 2.7 6.5 9.3 1.85 56.1 0.0 114

2.28 13 0.09 1.0 11.5 -5.8 5.5 5.4 9.7 1.83 56.8 0.0 110

2.10 12 0.08 8.4 -7.4 -0.4 2.3 4.6 4.5 1.85 55.3 0.0 110

1.50 15 0.06 4.7 3.9 -16.6 4.3 6.6 6.6 1.80 54.8 0.0 110

1.30 19 0.08 5.9 4.5 38.0 4.7 7.1 7.1 1.74 54.1 0.0 110

1m 3m 12m

52-week High/Low: M arket Cap (m)

A$9.78 - 7.84 A$ 3,129 US$ 3,329

12mth Fwd P/E Relative (x)


1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 2/07 2/08 2/09 2/10 2/11 2/12 2.0 1.0 0.0 08 09 5.0 4.0 6.0

Profitability

25

Credit Quality

30 25 20

35 30 25 20

Capital Adequacy

12.0 10.0 8.0 6.0

20

15 3.0 10 10 5 5 0 08 09 10
Bad debt exp/ Loans (bp) Prov./ NPL's (RHS) (%)

15 15 10 5 0 08 09
Risk weighted assets (A$bn) Tier 1 ratio (%) (RHS)

4.0 2.0 0.0 10 11 12E 13E 14E 15E

10

Other inc/A RWA (%) Costs / ARWA (%)

11

12E

13E

14E

15E

0 11 12E 13E 14E 15E

Relative to S&P ASX 200 L-T average

Int income/ARWA (%)

Page 2

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

P&L Forecast
Year end 30 June 1H11A 2H11A 1H12A 2H12F FY11A FY12F FY13F FY14F

Profit & Loss ($m) Net interest income Non interest income Total revenue Bad and doubtful debt expense Operating expense (ex amortisation) Tax NPAT (pre preference dividends and minorities) Minorities Preference dividends Amortisation of intangibles (ex intangible software) Cash NPAT Significant items Preference dividends Amortisation of intangibles (ex intangible software) Statutory NPAT Pre provision profit (cash basis) Underlying profit growth (%) Effective tax rate (%) Cash EPS (cps) Dividend per share (cps) Staff Nos (period end FTEs) Growth (% annualised) Gross loans Avg int-earning assets Cash EPS 460.3 159.5 619.8 18.1 371.1 69.8 160.8 -4.5 -4.3 10.1 162.1 17.6 4.3 -10.1 173.9 248.7 7.3 16.0 42.2 30.0 3,926 472.3 141.3 613.6 26.1 363.6 55.0 168.9 0.0 -4.4 9.6 174.1 -0.7 4.4 -9.6 168.2 250.0 0.5 20.7 44.9 30.0 4,019 480.7 126.9 607.6 15.8 367.5 66.9 157.4 0.0 -4.3 9.5 162.6 -99.5 4.3 -9.5 57.9 240.1 -4.0 52.9 40.8 30.0 4,091 506.9 139.7 646.6 25.8 384.5 59.1 177.2 0.0 -5.1 9.5 181.5 0.0 5.1 -9.5 177.2 262.1 9.1 25.0 42.9 30.0 4,096 932.6 300.8 1233.4 44.2 734.7 124.8 329.7 -4.5 -8.7 19.7 336.2 16.9 8.7 -19.7 342.1 498.7 10.3 27.5% 87.1 60.0 4,019 987.6 266.6 1254.2 41.6 752.0 126.0 334.6 0.0 -9.4 19.0 344.1 -99.5 9.4 -19.0 235.1 502.2 0.7 27.4% 83.8 60.0 4,096 1050.4 303.1 1353.5 41.5 785.0 145.3 381.7 0.0 -10.3 19.0 390.4 0.0 10.3 -19.0 381.7 568.5 13.2 27.6% 90.7 60.0 4,106 1075.7 341.5 1417.1 34.6 813.9 156.0 412. 7 0.0 -10.3 19.0 421.4 0.0 10.3 -19.0 412.7 603.3 6.1 27.4 96.4 64.0 4,116

5.1 5.1 15.8

7.7 5.5 12.9

1.5 5.2 -18.0

9.2 6.4 10.2

6.5 6.8 13.1

5.4 5.7 -3.7

4.5 6.1 8.1

6.6 5.7 6.3

Ratios Profitability ROE ROA Adjusted underlying profit/assets Margins and spreads Interest spread Free float Interest margin Income & Efficiency Non-interest/income Expense/income Expense/assets Expense/employee ($000) Income/employee ($000) Capital Tier 1 capital ratio Total regulatory ratio SHF/assets Asset quality Impaired assets ($M) Specific provision/impaired assets Impaired loans/gross loans
Source: Deutsche Bank, Company Data

8.3% 0.6% 0.9%

8.9% 0.6% 0.9%

8.2% 1.1% 0.5%

8.7% 1.2% 1.0%

8.6% 0.6% 0.9%

8.5% 0.6% 0.7%

9.1% 0.6% 1.0%

9.4% 0.6% 1.0%

1.58% 0.25% 1.84%

1.61% 0.25% 1.86%

1.54% 0.25% 1.79%

1.62% 0.24% 1.87%

1.60% 0.25% 1.85%

1.58% 0.25% 1.83%

1.60% 0.25% 1.85%

1.54% 0.25% 1.80%

25.7% 56.5% 1.4% 195.7 319.5

23.0% 55.7% 1.4% 184.9 309.7

21.1% 57.0% 1.6% 223.8 296.9

21.6% 56.6% 1.3% 183.2 315.9

24.3% 56.1% 1.4% 188.2 311.1

21.3% 56.8% 1.5% 202.5 305.0

22.4% 55.3% 1.3% 186.7 329.8

24.1% 54.8% 1.3% 193.2 344.5

8.1% 11.1% 7.2%

7.9% 10.6% 7.2%

8.6% 10.9% 7.3%

8.8% 11.1% 7.2%

7.9% 10.6% 7.2%

8.8% 11.1% 7.2%

9.2% 11.4% 7.2%

9.4% 11.6% 7.0%

317.6 25.7% 0.71%

358.7 25.5% 0.77%

349.6 27.7% 0.75%

362.5 27.6% 0.74%

358.7 25.5% 0.77%

362.5 27.6% 0.74%

349.1 24.6% 0.68%

265.8 29.2% 0.49%

Deutsche Bank AG/Sydney

Page 3

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Recommendation
Headwinds on many frontssearching for direction
BENs 1H12 result showed that it is a company facing a number of headwinds, including:
#

A significant spike in deposit competition, which has further harmed the previously solid economics of its large deposit book; An unprecedented 20% decline in the margin lending book in a half-year period, as negative equity markets and risk aversion dragged on this high margin business; A poor house price environment, which saw it earn negative revaluation income for the first time from the Homesafe Solutions product; and Rising securitisation costs, a flow through effect from unstable global debt markets.

Against this backdrop, in our view, BEN looks like a company that is searching for direction, with the recent acquisitions of Bank of Cyprus and NoQ striking us as movements away from BENs core banking competency. This suggests to us that the company is struggling to come to terms with the uncontrollable obstacles to better financial performance that it faces.

Its not all bad


Despite these headwinds, there is some cause for optimism, given:
#

BENs capital position has been repaired through the $150m institutional placement and forthcoming share purchase plan; Asset quality remains very strong, evidenced by stable arrears performance in most business lines and a very low bad debt charge for the period; and BENs funding base remains the most stable in the sector.

This suggests to us that BEN is in a stronger position to deal with the challenges it faces than it otherwise might be, albeit at a lower ROE.

but there is better value elsewhere in the sector


In the end, an investment thesis always comes down to price. On this front, we struggle to get excited given BEN is trading in-line with the majors on an FY12 PER basis, despite offering an EPS growth profile below that of the peers. We see significantly better value in ANZ, which is trading on roughly the same PER, and which has a well defined Asian growth strategy, a better diversified business model, and a stronger capital position than BEN.

Page 4

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Stock trading inline with the majors


11.0

despite EPS growth at the lower end of peers


12.0% 10.0%

10.5 9.9

8.0%
9.9

10.0

6.0% 4.0%

9.5

2.0% 0.0%

9.0

-2.0% -4.0%

8.5

-6.0% BEN ANZ FY12F CBA FY13F NAB FY14F WBC

8.0 BEN AN Z CBA N AB WBC

2H12F
Source: Deutsche Bank, Company Data

Source: Deutsche Bank, Company Data, IRESS

While BEN does look attractive relative to its long run PE rel vs Industrials, this reflects the apparent value in the bank sector, rather than BEN being particularly cheap itself. Also as shown below, BEN looks unattractive when comparing its implied P/BV to its current and forecast ROE profile. BEN trading below LT PE rel to Industrials
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Sep-2001 Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011
Source: Deutsche Bank, Company Data

but P/B is unattractive given forecast ROE


FY11 P/BV

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 6.0% 7.0% 8.0% 9.0% ROE 10.0% 11.0% 12.0% BEN at FY12 ROE BEN at FY14 ROE

Source: Deutsche Bank, Company Data, IRESS. Note: Rolling 12 month forward PER relative to All Industrials ex Banks

Given the stock does not jump out at us from a valuation perspective, and that BENs strategic direction appears to be diverted somewhat from where we would like it to be, we have retained our HOLD recommendation at this point.

Deutsche Bank AG/Sydney

Page 5

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Earnings changes
Earnings downgrades
We have made the following adjustments to our forecasts. Earnings Changes
Cash profit OLD FY11 FY12E FY13E FY14E
Source: Deutsche Bank, Company Data

Cash eps CHG % 0.0% 0.2% 2.8% 3.7% OLD 87.1 87.2 94.7 99.4 NEW 87.1 83.8 90.7 96.37 CHG % 0.0% -3.9% -4.2% -3.0% OLD 60 60 62 65

Dividend NEW 60 60 61 64 CHG % 0.0% -2.3% -2.3% -1.0%

NEW 336.2 344.3 390.4 421.4

336.2 343.5 379.6 406.6

The key drivers of the earnings changes were:


#

Inclusion of the Bank of Cyprus acquisition within the numbers, which largely offset the downgrades to the core business, driven by:
#

A lower margin starting point from 1H12, partially offset by an increase in 2H12 margin to reflect recent repricing decisions; Reduction in B/S due to a larger run off in the margin lending book in 1H12 than had been expected; Lower non Interest income following a weaker 1H12; and Small increase in the 2H12 BDD assumptions to reflect the seasonality that appears inherent in the business.

# #

Following these changes we are forecasting cash EPS growth of -4% in FY12 and 8% FY13 which is well below the average of the peers in FY12 before returning to the peer average in FY13. Impact on cash earnings excluding Bank of Cyprus We have provided a table below which looks at the adjustments to earnings excluding the impact from the Bank of Cyprus acquisitions. Earnings changes (excluding the impact of the Bank of Cyprus acquisition)
Cash Profit OLD FY11 FY12E FY13E FY14E
Source: Deutsche Bank, Company Data

NEW 336.2 337.8 368.8 394.6

CHG % 0.0% -1.7% -2.9% -2.9%

336.2 343.5 379.6 406.6

As shown above excluding the impact of incorporating the Bank of Cyprus acquisition into our forecasts, the cash earnings for BEN fell by ~1.7% in FY12, 2.9% in FY13 and ~2.9% in FY14.

Page 6

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

From the core (pre acquisition) businesses we believe BEN will deliver cash earnings growth of 0% in FY12 and 9% in FY13. This will see BEN at the bottom of the peers in FY12 before rising to slightly above the peer average in FY13.

Key Earnings Drivers


The table below provides a summary of the key drivers of our forecasts which include the acquisition of Bank of Cyprus. Key forecast drivers
FY11 Profitability Cash earnings growth EPS growth 15.5% 13.1% 2.4% -3.7% 13.4% 8.1% 7.9% 6.3% FY12F FY13F FY14F

Underlying earnings Net Interest Margin Margin Movement Interest Income growth Non Interest income growth Total revenue growth Cost growth 1.85% 0.05% 9.4% 1.3% 7.3% 5.1% 1.83% -0.02% 5.0% -8.7% 1.7% 2.9% 1.85% 0.02% 7.0% 11.3% 7.9% 5.1% 1.80% -0.05% 2.4% 12.7% 4.7% 3.9%

Balance Sheet & Asset quality BDD / GLA (excluding securitisation) (bps) Gross loans growth Average Interest earning asset growth 9.5 6.5% 6.9% 8.5 5.4% 5.7% 8.1 4.5% 6.1% 6.3 6.6% 5.6%

Returns DPS () ROA ROE


Source: Deutsche Bank, Company Data

60.0 0.6% 8.6%

59.2 0.6% 8.5%

61.2 0.7% 9.1%

64.1 0.7% 9.4%

We would flag that the growth rates in FY12 and FY13 have been impacted by the inclusion of Bank of Cyprus which we expect should provide full run rate benefits by FY13. Adjusting for the acquisition we are only forecasting:
# # # #

Asset growth of 2.0% in 2H12; Margin improvements in 2H12 of 3bps; Non Interest Income growth of 2%; and Cost growth of 2.0%.

We do not believe that these forecasts are overly aggressive, given the momentum from 1H12.

Deutsche Bank AG/Sydney

Page 7

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Key Issues
We believe the key issues coming out of BENs 1H12 result are as follows:
#

Margin pressure in 1H12 should alleviate in 2H12 on strong asset repricing benefits and higher capital; Recent acquisitions have been moving away from BENs core competencies; Continued P&L volatility from Homesafe Solutions; Subdued returns likely to continue for the foreseeable future; and Significant upside from Advanced accreditation but likely some years away, and by no means guaranteed.

# # # #

Margin pressure to alleviate in 2H12


BENs margin (down 6bps hoh, or down 7bps after Community Bank share) was impacted by a number of significant headwinds in the period, including:
# #

A decline in the margin lending book, with asset mix contributing -2bps; Significant deposit competition in the period (deposit pricing and hedging contributing 4bps); and Continued competition in mortgages.

Looking forward, we expect many of these pressures to be alleviated in 2H12, given:


#

The decline in the margin lending book is likely to have stabilized given a slight improvement in equity market sentiment of late. Furthermore, this book is now likely to be left to a core group who are attracted to the dynamics of margin lending; 15bps of out of cycle asset repricing is likely to drive a strong margin outcome in mortgages in 2H12; and Deposit competition, while remaining a drag, will become less onerous given much of the deposit base will have already repriced.

As shown in the table below, residential mortgages contribute more than 60% of total interest earning assets. Mortgages comprise > 60% of interest earning assets
1H12 ($m) Residential mortgage book Business Margin lending Unsecured/Other Loans Cash & investments Interest earning assets
Source: Deutsche Bank, Company Data

Proportion of Interest earning assets 61% 20% 5% 2% 88% 12% 100%

32,482 10,750 2,564 1,037 46,833 6,128 52,961

Page 8

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Given the 15bps of out-of-cycle asset repricing announced in February, the full year run-rate benefit would be +8bps to the margin, as shown below. Asset repricing should add ~8bps to the margin on a full year basis
Residential mortgages ($m) Percent to reprice Out of cycle rate rise Full yr impact ($m) AIEA ($m) Full year impact
Source: Deutsche Bank, Company data

32,482 85% 0.15% 41 53,593 0.08%

Our forecasts allow for the majority of the repricing benefits to come through in 2H12, partly offset by continued flow through of deposit competition on that part of the deposit book that did not roll in 1H12.

Acquisitions moving away from core competency


We believe that recent acquisitions by BEN (Bank of Cyprus and the small investment in NoQ) are moving away from the companys core competency of banking and wealth management. While the Bank of Cyprus does suit BENs Community Bank focus, the deal appears to be driven more by financial metrics to us (capital, funding, and cost synergies), rather than a direct overlap with BENs core business model. As for NoQ, we are not inclined to make too much of a small strategic stake taken in a ecommerce business that is developing online and smart-phone applications for the retail and food and beverage industries. However, while there are some business overlaps with BEN, such acquisitions are unlikely to move the dial on earnings and returns for the group. Furthermore, we believe these types of transactions tend to distract management attention for little financial gain.

Continued P&L volatility from Homesafe Solutions


As shown in the chart below, revaluation income from the Homesafe Solutions product swung to a negative in 1H12. This item is likely to drive considerable volatility through the P&L on an ongoing basis. Management disclosed on the conference call that the average gain on sale of properties to date has been 9%, however as shown below there is a fairly direct correlation between house price index changes in Sydney and Melbourne and revaluation income.

Deutsche Bank AG/Sydney

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20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Homesafe Solutions swung to a negative


20
$m

due to falling house prices in Sydney & Melbourne


14.0% 12.0%

$m

20

15

10.0% 8.0%

15

10

6.0% 4.0%

10

2.0% 0.0% 0

-2.0% -4.0% -5 Dec-2009 FY10 1H11 2H11 1H12 Jun-2010 Dec-2010 Jun-2011 Dec-2011

-5

Home revaluation income (RHS)

Avg Syd & Melb house price mvt (LHS)

Source: Deutsche Bank, Company Data

Source: Deutsche Bank, ABS. Note: Assumes an even split of revaluation income between Dec 09 and Jun 10 periods

Given this relationship we believe that BENs earnings may become somewhat hostage to market prices, thereby reducing the quality/reliability of earnings.

Subdued returns likely to continue


BEN continues to struggle to generate acceptable returns from its business. The ROE for the period was only 8.5% (on BENs measure of average ordinary equity). Given we estimate the groups cost of capital to be ~12%, the group is a long way off both acceptable returns relative to its own cost of capital, and the returns being generated by the Australian major banks. Subdued returns both on ROE
25%

as well as ROTE
30% 25% 20%

20%

15% 15% 10% 10% 5% 5% 0% BEN ANZ CBA FY12 ROE


Source: Deutsche Bank, Company Data Source: Deutsche Bank, Company Data

0% NAB WBC

BEN

ANZ

CBA FY12 ROTE

NAB

WBC

We struggle to see this changing in the near term in fact, the situation on deposit competition has worsened over the last 12 months rather than improved. To the extent that the majors will need to continue to improve their net stable funding ratios in advance of Basel III requirements, it is likely to be some time before we can say that deposit competition has truly abated. Until then, the profit potential of BENs extensive deposit base is unlikely to improve by any great margin.

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Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Advanced accreditation would be a positive move but likely some time off
BEN disclosed on the conference call that it intends to seek advanced accreditation with APRA under the Basel III standards. The rewards to such accreditation are significant. As shown below, BENs average risk weighting on mortgages is ~40% vs the average risk weighting of the majors housing book which have qualified for Advanced standing of ~19%. In other words, BEN is holding almost twice the level of capital on Australian mortgages than its larger peers. Risk weighting on mortgages is prohibitive
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% BEN ANZ CBA NAB WBC

Average Risk Weighting on mortgages


Source: Deutsche Bank, Company Data. Note: As at 30 September 2011 for all banks except CBA which is as at 31 December 2011

As shown below, we estimate the benefit of BEN moving to an average risk weighting of 20% on the mortgage book would release up to ~190bps of capital. Upside from potentially lower mortgage risk weightings
$m Current CRWA in mortgages Risk weighted assets assuming 20% risk weighting CRWA benefit Current total RWA Reduction in RWA from advanced accreditation RWA after CRWA benefit Current Core Tier 1 Revised Core Tier 1 Capital benefit
Source: Deutsche Bank, Company Data. Note: As at 30 September 2011

10,560 5,321 5,239 26,556 -5,239 21,317 7.78% 9.69% 1.91%

The move to attain accreditation is not without cost, however. BEN management estimate that the expenditure required (on items such as risk management systems, etc.) to attain Advanced standing would be ~$20m. While this estimate is significantly below the amounts spent by each of the major banks on the same process, BENs loan book is far less complicated than those of the majors, with the majority sitting within Australian housing, business lending, and margin lending.

Deutsche Bank AG/Sydney

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20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Given the significant lead time and cost involved in attaining Advanced accreditation, and the fact that this is still subject to regulatory approval which will be difficult to obtain, we are reluctant to factor in the benefits until we are more certain about the likely success.

Page 12

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Result Summary
Group Result Summary (Cash basis)
Result summary
2H11A Net interest income Non-interest income Total income Operating expense Underlying earnings Bad and doubtful debt Profit before income tax Profit after income tax and before sig items Dividends paid on preference shares Cash earnings
Source: Deutsche Bank, Company Data

1H12A 475.1 132.5 607.6 -367.5 240.1 -15.8 224.3 157.4 -4.3 162.6

Hoh growth 0% -5% -1% 1% -4% -39% 0% -7% -2% -7%

473.9 139.7 613.6 -363.6 250.0 -26.1 223.9 168.9 -4.4 174.1

BEN reported cash earnings of $162.6m, 7% below the 2H11 result. The major drivers were: Net interest income # Net interest income was flat hoh, driven by a 7bps decline in the underlying margin.
#

Drivers of the margin decline included: 1) asset mix towards the lower margin mortgage lending, 2) reduction in margin lending balances, 3) higher deposit funding costs. Community Bank and Alliance share of margin has increased by 1bp, contributing further to the group margin decline. Management has indicated that the share would have been greater had they not implemented the changes to the owner manager agreement. Management expects the Community Bank share to continue to increase given the strong growth in the community bank franchises. The margin however will benefit from the 15bps repricing on the mortgage book in 2H12. Lending growth was relatively subdued, up 1%, with a large decline in the margin lending business and lower commercial lending offset by growth in mortgages and consumer lending. Management has indicated that they have pulled back in the 2Q given the increase in funding costs made mortgages unattractive.

Deutsche Bank AG/Sydney

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20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Lending growth by segments


10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% Mortgages 2H11
Source: Deutsche Bank, Company Data

Margin declined by 7 bps


1.90% 1.86% 1.85% 1.80% 1.75% 1.70% 1.65% 1.60% 1.55% (0.02%) (0.04%) (0.01%) 1.79%

Consumer

Margin lending 1H12

Commercial

1.50% 2H11 margin Asset Mix Deposit pricing and hedging Community bank 1H12 margin

Source: Deutsche Bank, Company Data

Non-interest income impacted by weak Homesafe revaluation income # Non-interest income declined by 4% hoh, mainly due to a $5.9m reversal in the Homesafe revaluation income.
#

Improvement in fees from liability products was offset by lower asset product fees and declines in the other operating income. Overall revenue declined by 1% hoh or broadly flat allowing for the Homesafe revaluation income.

Expense growth was benign # Expenses increased by 1.1% hoh. Combined with the weak revenue growth, the cost to income ratio has increased from 57.0% in 2H11 to 58.2%.
#

Management has indicated that it will continue to retain capacity in preparation of an upswing in lending and to invest in the business for the long term. However it will look at the revenue picture in making the investment decisions. Staff and related costs increased by 0.4% hoh, despite a 1.8% increase in the number of FTEs. Cost to income ratio has increased
59.0% 58.0% 57.7% 57.0% 58.2%

FTEs and staff cost continued to grow


2.5%

2.0%

57.0% 56.0%

1.5%

55%

55.0% 54.0% 53.0%

1.0%

0.5%

52.0% 51.0%

0.0% 2H11 FTEs


Source: Deutsche Bank, Company Data

50.0% 1H12 Staff and related costs 1H11 Cost to income ratios
Source: Deutsche Bank, Company Data

2H11

1H12 LT target

Page 14

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank


#

Goodwill relating to the margin lending business was written down by $95m but this only affects statutory earnings.

Bad debts helped by flood overlay release # Bad debt charge for the half was down $10.3m hoh, reflecting a ~$5m reduction in the collective provision as a result of the flood overlay release as well as improvement in the portfolio as a whole.
#

Overall credit quality improved with impaired assets down 2.5% hoh and 90 days in arrears on well secured loans down 3.6% hoh. The Great Southern portfolio continues to be a concern with the 90 days past due increasing by 6.4% hoh, following 10.3% rise in the previous half. This is not surprising given the court case is due to start in 2012. Specific provision as % of impaired assets improved by 220bps hoh while total provision/reserve to gross loans was stable at ~53bps. Great Southern the only concern in the portfolio
25% 20%

Specific provision coverage is up


28% 28% 27% 27% 26% 26% 25% 25% 24% 1H11 2H11 Specific provision to impaired assets
Source: Deutsche Bank, Company Data

15% 10% 5% 0% 2H11 1H12 -5% 90 days arrears - Well secured


Source: Deutsche Bank, Company Data

1H12

90 days arrears - Great Southern

Impaired assets

Capital level is strong post the equity raising for BOCAL while funding remains solid # Core Tier 1 ratio under Basel II is 7.78%. Management expects the pro-forma Core Tier 1 ratio to be 7.59% as at 31 March 2012 post the SPP (retail equity raising) and the integration of the BOCAL assets.
#

Management has indicated that it has completed a feasibility study into a multi-year project towards achieving advanced accreditation status for capital purposes. However there is still uncertainty over whether the status can be achieved given it will ultimately be subject to regulatory approval. Funding position for BEN continues to improve with retail deposits now making up 77% of total funded assets. The bank is expected to retire ~$600m in term debt maturing in March this year which will leave it in the enviable position of having no wholesale term debt at all. The bank will continue to monitor the wholesale funding market and will issue once the costs become more economical.

Deutsche Bank AG/Sydney

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20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Core Tier 1 after BOCAL acquisition

Funding mix continues to improve


120%

8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% Dec 11 Core Tier 1

0.26%

100% 20% 80% ~(0.45%) 60% 40% 77% 7% 19% 7% 17% 8% 15% 8%

7.78%

73%

74%

75%

7.59% 20% 0% 2H10 Retail 1H11 Wholesale 2H11 1H12 Securitisation

SPP

Bocal RWA

Pro-forma Mar 12 Core Tier 1

Source: Deutsche Bank, Company Data

Source: Deutsche Bank, Company Data

Page 16

Deutsche Bank AG/Sydney

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Valuation and risks


Valuation
Our price target has increased to $8.50/share from $8.30/share, largely reflecting the improvement in sector rating. Our price target is broadly based on our DCF valuation of $9.04 and PE valuation of $8.10. SOTP valuation $8.10/share We apply a 9.7x FY12F PE multiple for BEN, based on the average of the major banks FY12F PE multiples after adjusting each multiple to exclude the impact of their own funds management businesses. Bank Valuation
Cash EPS (FY12F) Bendigo & Adelaide Bank
Source: Deutsche Bank, Company Data

PE Multiple 9.7

Valuation 8.10

83.8

Peer Multiples
Bank CBA (Hold, $49.10) ANZ (Buy, $21.95) WBC (Hold, $20.65) NAB (Hold, $23.18) Average
Source: Deutsche Bank, IRESS, Company Data

EPS (FY12) 454.3 220.9 206.3 263.4

PE Multiple 10.8 9.9 10.0 8.8 9.9

FM Contribution 10.9% 5.0% 10.9% 9.2%

Bank Adjusted PE 10.6 9.8 9.7 8.4 9.7

DCF Valuation $9.04/share Key assumptions for our DCF valuation include WACC of 11.65% (beta of 0.9, bond yield 6.25%, equity risk premium of 6%) and terminal growth rate of 2.5%, which is based on the long-term inflation rate forecast.

Risks
Key upside risks for BEN:
#

Significant improvement in credit market conditions and abatement in deposit competition. BEN should benefit from lower deposit rates given its significant exposure to deposits as a funding source; Improvements in securitisation markets; and Sharp rebound in equity markets, resulting in a recovery in the margin lending portfolio.

# #

Key downside risks for BEN:


# # #

Increased competition for retail deposits, resulting in margin reduction; Subdued lending growth in housing; and Decline in house prices resulting in negative Homeside valuation income.

Deutsche Bank AG/Sydney

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Banking & Finance Bendigo & Adelaide Bank

Appendix 1
Important Disclosures Additional information available upon request
Disclosure checklist Company Bendigo & Adelaide Bank Ticker BEN.AX Recent price* 8.14 (AUD) 20 Feb 12 Disclosure 14

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators


Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=BEN.AX.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Andrew Triggs

Historical recommendations and target price: Bendigo & Adelaide Bank (BEN.AX)
(as of 2/20/2012)
12.00
Previous Recommendations

3
10.00

2 1

4 5 6

8.00

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations

S ecurity Price

6.00

4.00

Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9, 2002

2.00

0.00 Feb 10 May 10 Aug 10 Nov 10 Feb 11

Da te

May 11

Aug 11

Nov 11

Page 18

Deutsche Bank AG/Sydney

20 February 2012
1. 2. 3. 4. 9/8/2010: 26/10/2010: 14/2/2011: 30/3/2011:

Banking & Finance Bendigo & Adelaide Bank


Hold, Target Price Change AUD9.15 Hold, Target Price Change AUD10.00 Downgrade to Sell, Target Price Change AUD9.10 Upgrade to Hold, AUD9.10 5. 6. 7. 8/8/2011: 28/11/2011: 16/12/2011: Hold, Target Price Change AUD8.30 Hold, Target Price Change AUD8.60 Hold, Target Price Change AUD8.30

Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of 10% or worse over a 12-month period

Equity rating dispersion and banking relationships

140 120 100 80 60 40 20 0

47 %

51 %

22 %

24 %

2% 0%
Sell

Buy
Companies Covered

Hold

Cos. w/ Banking Relationship

Australia Universe

Deutsche Bank AG/Sydney

Page 19

20 February 2012

Banking & Finance Bendigo & Adelaide Bank

Regulatory Disclosures 1. Important Additional Conflict Disclosures


Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas


Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Page 20

Deutsche Bank AG/Sydney

Deutsche Bank AG/Sydney International locations


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