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Bendigo and Adelaide Bank Ltd (ASX: BEN) shares are down close to 11% in 2023 to date, as we can see on the chart below.
It’s one of the larger regional banks in Australia, with a market capitalisation of $4.8 billion according to the ASX, although it’s a lot smaller than the major ASX bank shares.
While a share can seem like an opportunity if it falls by a substantial amount, sometimes a falling share price can be a trap. Indeed, when a company’s share price is falling, I think there’s a key question to consider.
Will there be earnings growth?
Bendigo Bank has been on the ASX for a long time. Investors probably know that if a company’s profit goes up over time, this can be a useful factor in supporting its share price.
If earnings don’t grow, then why would the share price rise sustainably higher than it is today? I’d suggest that it can’t.
Bendigo Bank’s FY23 half-year result showed an excellent rise in profit. Cash earnings after tax increased 22.9% to $294.7 million, while statutory net profit after tax (NPAT) went up 49.3% to $249 million. The bank made cash earnings per share (EPS) of 52.2 cents, up 22.2%.
The net interest margin (NIM) increased 19 basis points, while total income on a cash basis improved 14.5% to $958.2 million.
Total lending was $77 billion, down 1.1%, while residential lending was one times the overall lending system on a rolling 12-month basis.
Bendigo’s profit significantly improved compared to 2021. But the bank is expecting its credit expenses are “likely to come under pressure as the tightening cycle continues and moves closer toward historical averages for the bank, which are low by industry standards”.
Bendigo Bank, along with other ASX bank shares, may have suffered from strong competition for market share. But management believes the business is well-positioned to perform in this environment, and it’s targeting “growth at or better than the system whilst generating appropriate returns on equity”.
The bank pointed out it has “strong retail deposit gathering capability with the network of 302 branches contributing approximately $10 billion in net funding”.
Profitability may decrease with higher arrears and a lower-than-peak NIM, it seems.
Earning projections for Bendigo Bank shares
The ASX bank share is predicted to make earnings per share of 93.8 cents in FY23, which would put the business at nine times FY23’s estimated earnings, according to Commsec numbers.
However, EPS is then projected to fall by around 11% to 83.8 cents – this would put the Bendigo Bank share price at 10 times FY24’s estimated earnings.
In both FY23 and FY24, Bendigo Bank is predicted to pay a grossed-up dividend yield of around 10%.
The dividend income alone may allow Bendigo Bank shares to outperform the S&P/ASX 200 Index (ASX: XJO) over the next two years.
It could be one of the better-performing banks, but there are other ASX shares that could achieve stronger capital growth over the next three to five years.