By Justin Pierce and Tim O’Shannassy

Acknowledgement

Introduction

Bendigo and Adelaide Bank Limited (Australian Stock Exchange Code: BEN) is Australia’s fifth largest bank (Duncan, 2022), with a strategic focus on community engagement and customer service. During Full Year (FY) 2021 BEN increased its market share, customer base, total lending, and deposits—all while maintaining its commitment to community and delivering on environmental, social and governance (ESG) measures where is has proven leadership (Bendigo & Adelaide Bank Limited, 2021). During FY2021, BEN confirmed its commitment to a multiyear project to simplify operations, expand capabilities, and better communicate the purpose of the firm. The broader forward economic forecast for the Australian economy presents several opportunities for BEN.  Although the previously low interest rates placed pressure on margins, higher demand for lending is expected as Australia emerges from the pandemic (Janda, 2022).

Considering future challenges, BEN remains steadfast in its commitment to purpose, values, strategy, and shareholders.  Customers will continue to be at the centre of strategic decisions (Bendigo & Adelaide Bank Limited, 2021).

The External Environment

The passing of Her Majesty Queen Elizabeth II on 8th September 2022, ended the longest reign by a monarch in British history.  The United Kingdom and Commonwealth of Nations (Commonwealth) members now face a period of renewal as His Majesty King Charles III assumes his new monarchical duties (Hart, 2022).  The Albanese government set the agenda for stronger reconciliation with Australia’s first peoples, earning public approval and respect for early progress in this area (Grattan, 2022).

The Ukrainian war has reverberated around the world, causing increased commodity prices, gas shortages, and inflationary pressures (The World Bank, 2022).  In Australia, unemployment is at an historical low rate, putting further pressure on inflation.  At the same time, wages have stagnated, igniting calls from labour unions for significant increases in takehome pay (Jericho, 2022).

Australians enjoy their bank ‘bashing’, part of its egalitarian culture that aims to level out social power structures (Denniss, 2020).  It comes with the notion of the “fair go” (Bolton, 2003), and the great Australian dream of owning a home, for which most Australians require property mortgages (Robson, 2019).

Technological advancement was at its greatest during 1920-1970s, but may have slowed in recent times (Clancy, 2021; Nolan, 2021).  Technologies of note in service-based industries include artificial intelligence, including machine learning, and natural language processing.  For physical goods industries, robotics and automation continue to deliver efficiencies (Rathman, 2022; Goodman, 2022).

Australia’s huge land mass as the largest island nation is home to 26 million people (ABS, 2022), most living around the coastal areas.  Climactic conditions vary across the continent, and between one year and the next (Bureau of Meteorology, 2022).  Air quality has been impacted by bushfires, extreme weather events, and water management continues to be a delicate issue (Department of Climate Change, Energy, the Environment, and Water, 2021).

In Australia, the Corporations Act of 2001 establishes the regulations applicable to corporations, including the responsibilities of directors. The Competition and Consumer Act of 2010 establishes competition and fair dealing law, as well as consumer rights. Australia’s corporate tax rate is 30%, compared to the United States’ rate of 21%.

The Industry Environment

This banking industry is highly competitive, contributing significantly to Australia’s gross domestic product (GDP).  Experience from the boom and bust cycles of Australian economic history and ensuing difficulties in the banking and finance industry has led central policymakers to pursue the “four pillars” policy with some success in recent decades (Ryan, 2018; Ellis 2016).  Millennials seek out innovative solutions, and demonstrate lower brand loyalty, and this has provided an opportunity for buy now pay later (BNPL) providers, and neobanks, which have proven highly appealing to this demographic (Yeates, 2021).

Embracing these shifts in the market, banks have been acquiring start-ups, with the most recent example being NAB’s purchase of 86 400. Interest in bitcoin is currently at an all-time high, which presents a challenge for the “big four” trading banks and ASIC (Eyers, 2021), while blockchain technology is still in early stages of development (Pollock, 2019).

The banking market is segmented into retail, corporate, and institutional customers. Each sector has specific technological requirements, particularly in online and real-time processing (Yeates 2021).  Each sector has a range of choice of banking and finance provider, and there is little differentiation between these market players.  On the supplier side, IT infrastructure providers, and professional services firms (i.e., consultancies, auditors, etc.) make up the bulk of value chain partners.  Unlike some forward sectors, these tend to be large, established businesses with bargaining power to boot!

Establishing a new bank requires significant capital investment, registration with the regulator, APRA, licensing, and a disruptive point of differentiation to entice customers over.

Alternatives to retail banking include credit unions, and mutual funds.  For institutional clients, investment banking, brokers, and equity markets provide viable alternatives.

Company Analysis

BEN’s vision is to be “Australia’s bank of choice for customers, employees, partners, and shareholders”, and declares its purpose is “to feed into prosperity, not off it” (Bendigo & Adelaide Bank Limited, 2021, p. 16).  To achieve these ambitious outcomes, BEN aims to reduce complexity, invest in capability, and focus on customers, growth, and transformation (Bendigo & Adelaide Bank Limited, 2021, p. 16).

BEN’s operations focus on the provision of a broad range of banking and financial services (Bendigo & Adelaide Bank Limited, 2021, p. 11).  Following the recent Royal Commission, BEN has improved checks and balances in all operations, emphasising identity checks, and monitoring for money laundering.  The service aspect of BEN highlights the importance of process and procedure management in its operations.  Call centre operations, online processing, and data retention typify operational priorities.

BEN is required to understand its market, position itself among competitors, and maintain a steady flow of new—while retaining existing—customers.  The marketing function uses a community partner image and reputation to differentiate from its competitors.  A separate ‘community banking’ arm allows rural communities to register, operate, and share in the profits it generates (Bendigo & Adelaide Bank Limited, 2021).

BEN commits to employee development, empowerment, and wellbeing.  Branch staff are trained in customer service, with shifts timed to allow for child drop-offs, and other family commitments.  Succession planning is a key consideration at the corporate level, and of note is the majority female board (Bendigo & Adelaide Bank Limited, 2021).

Technology challenges include the near constant barrage of cyber-attacks, phishing attempts, and scams affecting Australian customers.  Maintaining a network of automatic teller machines (ATMs), data centres, and corporate networks that are resilient, fault-tolerant, and secure is a key challenge for the technology team.

Leading corporate reputation indices place BEN ahead of its key competitors.  When combined with a human-centric strategy, strong levels of trust, and positive net promoter scores, BEN’s innovation investment is 29.8 points greater than the average of the major banks.  This enables BEN to become even more nimble in responding to client needs, and to expand its market share (Bendigo & Adelaide Bank Limited, 2021).

BEN reported a statutory net profit of $524 million for the year ending 30 June 2021, an increase of 172%. There were increases in residential, agriculture, and commercial lending.  The Common Equity Tier 1 Capital Ratio increased by 32 basis points to 9.57 percent, showing a well-managed balance sheet and excellent risk management, while enabling continuing lending growth and future investments in transformation.  In addition, BEN declared a fully franked final dividend of 26.5 cents per share, bringing the total payout for the year to 50 cents per share.  The following Table 1 provides a high-level financial insight into BEN.

Table 1: Bendigo & Adelaide Bank Limited Financial Highlights FY2020-21 (AUD$ millions unless otherwise stated)

Strategy Challenge

Central to the strategy of BEN is its ongoing commitment to ESG, keeping in mind its purpose over the long-term.  What are the overall challenges of the external environment? How can BEN best be proactive about its future and shape its industry, particularly in the face of a weakening property market and changes in monetary policy? What does financial ratio analysis tell you about BEN’s performance and risk profile? How will BEN sustain growth and deliver profit growth in the short, medium and the long term given the current business? How can BEN better manage the increased competition resulting from mergers and acquisitions, changes in customer behaviour, and entry of new participants? How will BEN manage current and future strategic risks? What major projects should have priority for BEN in the medium term? How will BEN remuneration arrangements impact the organisation’s growth and transformation strategy? Is BEN doing enough on reconciliation and indigenous opportunity?

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