Marnie Baker, Managing Director, Bendigo and Adelaide Bank

Banks have long been the gold standard in paying rich and steadily growing income streams to investors. Institutional and retail shareholders alike have taken their franked dividends for granted.

The fact no-one questioned banks’ ability to maintain their dividends is a tribute to their performance over time. COVID-19 upended that belief in April when the Australian Prudential Regulation Authority (APRA) sent every bank a wake-up letter telling them they should seriously consider suspending dividends because of the pandemic. It told banks to bolster capital until the fallout from the crisis was more certain. The banking regulator wanted to minimise the risk of bail-outs.

While some banks have scrapped their latest payouts, Bendigo and Adelaide Bank (ASX:BEN) hopes that its deferred 2020 final dividend may yet be mailed to shareholders.

“All options are on the table for us,” says managing director Marnie Baker. “I would say that, if it was the preference, we would have cancelled the dividend rather than deferred it. So, you can read into that the board would like to provide a dividend. But we need to be mindful of the current environment and get more clarity on what the future looks like before we make the decision.”

In saying this, Baker knows that APRA issued updated guidance in July. The regulator said economic uncertainty had reduced somewhat. It eased its advice to defer dividends, but warned any payments should be moderated to sustainable levels to be determined by the use of robust stress testing. Customers and the economy needed to take priority ahead of shareholders. Certainly, this is still not a normal situation and investors still have no certainty their love for banks will be reciprocated. The regulator expects payout ratios to remain below 50 per cent this year. Dividends won’t rebound to pre COVID-19 levels anytime soon. Indeed, given the onset of the recession, brokers are predicting dividends won’t rebound for most banks either next year or in 2022.

Goldman Sachs analysts have cut their sector dividend forecasts for the remainder of 2020. Its assumptions include that the six leading retail banks – which include Bendigo – will increase their use of dividend reinvestment plans and other offsetting capital initiatives to help repair capital diminution. It said banks were expected to conduct ongoing stress testing and use capital buffers to absorb the impact of stress while maintaining support for businesses and households. The investment bank noted APRA was committed to ensuring moves to rebuild capital buffers would be gradual. Its estimate was Bendigo would pay a further nine cents per share in dividend this year. It expected a further easing next year, despite moderate growth in cash earnings per share. Recovery would improve further in 2022, but dividends at each of the six banks would still fall short of 2019 levels.

The dividend slump will ease at some point, but they won’t return to pre-COVID levels any time soon. That is unwelcome news for investors who now face having to diversify their portfolios to make up lost ground and reduce the risk a deeper recession could delay any bank rebound. It also leaves banks to develop plausible new strategies to keep the market onside.

Baker says the dividend deferral came as no surprise to both investment analysts and Bendigo’s large shareholders. She noted there were differing views, however, as to whether it should have been cancelled rather than deferred. “For retail shareholders, of course this hurts when you are looking for income in any form. I’m sure it will be a topic at question time as part of our annual meeting. There is a proportionate impact on retail shareholders. We have received correspondence questioning the decision to defer and seeking more explanation.”

The question is whether restrictions on dividends could be ongoing. “I’m not going to second guess the regulator,” Baker says. “It really does, I think, depend on the [economic] environment. They have come out twice now around reporting, and leading up to profit seasons.” Clearly, this is a frustrating situation for Baker and for the whole industry. As Australia’s fifth-largest bank, Bendigo’s latest financials were better than many. Its core takeaways when it announced its results were that it had strong deposit funding and liquidity profiles, a reinforced balance sheet, a well secured lending portfolio and resilient business performance. Its focus on delivering a broad range of financial services and innovations to regional, rural and suburban business and retail customers differentiates it markedly from the big banks. It prides itself as being a leader as well as a disruptor, and is spritely when it comes to product innovation.

It also reiterated the core aims of its strategic development plan. Like any other bank, it pledges to accelerate its digital engagement, build new capacity and focus on its cost reduction programs. But it also wants to achieve higher growth than the industry average, which means it must be more nimble and smarter than its competitors.

Bendigo and Adelaide Bank’s annual general meeting is traditionally held in its home town of Bendigo, but last year’s one was the first to be held in its new corporate headquarters. Around 150 shareholders were accommodated within a large atrium for the first time – pre COVID-19. “That is more conducive for people,” Baker says. “The way we operate our AGMs is to spend a lot of time going through the formalities, meeting shareholders who have taken the time to be there in person.” This year, however, it was forced to run its first virtual meeting. “That was not our preference, because directors and staff value meeting shareholders face-to-face. That’s something we will miss with a virtual AGM,” she said in an interview before the event took place. “But we are opening up for questions, as we always do prior to our AGMs. We are giving options to shareholders by being able to do real-time questions and voting. We’re trying to make it as accessible as possible, including to those with hearing impediments and sight impediments. I’m expecting that we’ll see more people turning up than when we would have a physical AGM and webcast it. This year’s will be a more interactive, virtual AGM. We’ll learn a lot of things through this and, perhaps, we might settle on a hybrid in the longer term. It’s important that it’s more accessible and meets people’s preferences around how they like to interact with the bank’s board.”

As well as maintaining a possibility of delivering the delayed second half dividend payment, Baker says investors could take confidence from the board’s commitment to maintain a healthy, medium-term cost-to-income ratio. That most recently sat at 62.7 per cent, slipping by 3.5 per cent since 2019 because of transformation investments, staffing costs, redundancies and COVID-19 impacts. The bank now has set a medium-term target to move down to a stronger level of around 50 per cent. “We firmly believe we can make that, otherwise we would have removed guidance from the market,” Baker says. “We still remain totally committed to that.” That ratio is the only measure on which the bank has recently given guidance.

An analysts’ briefing by Bendigo’s senior executives in mid-August was told an increased intensity on cost reductions and maintaining flexibility around the quantum of spend on the bank’s accelerated transformation program would be aligned with revenue growth. One focus would be on accelerating its cost transformation program, targeting sustainable cost base reductions that improve the customer proposition and experience. A cost transformation program has been established to identify areas of focus. Boston Consulting Group had been appointed to support the bank’s team in achieving its medium-term cost-to-income objective.

“We know we must constantly evolve because our customers' needs and the environment continue to change,” Baker told analysts. “The events of 2020 have accelerated the need, the change and the way we work and how we look and operate. It has accelerated the adoption of digital technologies and reinforced the importance of strong community connections and demonstrated how vital trust and the use of data and insight is to underpin strong risk management systems.”

At times of national economic stress, it is critical banks effectively sell a message they hold a tight grip on the reins. Dividends and costs are two critical measures of strength and security. If investors can be assured Bendigo will deliver on both, then confidence about future performance should also be bolstered despite continuing uncertainties about Australia’s economic outlook and the pace of economic recovery in the face of lockdowns and border closures.

It was already building up a head of steam before the pandemic. Measures of this success include a 10 per cent rise in customer numbers in the year ended June to 1.88 million customers. Market share increased to 2.24 per cent, according to APRA numbers, while the majors lost 1.1 per cent to hold 75.08 per cent of the market. Bendigo’s system lending growth rate climbed to two times, compared with the majors, which eased to 0.5 times.

The latest banking industry brand and trust index released by Glow found that, while the big four banks had the highest brand recognition, customers trusted smaller banks most. The highest net trust score of 23 went to Bendigo Bank, and it is also the bank customers would most likely recommend to a colleague or friend. It ranked third for overall customer satisfaction. What makes these numbers even more important is that they relate to the second quarter of 2020, after COVID-19 struck. That was when Baker says Bendigo was acting very quickly to help its customers.

“We deployed our staff into those areas where they were needed to provide support. That included the mortgage help centre. Other organisations call them collection centres, but we don’t because we think it’s about keeping people in homes not kicking them out of homes. We have been able to have the conversations that our customers are looking for in these really uncertain times. I give full praise to the organisation for the way we did that very, very quickly – within hours and days.” She says that, along with other banks, they received approval from the Australian Competition and Consumer Commission to determine the best ways of helping customers in need.

“We wanted to make sure that, from a societal perspective, the banking industry was able to step up and support Australians. We offered the ability to defer any loan payments, both interest and principle, waive fees and provide products that were better suited to the situation. A lot of things were done to support our customers.

“Being an essential service, our branches stayed open during that time. We only had a couple of branches that closed, and they were associated with the likes of universities and other organisations that were required to close down. But more than 90 per cent of our corporate staff, within 72 hours, were working remotely – within their own homes. It was seamless. As we sit here, today, we still have more than 90 per cent of staff working from home. Where there are fewer restrictions, some Bendigo and Adelaide Bank offices have re-opened. But staff still have the choice about whether they work from home or not. We've found the vast majority enjoying having that flexibility. And we expect, as an organisation, we won't go back to having everyone located in physical offices. We will be providing our staff with the flexibility to work from where they believe they can be most productive.

“I take the safety and wellbeing of our staff very seriously. That is not just physically, but also mentally. Increased support is required for people to come through a period like this. That has been front of mind.”

The ability to change the working environment could be aided by being largely located in regional centres. “We are the only major bank that is headquartered outside of a capital city. We’re very proud of that, and that has huge advantages. I talk a lot about regional Australia, and the benefits that could come from having more of our population outside capital cities. COVID exposes a weakness, and it is that 40 per cent of our population live in just two cities. We are able to recruit from a much larger area, and also allow people to live where they want to live and still have a career doing the work they like to do.

“I’m very passionate our model is based around community. Something that has been highlighted by COVID is how important communities are, and how important local is. We want the community we live in to be healthy and sustainable. We want good health care. We want good education. We want good services. We want good financial services. All of those things go to a really good, healthy, sustainable community. And banking is a key part of that.”

It is the bank’s bond with its communities that has stood it in good stead in the past. While Baker says there will be changes to the way banks operate over time, branches are not going away. Plenty of customers will retain memories of the 1990s when major banks slashed their branch networks, with about a third shut down Australia-wide. They were dark days when some towns where left without a bank of any sort. And there was little in the way of electronic banking to help customers, either.

 “I think it was over 2000 branches that closed,” Baker recalls. “That was the opening for our community bank model. We had thought about it for some time, and it was the catalyst for our community bank, which is now more than 20 years old. It has been a huge success in transforming banking. It’s been a significant innovation, and I know if you speak to the 321 communities that still have a bank in their centre they will tell you about the benefits they have seen in economic and social prosperity.”

There could be fresh opportunities now if other banks decide another round of branch closures or cut in services is required in regional areas. “Perhaps this period is another opportunity. I can’t give all our secrets away. We have been doing quite a bit of work around what we call concept stores. Not branches, but concept stores. About 18 months ago, maybe longer, we opened our first concept store in Norwood in South Australia. We’ve opened others in Coffs Harbour and in Leichhardt in New South Wales and Carlton in Victoria. We’re about to do another one this calendar year in Bendigo. They are very different looking, in a sense that they are very, very modern. Customers walk past and wonder where the branch has gone because they don’t look like a bank.

“The one size fits all approach you’ve seen in branches in the past is gone because all communities are slightly different. They have different needs, expectations, nuances to them. This is about developing concept stores that work for their community. A great example is the store in Norwood. It enabled our business customers who had an online presence but didn’t have a physical high street presence to come in and operate their businesses in a very visual way. It has been huge. Our business customers love them. It’s a way of providing them with great expertise from across our network, from mentors and other small businesses and the like.” It’s an attempt to revamp a decades-old business model, and Baker is seeking to accelerate parts of the bank’s strategy to accommodate that.

“Our strategy is really about growth and transformation. We are 12 months into what is a multi-year strategy. We didn’t see COVID occurring when we first put it into place, but we have revisited it in light of the current environment and found that it was still really sound. But, of course, we are playing around with sequencing the pieces of that strategy.”

Another important part of Bendigo’s growth strategy is technology innovation. This has been going on for a number of years, including when it introduced Visa into Australia. Baker says the bank also pioneered mortgage offset accounts, ubiquitous now throughout the banking industry and, more recently, green home loans before climate change was large on the agenda. They can be used to buy eco-friendly cars, install solar power systems and hot water. It is also funding start-ups such as Up, a mobile-only digital bank and mortgage lender tic:toc. These businesses attract customers around 10 years younger than Bendigo’s broader customer base.

“This is traditionally a market we were strong in,” Baker explains. “So, we’ve played around a little, like playing with new brands. That has been hugely successful. We have 250,000 customers in Up now, and it’s topping the app stores and getting rave reviews.” How about buy-now pay-later opportunities?

“Absolutely. There has been a lot of conversations around this. They will disrupt the banking industry. I look at it very differently because I love disruption. We should embrace it, because then you are moving and growing. I spend a lot of time with the fintech industry because I’m a big advocate. They pick a part of the customer journey, and they hone in on it. They change it from a customer-centric way, and they do it really, really well. That lifts the bar on customer experience, it lifts the bar on expectations and it lifts it for everyone. Incumbents can’t be complacent. They need to be moving, and they need to evolve with customers’ expectations.

“The likes of Afterpay (ASX:APT) really show that there’s a different way people want to access credit. In essence, it’s replacing a credit facility and credit cards. This is how we evolve. Things that make sense one day don’t necessarily make sense in the future. Is this the way that customers are wanting to access short-term credit? It could very well be.

“This is how innovation occurs. ATMs became the way that people accessed cash or EFTPOS. They replaced a lot of what was done in branches. This is how everything evolves, and we have to be really conscious of it. We should be listening and making our own changes within our businesses to accommodate that. You always have the choice of the being the leader, or a fast follower or not so fast follower. In today’s age, you can’t be a slow follower, because you quickly become irrelevant. You also have choices around building from within. We tend to partner.” One of those partnerships is with Swinburne University where it helped to launch Australia’s first Master of Financial Technologies course.

Another area Baker says the bank is targeting involves going back to its roots, before it became a bank when it was a building society. Its core customers then were couples and young families saving to buy a home. That gave them a grassroots presence within more than 500 rural and regional communities. “We are living and breathing in those communities. Given the proposition that we now have, converting to a bank in 1995, we really should be banking the vast majority of the businesses in those communities. It’s a relationship-based model working with small- and medium-sized businesses. It sits very comfortably with who we are and what people expect from us.”