Borrowers can handle higher rates, says Bendigo boss

Bendigo and Adelaide Bank chief executive Marnie Baker says the lender’s home loan customers and the wider economy can cope with a gradual rise in interest rates, after the bank’s results showed competition was eating into returns.

As Bendigo beat market expectations with $260.7 million in half-year profit, Ms Baker became the latest bank boss to back market predictions for interest rate hikes later this year. Ms Baker, who runs Australia’s fifth largest retail bank behind the Big Four, argued the economy was ready for higher interest rates because of rising inflation, and signs of a tighter labour market.

“I think the economy is ready for that [higher interest rates]. I think we do need to be very careful that we don’t make that a jolt to the economy, but I think we’ve been in an extremely low interest rate environment for a long period of time. I think the economy is ready and it’s good for the economy to start to see rates rising,” said Ms Baker, who also acknowledged the bank would benefit from higher interest rates.

Ms Baker said customers who took out loans with the bank were assessed for how they would deal with higher rates, including their ability to withstand 3 percentage points of hikes, or a minimum or “floor” rate of 5.25 per cent.

“We stress test any loans that we have in the book when someone comes to borrow from us. There’s a floor and a buffer,” she said. “Interest rates would have to increase pretty substantially to even hit those floors and buffers.”

Banks’ profits have been crunched by record low interest rates, and investors are keenly awaiting any increase in borrowing costs, which they believe would reverse some of this pressure.

Bendigo’s result showed its net interest margin contracted by 14 basis points compared to the June half, to 2.09 per cent. Margins, which compare funding costs with what banks charge for loans, have been squeezed because of stiff competition for loans, and because a growing portion of banks’ deposits cannot be cut any lower as they are at virtually zero.

Bendigo’s cash earnings profits were up 18.7 per cent to $260.7 million, helped by an expansion in its market share and a significant cut to its charge for provisions for bad debts.

However, the lender said it expected revenue would be lower in the second half due to the squeeze on margins and because the latest half received a one-off benefit in the form of a payment from Cuscal, in which Bendigo is a shareholder.