Adelaide Banks [ADB] Best of the Regional Banks

Adelaide Bank (ADB) shares continued to trend higher yesterday following the release of an Update Statement, reiterating the banks medium term guidance of double-digit earnings per share (EPS) growth. Macquarie Research Equities (MRE) consider ADB to be the best of the regional banks, offering the highest growth EPS outlook of the regional banks, with the lowest PE (14.4x). MRE currently hold an Outperform recommendation on ADB.

Key points delivered through the Update Statement were as follows:

(1) Double-digit medium term guidance reiterated. ADB management reaffirmed its target of 10% plus EPS growth (over the next three years), a reduction in its cost-to-income ratio to 46% (from 53.6% in 2005), and maintenance of credit quality in the “top quartile of Australian banks”.

(2) Strong lending growth continues. At the end of November, ADB’s residential loan book closed at just over $15.2bn, which is up 5% on June and ahead of market growth. ADB’s margin lending book reached $2.9bn, up nearly 9%, and business lending grew 11% to $1.4bn. Strong expansion of ADB’s Portfolio Funding, started just two years ago, continued with balances growing to almost $600m (up 95% from a very low base).

(3) Credit quality deteriorates slightly but remains in line. ADB has witnessed an increase in non-accrual loans (to 8bps of total loans, up 2bps) and residential loans past due 90+ days (up 11bps to 77bps of the non-securitised residential portfolio). Management highlighted these levels are in line with historical levels and as such they “don’t see any cause for particular concern”.

MRE have a share price target of $13.17, and believe that above system credit growth, assisted by expansion into the national broker channel will continue into 2006 and 2007.

ADB continues to outpace system growth in mortgages and looks set to deliver double-digit EPS growth in FY06 and FY07. Despite offering the best EPS outlook of the regionals, ADB is trading at the
lowest PE (14.4x versus BEN’s 15.8x and BOQ’s 17.5x). MRE maintain an outperform recommendation and suggest a switch out of Bank of Queensland (BOQ) shares into ADB.

http://www.macquarie.com.au/