BNK Bank margins surge as new lending strategy kicks in

BNK Banking Corporation reported a 32% rise in net interest margins compared to the same quarter last year.

BNK Banking Corporation (ASX: BBC) has delivered some solid key metrics in a first quarter update that shows its net interest margin hiking by 32 per cent to 1.83 per cent compared to the first three months of last year.

The improvement in operating margins was primarily driven by a 273 per cent surge in higher-margin loan settlements compared to the previous corresponding quarter last year, with residential and commercial completions hitting $56 million during this year’s first quarter alone.

The bank’s commercial book has now surpassed $160 million, reflecting a deliberate shift toward more profitable lending as BNK continues to reshape its balance sheet.

Higher-margin residential and commercial loans now make up more than a third of BNK’s total loan book, which itself has grown 4.2 per cent to $941 million in the three months to September.

The Perth-headquartered bank delivered an unaudited underlying profit after tax of $302,000 for the September quarter.

While it was lower than the same period last year, the company says the key story lies in the significant expansion in its lending margins, highlighting a clear trend of improving profitability across its core lending divisions.

We’ve made good progress across margin improvement, profitability, and portfolio optimisation. Our approach to optimising portfolio composition has proven effective and we remain focused on controlling our cost of funds and operating expenses.

BNK Banking Corporation CEO Allan Savins

Savins pointed to the company’s expansion into senior secured structured credit deals as a major milestone. Known as senior-secured “warehouse facilities”, the wholesale lending product allows BNK to join forces with heavyweight financiers to bankroll Australia’s thriving non-bank lending sector.

The model acts like a funding conveyor belt. BNK and its partners supply the cash, which the non-banks then on-lend to their customers.

The bulk of the money comes from big-name investment banks, with BNK adding a strategic layer of its own capital. It is then used to finance the non-bank who takes on the riskiest position and it is the first to wear any losses in the event of default.

BNK closed two warehouse facilities transactions during the quarter, including its first in July and a second at the start of October. The move to embrace the structured credit sector has allowed the bank to diversify its credit exposure and scale high yielding investment opportunities, with low risk exposure.

BNK also offloaded a large chunk of its non-core legacy Adelaide Bank loan portfolio to Bendigo Bank at the start of the month. The sale, worth $2.75 million, represents roughly 40 per cent of that legacy portfolio. The company says it will streamline operations by freeing up staff and systems capacity.

The deal will result in a modest $88,000 one-off statutory loss in the December quarter however it is expected to sharpen BNK’s focus on its growth engines.

Total deposits eased slightly to $994 million, giving a deposit-to-loan ratio of 106 per cent and reinforcing BNK’s strong liquidity footing. Capital adequacy remained robust at 28.6 per cent, only marginally down from June’s 29 per cent, while net tangible assets held steady at $1.00 per share.

Loan arrears remained within expectations, with 90-day residential arrears improving to 1.04 per cent, with Savins saying the Reserve Bank’s August rate cut had started to ease pressure on BNK’s customers.

Operating costs rose 13 per cent from the prior corresponding period as BNK continued to invest in people and technology. Management said those costs were strategic, designed to build capability and support the bank’s transition into higher-margin, scalable lending.

BNK’s September quarter appears to paint the picture of a small bank thinking big and one that’s steadily swapping volume for value. With higher-yielding loans climbing, structured credit deals bedding down and a clean, well-capitalised balance sheet behind it, the company looks well placed to keep widening its margins.

If the early numbers are any guide, BNK’s measured march into the high-return lending arena is only just getting started.

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