👉 Background: Bendigo & Adelaide Bank is the sixth biggest bank in Australia based on market value. Bendigo Bank has been around since 1858 and specialised in being the biggest ‘community’ bank as it calls itself. It merged with Adelaide Bank in 2007 and became Bendigo & Adelaide Bank. It also is the owner of Up, which it fully acquired in 2021.

👉 What happened: Bendigo & Adelaide Bank has announced that its deposits grew by over 5% in the half and its residential lending increased over 5% as well. But, just before you get too excited - Bendigo & Adelaide Bank saw its net interest margin (NIM) drop by 0.06%. And this caused investors to panic.

👉 What else: The drop in NIM was caused by receiving too much demand for loans, from brokers in particular. This meant Bendigo & Adelaide Bank needed to use expensive wholesale funding to service these customers. But, investors were not happy with this (and the lack of previous disclosure). Next minute: its share price dropped more than 15%.

What's the key learning?

💡Too much demand for loans is a bad thing when you don’t have enough cheap money.

💡Banks typically fund their home loans in two ways:

• Option 1: Banks fund home lending through deposits from their retail customers. For example, you offer 4% interest on deposits and lend it to borrowers at 6.5%.
• Option 2: Banks fund their home lending through wholesale funding - that’s money borrowed from big investors, super funds, and other financial institutions, which is often more expense.
  

💡For Bendigo, this became a problem because loan demand grew beyond what its deposits could support. This meant the bank had to rely more on wholesale funding which increased its costs and squeezed its margins. And next minute, its cash profits fell 10% lower than the previous half. Ouch!