February 10, 2019 / 10:25 PM / 6 days ago

UPDATE 2-Inquiry fails to create level playing field for smaller banks-Australia's Bendigo

* Sector inquiry does little to reduce power of large banks -CEO

* Shares fall sharply following 2 pct drop in cash earnings

* “Soft” result, says Goldman Sachs (Recasts; Adds quotes from CEO and analyst)

By Paulina Duran

SYDNEY, Feb 11 (Reuters) - A powerful inquiry into misconduct by Australia’s finance sector failed to address concerns that competition was skewed in favour of big lenders, mid-sized Bendigo and Adelaide Bank Ltd said on Monday, as it posted a decline in half-year profit.

Shares in Bendigo fell almost 6 percent after the lender posted a 2 percent decline in first-half cash earnings, hurt by lower lending volumes and a dent in margins because of higher funding costs in term deposits and wholesale markets.

Chief Executive Marnie Baker told analysts in a call that it was hard to compete on costs with Australia’s four largest banks given they enjoyed cheaper funding rates.

She voiced disappointment that the year-long inquiry into banking misconduct, called the Royal Commission, had done nothing to reduce the power of the large banks.

“Whilst the Royal Commission final report makes strong industry-wide recommendations to improve customer outcomes, little goes to the issues of competition and a level playing field, something many inquiries cite as being essential,” she said.

The four biggest Australian banks are Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank .

Bendigo’s first-half cash earnings, which exclude one-off gains or losses - fell to A$219.8 million ($155.8 million) from A$225.3 million a year ago. Two analysts had on average forecast a profit of A$220.3 million for the period, according to Refinitiv Eikon data.

The bank’s shares fell the most in a day since mid-2016 following its profit announcement, and recovered slightly to be 5.6 percent lower in the afternoon. The broader market was down 0.3 percent.

“The composition of the result was soft,” said Goldman Sachs, in a note to clients. Total lending was down 1 percent from the previous half, driven by a sharp cut to its exposure to the commercial property sector.

Expenses grew 3.9 percent, driven by higher legal and product delivery costs. On a statutory basis, net profit fell more than 12 percent to A$203.2 million.

Half-year net interest margin (NIM) before revenue share arrangements, a key gauge of profitability that measures the difference between interest costs and interest earned, contracted 1 basis point to 2.35 percent.

Bendigo attributed the drop in NIM to higher funding costs rising out of increased bank bill swap rates, which offset the benefit from the bank’s move to increase interest rates last year.

The bank declared an interim dividend of 35 Australian cents per share, the same as the previous corresponding period. ($1 = 1.4104 Australian dollars) (Reporting by Paulina Duran in Sydney, and Aby Jose Koilparambil in Bengaluru; Editing by Peter Cooney and Muralikumar Anantharaman)

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