Westpac New Zealand's interim profit is down 5% with the bank's net interest margin falling eight basis points.
Westpac NZ's net profit after tax for the six months to March 31 fell $26 million, or 5%, to $497 million from $523 million in the same period of the previous financial year.
Home lending grew 7% to $62.2 billion, with net loans up 4% to $94 billion. Westpac NZ's loan provision ratio dropped to 0.4% from 0.5%. Deposits rose 6% to $78.4 billion.
CEO Catherine McGrath says the Westpac Life sale added a one-off gain of $126 million to the financial result, but the significant write-back in impairments that boosted the result in the March 2021 half-year wasn't repeated. Cash earnings rose 9% to $635 million.
"House prices have started to come off their peak and our economists expect them to fall further before flattening. Generally speaking, this trend shouldn't worry recent home buyers who are in it for the long haul, and will give breathing space to first home buyers who are exploring their options," McGrath says.
On Friday Westpac NZ's economists predicted house prices would fall 15% over 2022 and 2023.
"Six months ago the housing market was still reaching its peak, the Omicron variant hadn't emerged and there was peace in Europe. We've seen a real shift in trends since then, including significant growth in inflation," McGrath says.
Half-year net operating income rose 12% to $1.389 billion, with net interest income up 3% to $1.102 billion. Operating expenses were up 5% to $564 million. The bank booked an impairment benefit, or write-back, of $10 million versus a benefit of $99 million in the March 2021 half-year.
Westpac NZ said its net interest margin fell eight basis points to 1.98%. However, the bank's cost to income ratio fell 245 basis points to 40.60%.
Westpac NZ's KiwiSaver funds under management rose 8% year-on-year to $9.3 billion, helped by the transfer of 37,000 new members to the bank's default balanced fund in December and January after Westpac NZ was reappointed as a default provider.
Running foul of the Reserve Bank
McGrath took the helm at Westpac NZ last November after returning to NZ from Britain's Barclays Group where she was most recently Head of Channels. This came after a bad period for the bank.
In March last year Westpac NZ was forced to hold extra liquid assets after the Reserve Bank aired "ongoing compliance issues" involving "material failures" in the way the bank reported key liquidity details to its regulator. This means Westpac NZ has a Reserve Bank enforced overlay in place requiring it to discount its liquid assets by about 14%, which at March 31 was $3.1 billion.
The Reserve Bank also ordered two independent reports. The first assessed Westpac NZ’s risk governance processes and practices applied by the Westpac NZ Board and executive management, and the second aims to provide assurance that the actions Westpac NZ takes to improve the management of liquidity risks, and the culture surrounding it, are effective. The second report, being done by Deloitte, is due by May 13. Separately Deloitte is helping Westpac NZ with IT issues.
"We have put a lot of focus and resources into risk, technology and regulatory compliance. We commissioned independent reviews of our liquidity risk management and risk governance, as required by the Reserve Bank and are progressing well on fixing issues in these areas," McGrath says.
"At the same time we have a number of new faces on our refreshed board and executive, and it's exciting gaining those new perspectives as we look to the future."
Westpac NZ attributes its increase in half-year expenses primarily to increased investment in technology resilience and data capability along with risk and compliance projects. It also added 299 staff over the year.
Westpac Group's net interest margin tumbles
Westpac NZ's parent, the Westpac Banking Group, posted a 12% drop in interim cash earnings to A$3.095 billion. Its net interest margin tumbled 24 basis points to 1.85%, and its return on equity fell 146 basis points to 8.73%.
Westpac Banking Corporation is paying an A61 cents per share fully franked interim divided. That's up 3c and is equivalent to 69.01% of cash earnings. Meanwhile, the group's Common Equity Tier 1 capital ratio weighed in at 11.3%, down 99 basis points from September 30 last year.
The links below are to the various Westpac announcements.
72 Comments
Falls in house prices "shouldn't worry recent home buyers who are in it for the long haul".
Agreed; short term falls (even depressed for a number of years) in house prices are not the issue even if the short term there is some negative equity.
The more significant issue for recent FHB is increasing mortgage rates. The stress test was likely calculated at just over 6% but that will involve some belt tightening. . . however past experience shows that over time wage increases negates the full impact of higher rates.
The vast majority of recent FHB will work their way through this and while there will be some pain at least they will be advantaged paying off their mortgage and not the landlord's. They will also be advantaged of not being concerned with increases in rents, and the security of not being evicted as the landlord decides to sell the property.
I'm interested to know how many recent FHB bought a place for the long haul, versus how many bought just to 'get on the ladder', hoping to upgrade to a place that will be suitable in three or five years. That was the prevailing advice from 'everyone and their dog' last year, wasn't it? "Just buy any crappy old place now for an amount that will make your jaw drop and your eyes water, then worry about what you actually need once you upgrade in a few years.."
For example, FHBs might have bought a 2-bedroom with a primary school-aged daughter and son sharing - for now. Or very far away from their places of work - which would be a double-whammy considering the recent petrol prices. Or far away from a college, hoping to upgrade before the family get to that point.
Haha do you see the other side of the coin there Carlos? For his/her house price to triple in price in such a short time, some other sucker is carrying the debt that has turned into his/her equity/profit. So his/her success is equally matched by some other housing market participants pain/financial loss.
Unless were are dealing with the perfect ponzi where everyone wins/forever?
I also see it this way. I have friends and younger siblings struggling to buy their first homes. Could we have sold for less? Of course. But we listed with a price (BEO) and took the first offer we received which was from FHB exactly for BEO.
Why would I then discount their offer? Hey thanks for your generous offer, but my wife and I have decided we'd rather carry an extra $30k - $50k in debt so how would you like a discount? Maybe if I could ask my vendor to drop their price by $30k - $50k to compensate?
Rick
Quite a number on this site have posted to be on pretty good salaries of $100k plus.
As you seem to want to take a moral high ground: if you are on $100k, have you ever given consideration to many workers, working more than 40 hours a week, supporting families on $50,000, and the negative impacts on inequality and poverty?
Just looking at the issue more broadly as maybe you are possibly being a little egocentric?
PTCATP
P8
There are few peps that are not in the "ladder" that have a good salary, or very good (I am, at least)
There also many peps that even being very well off still feel like the system is broken (I am, at least)
This is the second time I see that you dare somebody to act in that sense from their pocket, while instead what we want is more systemic justice.
I can't stand the fact that most of the people (in the planet, not just in nz) are living in conditions that I would think unbearable.
I don't feel good every day because I know I am not helping, or at least not helping enough.
I hope in a better world. And I know that is possible.
What pushes my buttons is seeing, reading, hearing that some of you guys actually think that 12x-average-salary-house-price is not an outrage.
You made money, good for you.
Don't brag, not because you made money this way. Is legal, is just (maybe), but that needs to end, for the good of everybody else
Yes, I have actually. I support less tax for them and more tax on unearned income.
It would take pretty shoddy character to want to enrich oneself by shovelling ever more massive costs and debt on those who follow or have less and live off their earnings instead of one one's own two feet.
at least they will be advantaged paying off their mortgage and not the landlord's
Incorrect!
Do the maths before you make statements like that. Let's take a small loan of 800k (ie below average house in Auckland). At 6% interest rate (we'll most likely get there within a year), you'll be paying $900+ per week interest in the first few years!
In my area, a $1M house would cost about $600-700 per week to rent. So that lucky FHB who thinks he's paying off their own mortgage and not the landlord's is actually throwing out an extra $200 per week extra to enjoy that intrinsic value™. Add insurance, rates, maintenance and suddenly it's more like $300 per week.
Not to mention the tight spot many people will be in this year when their mortgage payments go up by 50% or more. Being low on money for months and months can be very stressful and unhealthy.
What you're not factoring in is rental increases.
$700 per week, inflated at just 3% p.a. over 30 years = $1,731,745.
$800k mortgage @ 6% over 30 years = $1,725,523
But if wage inflation also tracks at 3% p.a., then you can make increased payments to the mortgage. Whereas rent increases will soak up your wage gains.
Don't be disingenuous. You were calculating the difference between rental going up at 3% PA and made no adjustment for interest rate, rates or insurance.
"$700 per week, inflated at just 3% p.a. over 30 years = $1,731,745.
$800k mortgage @ 6% over 30 years = $1,725,523"
My point is simply that comparison is flawed. You understand a salary increase of 3% for most people would be larger than a 3% increase in rent - unless you assume they spend 100% of their income in rent. A 3% increase in mortgage rates would only require a interest rate increase of 0.18% from 6.00%.
To lay it out, lets say household income of $100k - 3% increase = $3k PA
v 3% increase in Rent = $1092 PA
v 3% increase in interest rate (i.e. +0.18%), rates (c$3k) and insurance (c 1.5k) = $1735 PA. Accept that interest rates may not go up 0.20% every year, as up and down, but certainly rates and insurance will, and in terms of interest rates, they have gone up over 100% since May last year, so that first rollover will be a kicker.
A lot of people spout the 'you're paying someone else's mortgage' but depending on where you live and the price of houses (esp. Auckland), it can make more financial sense to rent. Notwithstanding the non financial benefits of ownership (FYI, yes I own) but there are also non financial cost of ownership (stress and time) as well.
Let's assume a person increases payments by 3% every 2 years (2 year fix/refinance). On $800k, they will shorten the 30 year mortgage to 22 years. Interest of $725k, principle $800k = $1,525,000. $200k less than the renter at $700 per week increases 3% p.a over 30 years. $6.7k per year to spend on rates and insurances to break even. Anything above that can be considered intrinsic value of home ownership.
The 3% increase of loan payments every 2 years is very conservative, if it were a fair comparison I would have increased mortgage payments by the same magnitude as rents as 3% p.a.
Most FHB will not be paying 6% rates. Most FHB will most likely be on fixed 3 to 5 year terms by now. If they were smart enough to get into million dollar homes first up, they are smart enough to see higher rates were coming. Problems with rising rates have been largely kicked down the road, sure its a problem for new FHB now but its not a problem for anyone who is already in the market.
It’s amusing to read comments like “they are smart enough to know rate hikes we’re coming”.
When a lot of these people fixed their mortgages the RBNZ was warning of negative ocr and even as recently as mid last year claiming inflation wasn’t an issue and stimulatory policies would remain in place.
The idea the average person saw this all coming is so laughable
There are very few people that have any interest in this stuff. If they were taking advice from a mortgage broker they might have hedged 1, 2 and 3 years out at a third each. But I'd bet that most went for betting on the 1year rate. Reassured by the agent selling it that low rates will be around forever
Carlos, what about those investors that were "smart enough" to buy a million dollar rental?
Fully 40% of investor loans are on interest only terms.
Just watch the banks pull the emergency handbrake on all interest only lending, and force them all back on to P&I in the name of risk management.
P8 are we talking 10 years of being in negative equity not able to move,lost deposit which took 10 years to save, hopefully no one gets ill or wants children. With rates climbing and inflation will they be able to afford mortgage. P8 you and westpac need to get in real world.
Carlos banging your head against a brick wall could help you. I have brought and sold a number of properties here and abroad unlike you who only just got your mansion in 2 dollar Tauranga and are obviously over exposed.house prices are crashing get over it,you could always rent a room out to help you.
The only "Over Exposed" going on down here is on my front deck as far as the neighbours are concerned. Living mortgage free and money in the bank so I'm in a position where its about as good as it gets. My days of having to rent out the spare room are over, been there done that for 10 years. FYI its 10 dollar Tauranga and happy to be here, no regrets about leaving Auckland it got totally ruined over the years.
Carlos if this is true why do get so upset at the thought of house prices dropping as they obviously are, hopefully the young will be able to buy a property as we were able, yes I agree Tauranga is a nice place had some friends of ours who had a holiday hotel down their around 10 years ago great beach.
The whole of NZ is slowly getting ruined. The days of us pitching the camper on the side of the road up North and looking for a water source are long gone along with just snorkeling for flounder on the incoming tide with just the BBQ fork. Good times that are never to be repeated. Tauranga is a good 10 years behind Auckland, I'm buying a lifestyle and time.
A lifestyle that is deteriorating Carlos. There are far better cities in the north island which have not been spoilt by population increases. I think I would be staying in Auckland and that is saying something. You are rudderless in Tauranga council wise at a time they need a good team dealing with the population growth.
The differential has closed up a little in percetage terms but I think you will find houses down here are way better for the money. There are far more new builds that are actual "Houses" and not some terraced row of boxes all joined together. Hard to do a direct comparison, your like 10 minutes away from the "CBD" in a new house with double glazing on a section size no longer available in Auckland. All things considered the house is probably half the price of an Auckland equivalent.
DTRH
A big assumption there with 10 years negative equity.
No hassle - if you are a FHB, then you wait the ten years or when you reckon the market has bottomed. Others are getting on with life.
Remember a basic premise of investing which applies here. There is no certainty in predicting or timing or future of the market . . . those (the majority on this site) who argued with certainty of a 30 to 50% fall in the market in 2020 saw the opposite happen.
This crash is across everything will take housing a bit longer but anyone can see it is so overvalued the emergency low rates just gave it the final 35% lift too crazy price’s. This is now turning and will probably hit bottom 2 or 3 years time around 60% down from high, and at bottom it will stay for years.
"however past experience shows that over time wage increases negates the full impact of higher rates"
How - interests rates have been falling the last 30 years so what higher rates are you referring to? (honest question).
And if you are referring to the 1970s were house prices 10x incomes back then?
One important thing to keep in mind is that back then the loans were much, much smaller compared to wages. I did the math in 2020 I think, even at the (then) record low rates, one was paying more (a bigger proportion of their income) as repayments then someone in the 80s when rates were record high.
80s: Small loan, very high interest rates
2020: Gigantic loan, tiny interest rates
2022 - ? :Gigantic loan, medium interest rates
Is it still the case that NZ does not have a deposit Guarantee? How worried should cashed up people (waiting for a down turn) be that NZ banks exposed to the housing market could collapse and take their savings with them?
For anyone interested how detached from reality house prices have become across the anglosphere, check out these charts that compare disposable income to house prices....
https://pbs.twimg.com/media/FP09Fo-WQAodb3H?format=png&name=medium
If you think the US housing bubble was a big deal....its just a blip compared to what we've created in Can, Aus and NZ. We're living in denial to just how insane things have become......ultimately it is income that determines asset prices over the long term, and we've been stealing cash flows from the future to fund ever higher asset prices in the present by pushing interest rates to zero. At some point, we're going to have to face the reality that is in front of us..........and when that happens, it will be extremely painful.
Perhaps IO, but the more likely scenario is tolerating inflation - I am waiting for that narrativie to start. Even Mike Riddell just this morning raised the potential for a 4% target.
For an aberage $1m house, the cost of building the dwelling is likely around $500k and that cost is only going up. Yes, the land can drop within reason - but we're not going back to $500k.
It's 2022, there are emoji's of pregnant men with beards - hard times will be cancelled.
"hard times will be cancelled"
Unfortunately that isn't how the world works in the long run TK! Its living in denial. Every time an individual or a nation avoids a painful truth, it becomes weaker in character, not stronger.
It is a sign of decline..........
I remember the Kennedy saying along the lines of 'we do these things, not because they are easy, but because they are hard"........but now we just cancel hard times because hey, who wants to suffer anything for the future collective good?
I'm on the fence, I get your point. But - much of the inflation we have is due to Covid and our energy policy (greenflation). It should pass through in due course.
The housing market is already slowing - do you want to see a recession, businesses fail, unemployment up?
Yes if those are the hard times required to bring about financial and social stability in the long run.
As I say above, avoiding pain is a sign of weakness, not strength.
There are too many people who want the status quo to continue, because they have too much to lose (mostly in asset prices, and some in unprofitable/zombie businesses), but have little consideration to the pain that others are in while we attempt to artificially sustain the unsustainble (which to me is the definition of QE). .
There is already widespread suffering in our society, but some people (mostly relatively wealthy asset owners or business owners) appear to only think the suffering will start if we have a recession! (lol). Not to be rude, but that comes across as bit out of touch with what is really happening out there right now. For those people having nothing to lose, but much to gain if we see significant drops in asset prices as a result of a recession.
I also find the idea that a recession is bad because it will make things worse for the 'have nots' rather odd. In many respects, that smells like the rentier class want to continue the status quo in order to continue the conditions of financial repression that is/have been making them wealthy at the cost of the rent slaves. A recession puts all of that at risk. But I'm sure that isn't you TK!
Sooner or later there's going to be some demand for answers from the group that not only made sacrifices on the way up, but also now face them on the way down. 'The Greater Good' seems to be an awfully flexible concept which is perhaps better paraphrased as 'Can't somebody else do it?'.
Yes those benefitting from the status quo assume that the suffering only starts once it impacts them (during a recession!)...they completely miss the misery that has been going on for years now for those who don't own assets. I.e. those in the bottom half of the k-shaped recovery.....
Westpac better hope recent buyers bought that first home for the long haul, but I seriously doubt that was the case. In fact, correct me if I'm wrong, but if you discussed buying a 30 year forever home straight up you'd be scolded, don't be greedy. Buy a starter home and climb the ladder.
I really really really hate the "just get on the ladder, our first home was shit too" argument coming mostly from people over 50.
First of all, I don't want to get on a ladder. I want the average working couple to be able to afford their own home, preferably before they hit 30.
Then I also want to point out that it's very different to live in a shithole when you're 23, with no kids, working in a junior position, then doing the same when you're 35, potentially with a child or two, with 10 years work experience.
When I was 23 I was happy eating ramen in a cold damp apartment with 2 flatmates, just having started a job, playing video games all night. Your 30s are supposed to be the time to build a family, with a solid financial background. This shouldn't be the privilege of just 20% or so of my generation.
Usually you'd say experience trumps education, but if your experience is riding the waves of capital gains up and up for 30 years, it's hardly useful for the next generation to know about.
Unless you believe the old 'in the long term, prices only ever go up' thing, even if that means house price-to-income goes from 10 to 15 to 50, and each subsequent generation simply takes on more debt.
It's quantifiable that houses in the long term do go up. Very hard to argue with that.
But, timing when you get into a house is also a variable that can have a huge affect on the experience.
With the prices now required, this is exaggerated more and more. The risk of poor timing having really bad outcomes, gets larger and larger.
Financial literacy becomes extremely important for each generation coming through. Unfortunately though, it seems that basic literacy and numeracy for larger percentages of the population is in decline.
Who your parents are is probably now the largest indicator of success for any investment class. It's a tragedy and we will all suffer as a society because of it.
Tax free capital gains on property.....savings treated as income so taxed......
But the only way, in the long run, for house prices to outgrow inflation, is for some type of financial repression where income is taken from one group...and given to another (non home owners, and given to home owners). Otherwise in a closed loop system, how do you price something that is based upon the cash flows of wages/income, but it grows faster than the cash flows that justify its price?
Continuously dropping the discount rate is one method, which we have just done for the last 30-40 years.....now what? Houses are a bit like bonds....if the discount rate ever goes up, the nominal (and real prices) will fall. Look at the likes of the TLT bond fund in the US at present....its getting destroyed. Apparently we're witnessing the biggest destruction of wealth in bonds ever in history so far this year......
" waikatohome"...disagree
There is Only doubling in nominal terms,in your too basic equation, ,however it will not double in purchasing power ,and your equation accounts nothing for tax on your 5%, does it. In reality maybe you might get an average of 3.0 % at best as ocr and yields are going to rise and fall, and its a tax paid 2%, against an accumulated 30 % inflation,for arguments sake,(, if its even under control in 3 years time,) so in fact your money is worth less in 10 years than it is today,even with the best deposit rates you can get and every tax paid dividend ,re-invested at every maturity.
Might be better in Local Dividend stocks. But leaving in the bank, there will not be any doubling of its purchasing power,( real positive returns after tax) in your remaining lifetime.
So people go to property,and that is the choice of most New Zealand amateur investors. The inflation hedge,the higher return ,when interest rates are low.
And most of the moaning appears to be about how hard that is becoming,as tax policy moves against it.
What happened over the last 30 years,is not going to happen again.
You are right, it is too simplistic but so is the view of property investing. If you borrow 450k as a mortgage at 4.5% for 30 years you pay back $820k including interest and fees. This doesn’t include repairs or maintenance. The doubling in value is a headline figure. The trick is to get someone else to pay off the interest only loan as a tenant and then take the tax free gain. This assumes that you have it tenanted and the price does increase. I would say neither scenario is guaranteed over the next 10 years.
Not sure that those consumables live long enough to grow. You can't buy and hoard them as they go off at some stage and are worth nothing
Logically inflation dampens house prices because it eats at discretionary income. People can't afford to borrow and buy.
We've just come through 12 years of no inflation which is where equities thrive from a price perspective. Whether it returns to a mean I have no idea.
Have seen many times that shares are the better bet in the long run for returns. Which is why index funds are so popular.
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