Matt Comyn, the CEO of ASB's parent Commonwealth Bank of Australia (CBA), says pricing conduct in the New Zealand home loan market is "difficult to reconcile" and offers "unsustainable returns."
Speaking to analysts and investors after the recent release of CBA's June-year financial results, both Comyn, and CBA's Chief Financial Officer Alan Docherty, highlighted what they described as intense competition in the NZ mortgage market.
"The mortgage market in New Zealand is even more challenged [than Australia], where pricing conduct is difficult to reconcile. We've pulled back on volume growth in New Zealand given the unsustainable returns, with growth in the second-half [year] well below system [overall market growth]," Comyn said.
Docherty said ASB's margin on new home loans is currently less than half of what CBA gets in Australia, "and significantly below the cost of capital." He said "very deliberate targeted action" on volume growth and interest rate trade-offs was taken in NZ. This had helped slow the level of margin contraction ASB would've experienced if it had continued growing housing lending at or above system.
"As a result we have chosen to grow well below system in New Zealand, and have limited the impact to one basis point of group margin decline over the most recent six month period [the six months to June 30]," said Docherty.
ASB is NZ's second biggest mortgage lender. As of June 30, its residential mortgages stood at $75.652 billion. That's 69% of the bank's $109.045 billion total gross lending.
ASB's total residential mortgages grew $2.028 billion during the June 2023 year. Growth fell from 3% in the first-half of ASB's financial year, to just 1% in the second-half. CBA put ASB's home loans market share at 21.5% at June 30, down from 21.6% a year earlier.
According to Reserve Bank of New Zealand (RBNZ) data, total housing lending grew 3.1% in the June year.
Whilst most NZ home loans are on fixed-term interest rates, the majority in Australia are on variable, or floating, rates. As of June 30, 72% of CBA's home loan portfolio was on variable rates. RBNZ data shows almost 90% of NZ home lending was on fixed-term rates as of June 30.
'That doesn't seem sustainable'
Comyn said a two-year fixed mortgage from ASB had a customer interest rate of about 6.79%, with the two-year swap rate at about 5.50%. (It was 5.65% at the time of writing).
"The extra part you need is to calculate [what] the weighted market curve would be for five years. If you guessed that was a bit more than 100 basis points you're pretty close. You can do the maths when you unpack that and what that margin might be. And that doesn't seem sustainable," said Comyn.
He added that, unlike in Australia, CBA hadn't seen any weakening of competitive intensity in NZ in the second-half versus the first-half.
The Commerce Commission's market study into retail banking competition is focusing on deposit accounts and home loans. Asked about the deposit market in NZ, Comyn said it was competitive but not to the level of the mortgage market.
ASB's key financial metrics show it's a very profitable bank. In last week's June-year financial results, ASB posted record annual net profit after tax of $1.559 billion, a 6% increase. Its net interest margin rose 22 basis points to 2.44%. The bank's return on equity rose 20 basis points to 15%, and it paid $700 million of annual dividends, down from $975 million last year.
ASB's home loans at least 90 days past due rose to 0.34% at June 30 from 0.22% at December 31, 2022. CBA said at a group level home loans at least 90 days past due were 0.47%. This was a four basis points increase on the prior half, mainly driven by ASB increases reflecting cost of living pressures, the bank said. CBA also noted group gross impaired assets rose A$300 million to A$3.3 billion, attributing this to "higher corporate impaired assets and increased restructures within the New Zealand home lending portfolio."
Meanwhile, ASB said it had $11.143 billion of total capital at June 30, giving it $5.480 billion of capital in excess of its minimum requirement.
ASB's financial performance did, however, deteriorate in the second-half versus the first half-year. June-half cash profit fell 11% to $728 million from $822 million in the December-half. And June-half net interest margin fell 16 basis points to 2.36% from 2.52% in the first-half, although 2.36% is still a strong net interest margin.
ASB comprises just under 10% of CBA's total group lending.
'It'll be interesting to see how that will change'
Comyn said ASB had "sunk well below system" growth and was trying to maintain discipline.
"There's also a point where you need to defend, it's a low growth environment. I think that's clearly been an area of focus for the team and we're seeing further trends with a similar deterioration in New Zealand. So it'll be interesting to see how that will change in FY24 [ the bank's 2024 financial year]."
"[The] level of competitive intensity, and I think lack of sustainability on some of the lending margins particularly in home lending, I do think are difficult to reconcile," said Comyn.
CBA's June-year cash net profit after tax rose 6% to A$10.164 billion. Its net interest margin increased 17 basis points to 2.07%, and annual dividends increased 17% to A$4.50 per share.
CBA also plans a new A$1 billion on-market share buyback. In February CBA said its total announced and completed capital return to shareholders over the past two years was almost A$22 billion via dividends and share buybacks.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
68 Comments
Yeah, no need to have DGM Death Cult leaders, like High Priest Nguturoa or Disciple Hawkes Bay, consult the scrolls to know the answer - rates higher for longer.
Another important factor is tightening credit standards. We are drifting into a world where rates matter a bit less as they only want to lend to the rich anyway.
A precursor for more interest rates increases this year. We are a very small country and unless they can make a huge profit out of us, no one will bother. So yeah we are being exploited and exploitation will continue.
Sheeple have no control on their own country, we are at the mercy of big organisations. We have nothing of our own to be proud of. Even our own Fonterra sells us our own milk at a higher price than they sell it to the world.
God save NZ
It is no accident that this PR piece by the ASB/CBA follows shortly after the opening of the Commerce Commission's preliminary issues paper for its banking market study,which expressed a primary interest as being in the "dynamic between the interest rates charged for lending and interest rates paid for deposits."
It is also a means by which one of the largest members of NZ's banking oligopoly communicates with the other members to coordinate their action. In this case, the message is tighten-up on lending so that the country appreciates its big Aussie banks.
Looks like that's where they're making money, less competitive for a reason... If margins aren't good on swaps where else do you get the funding...
Let’s take a quick look at how it works — starting with fixed-rate mortgages.
Through the first half of 2021, the 2-year fixed home loan rate was 2.5%, while the 2-year wholesale interest rate was 0.1%. That’s a margin of 2.4%.
Right now, the respective rates are 6.8% (home loan) and 5.5% (wholesale). That’s a margin of 1.3% — so, about 1.1% less than at the start of 2021.
That’s got to hurt, right? Not exactly.
Because, at the same time, the bank margin on deposits has skyrocketed.
On funds held in Kiwi transaction accounts — about $40 billion — the bank margin has lifted by roughly 5.5%. On the $75 billion Kiwi have stashed in savings accounts, it’s grown by about 2%. And there’s been margin expansion in the $115 billion bank term deposit portfolios, too.
All up, that expansion in deposit interest margins (which are gargantuan right now, by the way) is worth close to $5 billion, much of which has gone straight to bank profits.
So yes, home loan margins have shrunk — perhaps some small consolation for Kiwi mortgage borrowers — but the banks are more than making up for it in the deposit space.
https://www.squirrel.co.nz/blogs/housing-market/aussie-bankers-should-b…
Squirrel Mortgages : Written by John Bolton, Oct 17 2022
For a long while now we’ve been saying peak mortgage rates will be between 5.50% and 6.00%, and I’ve yet to see anything to change my mind on that.
As inflation gets under control, expect to see interest rates fall, with mortgage rates coming back to around 4.50%.
Who will be correct, John Bolton or The Prophet ?
10% Interest Rates This Year, Guaranteed !
The Prophet can Not be Shut Down.
How are your Famous Four Accounts going Tim ?
I see you also joined the Baptists . Good Start I Say. Were you and Ashley at The Church this morning ?
Preaching about 10% Tithing ? See we do both have something in common. It's that number 10.
....
[ This account has been blocked for the excessive boorish style of commenting. Ed ]
ASB is NZ's second biggest mortgage lender. As of June 30, its residential mortgages stood at $75.652 billion. That's 69% of the bank's $109.045 billion total gross lending. Ridiculous concentration risk.
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 61.56% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households, at capital risk weights around 35%.
"Ridiculous concentration risk." Isn't that roughly the same for the other major NZ banks? My concern is RBNZ is asleep at the wheel and we won't know until there is an OBR event about which if known in advance by RBNZ will not be made public for fear of a massive bank run.
An additional concern is a commentator a few days ago said that any mortgage in arrears that the bank had come to an arrangement with about a re-scheduling payments is not shown up as an arrear mortgage. I find this astonishing if true. The banks could be hiding a few billion this way hoping on a wing and a prayer that the mortgagee will come up with the payments.
An extreme example of arrears.
https://www.newshub.co.nz/home/money/2023/07/auckland-woman-s-warning-t…
A key point summary of the above article
She split from her partner in 2018 and took over the mortgage.
soon fell into arrears and Westpac shifted her onto a floating interest rate of 8.64 percent - more than double what she started on.
she was in and out of hospital after a serious leg injury left her unable to work, and now relying on Work and Income.
Janna has lived in the property for more than 15 years
But the bank said Janna "has not made any repayments for over two and a half years,
resulting in substantial arrears" and say they "provided her with a long period of time to sell the house herself, which she had agreed to do, but not completed."
Mortgagee sales right now are nowhere near the heights of the Global Financial Crisis when they peaked at 772 in the third quarter of 2009.
Still as relevant today as ever. Most likely always will be too.
There is some good commentary on this by David Cunningham.
Banks have record net interest margin at the moment. That combined with low growth will make it hard to deliver on their insatiable appetite for profit growth.
Give back the money or pay the principal , stop stealing physical effort converted onto currency or people will loose trust and leaves nz for ever and it will become trend.
This is an unattractive place away from main land with wet climate with no export other than milk and farming. Trust was the reason why ppl came here, but no body will forgive exploitation.
People can’t even eat food properly now. News will spread real fast in this era. Stop robbing hardworking work force and nobody have the right to seize money if u call yourself a non profit organisation.
people is more important, without people no point in a land mass or calling it’s economy growth or even with a name. Take care of people who are building it as a country. People are above country, idea of country is for the people who live on a land mass
This article is as much about a contracting market as it is about profit, and interest rate margin. If CBA see limited demand here, they will focus on reducing cost and maximizing margin, (on reduced volumes) and focus om operating costs. Redundancies will rise, and there will be more functions moved offshore to Indonesia.
Employment in the FIRE sector (finance, banking, insurance, real estate) is already tightening.
Take a look at who is around the bottom of the Industry trends graph at the end of this interest.co.nz article:
Job adverts fall for fourth consecutive month - down 25% on last year | interest.co.nz
"ASB comprises just under 10% of CBA's total group lending"
"ASB posted record annual net profit after tax of $1.559 billion" (A1.44B)
"CBA's June-year cash net profit after tax rose 6% to A$10.164 billion"
So ASB is returning over 14% of the profit on less than 10% of the lending.... must be hard in the banking industry
The answer is extremely simple. Banks don't need to earn such large net interest margins on their home lending portfolio because they are being paid a higher OCR rate on their reserves held at RBNZ.
Of course Mr. Comyn knew this he just wanted to try to persuade you, the public and regulators not to look at the lack of competition in the sector. This is the time banks take big profits...I should know, I'm a shareholder in a couple of them. You don't become a bank CEO without developing an art for telling half truths and using misdirection to manipulate the public, that's why they're paid the big bucks!
And I'll be making it even harder for ASB ... All my mortgages and business is leaving them. (I'll keep the transaction accounts so they can see the rent payments entering and immediately exiting to other lenders). But why am I doing this?
1. Their service is atrocious. (Web site malfunctions when you try to contact them. Massive wait times via phone. Misinformation. Out right misdirection. Minimal information. Claim not to provide 'financial advice' - but they do - when it benefits them. I could go on ....)
2. Their mortgage lending rates are uncompetitive.
3. Their deposit rates are uncompetitive.
4. Their treatment of this customer has been rude, arrogant and outright oppressive. Not so much the people at the coal face. But as you move up the hierarchy the distain for the customer becomes palpable.
5. Every decision they make is a 'commercial decision' so they are not constrained by the CCFA in any shape or form ... according to them. Oddly, my new lenders, when presented with the same facts, have a completely different view. Odd that.
One of my first business mentors said, "don't get mad, get even".
Bye, bye, ASB. I hope my new lenders - who seem good now - stay good. Time will tell.
Bring back Sir Ralph? Or maybe not ...
On another note ....
Totally agree with the poster above that suggests the CEO of ASB's Aussie parent bank CBA is simply laying out the nonsensical argument that NZ's banking oligarchy will try to sell to the Commerce Commission. It is so obvious and so monopolistic that only a National Party government would swallow it. And swallow it they will. They owe John Key (now with ANZ) that much ... and probably more.
No problems with ASB here, there Website is great. You cannot expect to get an actual person on the phone with anyone quickly nowadays, banks, telecoms companies you name it and chances are you are not speaking to someone in New Zealand either. I do everything I need to do with them online. Their TD rates are fine, sometimes a bit of lag but pretty much the same as everyone else. I'm not switching large sums of money about for a 0.05% rates difference.
"I'm not switching large sums of money about for a 0.05% rates difference."
What will you switch for? 0.25%? Might I suggest shopping around some more. 0.25% is actually a range below what I've got when shopping around. And on "large sums of money" that starts to become significant. Most banking providers offer cash-backs which more than fund the usual legal fees associated with switching mortgages.
Interesting you mention "telecoms companies". I've just switched from paying $85 a month to $72 a month (incidentally, for double the bandwidth which I'll probably not use). Why? Because the incumbent's service levels were atrocious and it took days to get anything looked at, addressed or fixed, and the incumbent was price gouging existing customers to buy new ones. The new provider got my business because they engaged via voice and email, and answered every question within 20 minutes or immediately. When the 12 month contract completes - I'll shop around again as I expect prices to fall further.
Lazy consumers are making for very lazy and uncompetitive businesses in NZ. Time for collective action.
A lot of uninformed comments here...swap rate is simply a mechanism to change the interest rate repricing timeline, it is not a funding mechanism. If cost of funds is 100bp over swap then that is the additional cost to add on to fund the asset (mortgage). Banks do not "punt" their Balance Sheet long or short depending on their view of where interest rates will go... they hedge using swaps. That is how that can maintain a stable margin. If banks don't maintain a margin they go under... Do you want to go back to the good old bartering days of the middle ages?
re ... "Do you want to go back to the good old bartering days of the middle ages?"
Given the power and cleverness that modern I.T. systems can deliver - I'd be completely okay with this. What did we do before TradeMe? Can anyone remember?
I'd expect the vast majority of "banking" could be taken over by non-A.I. rule based systems right now. Resulting in a massive cost saving for lenders and borrowers alike. The banking industry is well aware of this. They are terrified. Good job too. They should be terrified. The writing is on the wall.
Is it possible to take comments seriously from a guy who's wage is 111x the average wage? (now over $10,000,000 AUD). And taking a $3,000,000 pay rise in the past year....
To justify this wage, does he work 111 times harder than the average worker, and is 111 times as productive as the average worker? If he does/is, then either he is superhuman or the average staff shouldn't bother showing up to work as their efforts aren't necessary or worthwhile.
https://www.dailymail.co.uk/news/article-12387619/Commonwealth-Bank-CEO…
Perhaps if he (and the rest of his executives) took a pay cut, they could reduce their margins even more, and pay more in returns to savers and allow debt holders to have lower mortgage rates.
He is an example of why the current form of capitalism is completely broken, lacks principle/s and needs massive reform.
Executive pay should be capped to 3-4x the firms average wage (especially when they are so closely regulated by the state - and bailed out by the state when the going gets tough). Why? Because I have no idea how anyone can be 10 times or 20 x (or even 111 times) as productive as the staff of the firm. That is impossible (unless you hire completely incompetent staff that actually all need to be fired/replaced). Taking a wage 111 times the average worker just shows that the firm (banks in general) are ripping off the customer base and paying completely unjustifiable wages to the executives (it is a rort).
Don't get me wrong, I'm a believer in free market capitalism....but what we see with the likes of our big banks is crony capitalism at its worst. It won't be remembered fondly in the future. He is getting paid a large amount of money to orchestrate financial and society instability in our economies by pumping up a dangerous residential property bubble in Australasia. And the more of the problem he makes, the more he gets financially rewarded - which is a completely crazy concept, when in the end the tax payer will have to bail his company out, for the foolishness that he has been financially rewarded for creating in the first place.
Sadly, the logic goes that a "good" CEO only needs to make his employees 1% more productive to justify their massive 111 times the salary of their average employee. (In banking, and other I.T. dependent businesses, I've seen I.T. architects delivery this and yet the CEO gets the credit even though they had no idea what the I.T. architect actually did, nor did the other "C level" officers.)
Here's the issue we face and why the middleclass are getting demolished at the expense of the very few at the top:
"In 2021, the ratio of CEO-to-typical-worker compensation was 399-to-1 under the realized measure of CEO pay; that is up from 366-to-1 in 2020 and a big increase from 20-to-1 in 1965 and 59-to-1 in 1989. CEOs are even making a lot more than other very high earners (wage earners in the top 0.1%)—almost seven times as much. From 1978 to 2021, CEO pay based on realized compensation grew by 1,460%, far outstripping S&P stock market growth (1,063%) and top 0.1% earnings growth (which was 385% between 1978 and 2020, according to the latest data available). In contrast, compensation of the typical worker grew by just 18.1% from 1978 to 2021"
Is this price fixing? "We've pulled back on volume growth in New Zealand given the unsustainable returns, with growth in the second-half [year] well below system [overall market growth]"
Its getting pretty close IMO: "Hey competitors, we are not going to compete at current prices, feel free to raise them a bit"
Why would Australian borrowers choose floating over fixed? Are the rates that much more attractive?
Could CBA be funding their higher floating rate loans to Australians using lower rate fixed swaps?
How much of the $22 billion returned to shareholders over the last 2 years went to NZ shareholders? I'm guessing that the percentage would be a lot less than how much of CBA's profit came from NZ.
Explains why ASB is the least competitive player in the market - they literally turn away perfectly good business simply because they want to show these 'top brass' their margins are getting better.
NIM's have increased substantially over the past 5 years and yet it's still never enough. $10.4M in remuneration to Matt in FY23 and still unhappy.
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