ASB has written home loans at zero margin at times over the past 18 months, according to the bank's CEO Vittoria Shortt.
Speaking to interest.co.nz on Wednesday after ASB posted an 11% drop in interim profit to $749 million from last year's record high $840 million, Shortt said it had been an unusual time.
This saw ASB's total advances to customers contract, dropping $805 million to $107.642 billion at December 31 last year from $108.447 billion at June 30 last year.
Asked to what extent the lending contraction was driven by weak credit demand, ASB’s commercial strategy or competitive dynamics, Shortt said it was very mixed.
"It depends on what sector you're talking about. In the rural sector we were on par with the [overall] sector, and really pleased with the resilience we're seeing with our customers there. We haven't seen a lot of demand from them. Where we have seen demand we've been meeting it," said Shortt.
"Our business sector includes corporate, major property businesses all the way down to the smallest of businesses. Where our growth has been weaker has been in the small end and that is more aligned really to home lending. On the home lending front the competition has just been absolutely intense and we've got to be really careful in those periods that we stay consistent with our credit settings and we have been more selective there."
ASB had "not materially" altered credit settings over recent months, she added.
At $75.103 billion, down $549 million over the six months to December, home loans comprise 70% of ASB's total lending. It's New Zealand's second biggest home lender after ANZ.
Last August Matt Comyn, CEO of ASB's parent Commonwealth Bank of Australia (CBA), complained pricing conduct in the NZ home loan market was "difficult to reconcile" offering "unsustainable returns." And CBA's Chief Financial Officer Alan Docherty said ASB's margin on new home loans was less than half what CBA was getting in Australia, "and significantly below the cost of capital."
Asked about these comments Shortt said it had been "a really challenging" period.
"We saw periods where the margin got to zero on home loans. So that is well below the cost of capital. That has been a very challenging dynamic," Shortt said, adding this was "over the last 18 month period, broadly."
Asked how this had affected ASB's term deposit rate pricing, she noted there was a mix between pricing deposits and offshore funding, with a lot of different factors at play.
"One of the things we've been conscious of is making sure we've passed on benefits of the interest rate cycle to deposit customers. They've had a long time where the interest rates have been so low. For a lot of retirees or pre-retirees they're really dependent on interest income. Deposit marketshare growth has been around 3% [over the half-year]- that's an example of where our pricing reflected growth," said Shortt.
Of home loans, where she says system-wide growth was 3% over the 12 months to December versus ASB's 0.2% growth, Shortt said ASB always wants to grow on average over the long-term.
"If I have a look at our market share over the last five years it has moved about a lot. And there are a lot of things that go into that. The competitive response is a big one."
"You'd have to say that when it's a low growth environment it obviously gets more competitive. You've got a lot of market participants who want the same thing. So everyone's trying to do better," said Shortt.
In its interim results ASB reported a 26 basis points fall in its net interest margin, the difference between what the bank borrows money at through the likes of deposits and what it lends it out at, to 2.21% from 2.47%. Despite the fall, that's still a healthy margin.
Asked whether deposits or mortgages contributed more to the margin drop Shortt said a competitive home loan market, higher funding costs and customers switching to lower margin savings products such as term deposits from lower interest savings accounts, all contributed.
"All three are really important there."
The Commonwealth Bank of Australia-owned ASB doubled interim ordinary dividends to $800 million, up from $400 million in the prior interim period.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
29 Comments
Loans at zero, what's the point
My thoughts exactly. Perhaps all the depositors can chip in and take a haircut on their term deposits to help poor ASB/CBA out.
Or maybe this is just some kind of psyops / propaganda on behalf of their mates at RBNZ. Justifying their FLP.
What she said was, "We saw periods where the margin got to zero on home loans."
She doesn't say how long those periods lasted, nor how many loans, or their value, or what type of loans they were, nor whether they were given to ensure RNBZ capital ratios. Further, if the length of the loan was 20 years plus that's plenty of time to recoup 'selling' costs.
So nah. This is typical Bwanking CEO speak to make you fell sorry for the poor bank that is still making enormous profits.
It could well be to keep property prices up, if house prices fall banks are in a bad position. I also think its a bit of word smithing too, the statement:
ASB has written home loans at zero margin at times over the past 18 months
Is true if they did 2 home loans at zero margin in the past 18 months. Much like advertising, I take any statement from a bank as the worst possible interpretation. I they wanted to give real information she could of said x% of loans where given at zero margin but didn't.
Prince John's bank will make a lot more money if the OCR is raised twice by 0.25% like his economists have said.
NZ Inc. will tank - big time - and the wealthy will pick up the pieces at rock bottom prices. In a few years they'll own an even greater percentage of NZ Inc.
But even if the RBNZ MPC doesn't bow to Prince John's wishes, they'll make a few extra $$ by people fixing longer. A win-win.
There is a reason why the rich are getting richer. Central bank action (in the absence of government action) to control inflation is a massive part of why. Eventually - but no time soon I expect - the voting public will understand this and demand blood. There are very good reasons why the rich hide their wealth around the world through complex ownership structures. Avoiding tax is only a part of it.
LOL. No. That's not how it works.
When you took out the mortgage at 3.19% the bank was borrowing at about 2% less (could have been a lot less depending on the RBNZ's cycle of idiocy). They're still way into the money. And if they borrowed for longer than your mortgage term (they almost certainly did), then when you re-fix at current rates they'll be creaming in even more!.
And depending on when you took out your TDs (assuming that's how you're saving) they were charging 7% or more for mortgages and likely had been for some time.
Don't be fooled that your situation will last for long - or that you'll see it again in your lifetime.
And don't for one moment feel sorry for these banks. They understand time way better than the vast majority of people do.
The sooner one bank (possibly a new one) enters the market with a fully fledged A.I. setup and reduces margins down to 0.3% the better. (Note: This could have been done years ago!)
Sigh. Yes, I'm well aware of all this. All I'm saying is for this tiny, insignificant portion of funds, for this tiny, insignificant portion of time, relating to my specific accounts, I'm getting back more from them on the $1 in a savings account than they're charging me for the $1 on the mortgage. Perhaps a better wording would have been "...I'm above water with them."
The savings are not on TD. Even standard "one withdrawal free per month" bonus savings accounts are paying 5% right now.
I know it's not going to last forever, and may never happen again. I'm also aware they're making bank on the interest I'm paying on my mortgage, and when the term expires in 2-and-a-bit years the rate will likely be much higher. It's going to be a very long time before my savings outweigh my mortgage.
I have never and will never feel any pity - let alone love - for banks. I have spent several decades nurturing relationships best described as "mutually tolerant" with several of them.
But I'm also familiar with the concept of finding small joys in an endless financial morass. Please, just this once, let me have my delusion.
Actually the Banks over the last few years have shifted much of the work to the customers themselves by closing banks and forcing them to use net banking, phone banking, etc. AI may speed up the process, but AI will be more used in the Banks to predict customer behavious, rate movements, investment strategies, etc. That is my thinking.
If I understand you correctly, they are different measures and have no relationship to each other.
Just quietly, I'd be pretty happy with 2% on such huge sums. When the first bank appears using "A.I." throughout their operations, banks expenses will fall dramatically and 0.3% margins will look pretty damn good.
(I put A.I. in inverted commas because the vast majority of what they do at the retail level can already be done by existing technologies. But I thought I'd jump on the fashion bandwagon and call it A.I.)
"At $75.103 billion, down $549 million over the six months to December, home loans comprise 70% of ASB's total lending."
Anyone looking for a snapshot explanation for our falling per capita output, here it is. 70% of lending is tied up in NZs obsession with property. Probably the most unproductive use of capital imaginable and it's happening enmasse.
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