Banks' combined net interest margin dropped 6 basis points in the June quarter, KPMG says

By Gareth Vaughan

The Co-operative Bank, formerly PSIS and the country's newest bank, recorded the strongest net interest margin among the banks in the June quarter, according to KPMG.

With three of the big banks poised to report annual results and the release of September General Disclosure Statements imminent, auditing and financial advisory firm KPMG has released its wrap of the June quarter showing banks' combined interest margin dropped six basis points led by Commonwealth Bank of Australia's New Zealand operations, including ASB.

The sector's interest margin fell to 2.25% in the June quarter, down two basis points over six months and flat year-on-year, KPMG says.

Quarter-on-quarter, the biggest falls were CBA's 14 basis points drop, BNZ's 10 basis point decline, and the ANZ Banking Group's nine basis points fall. Heading in the opposite direction was Kiwibank, with its interest margin rising nine basis points to 1.89%, putting it in line with CBA's and completing a fourth straight quarterly rise. That said, Kiwibank and CBA's 1.89% margin was equal lowest.

The highest interest margin was recorded by the Co-operative Bank, which secured banking registration from the Reserve Bank last October, at 2.70%, even though this was down two basis points during the quarter. Next was SBS Bank at 2.66%, up three basis points, followed by ANZ's 2.45%, BNZ's 2.32%, Westpac Banking Corporation's 2.24% (up two basis points), and TSB Bank's 2.10%, which was down three basis points.

In its annual results announcement in August, ASB reported a 2.16% net interest margin. KPMG includes ASB within its broader CBA figure.

'Intense competition for quality customers'

During the June quarter, KPMG said interest earning assets increased by 1.1%, or NZ$3.6 billion, whereas interest income decreased slightly, indicating growth in assets "not quite" balancing pressure on margins.

"With the Reserve Bank of New Zealand likely to hold the Official Cash Rate flat at 2.5% till mid 2013, there has not been a lot of movement in market interest rates," KPMG said.

"However intense competition amongst the banks for quality customers is a potential factor for the sector’s decrease in interest margin for the quarter, which after a period of a year or two with asset competition
being flat and the main competition being on funding, this might be the early signs of a return to the behaviour of the 2003-2007 period."

With Reserve Bank data showing mortgage customers switching to fixed-term rates from floating, or variable, rates, this is likely to impact margins given banks traditionally earn a higher margin on floating rate based lending products, said KPMG.

Across the banks it surveys, KPMG says the average interest margin over the last two years has been 2.25%.

The Reserve Bank's own monitoring of bank net interest margins shows the margin across retail registered banks was 2.27% in August, down from 2.28% in July.

Speaking to interest.co.nz in May, BNZ CEO Andrew Thorburn said he expected his bank's net interest margin to be in the 2.30% to 2.45% range over the long-term. BNZ recorded a 2.41% net interest margin for the six months to March.

In its half-year results, ANZ disclosed a New Zealand business net interest margin and a New Zealand geography one. The former rose 12 basis points to 2.65% and the latter was up 10 basis points to 2.50%.  Westpac New Zealand's net interest margin rose six basis points to 2.43%.

Net profit up 45%

Meanwhile, in terms of net profit, KPMG says the banks it surveyed recorded a 45%, or NZ$282 million, quarter-on-quarter surge to NZ$914 million.

"Conversely the previous quarter decreased by NZ$516 million (also 45%), indicating volatility in sector profits caused by fair value movements in their derivatives and investments. The largest increases in the quarter were due to ANZ and BNZ, up NZ$150 million and NZ$113 million, respectively. These two banks were also the major contributors to the March quarter decrease in net profit," said KPMG. (See more on bank profitability here and here).

Total assets across the banks rose 2.3% to NZ$370 billion, driven by ANZ and Westpac. The cost to income ratio across the sector fell to 45.14% in the June quarter from 52.06% in the March quarter, and gross loans rose 0.88% to NZ$291 billion.

KPMG's audit clients include ANZ New Zealand, TSB Bank, and SBS Bank.

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