New Zealand's big five banks recorded another strong quarter in the three months to March 31, with both profit and lending rising, analysis from PwC shows.
At the same time interest paid to customers dropped and operating expenses were cut.
PwC partner Sam Shuttleworth said across ANZ, ASB, BNZ, Kiwibank and Westpac net profit before tax increased $94 million, or 5.9%, to $1.69 billion in the March quarter from the December quarter of last year. Shuttleworth attributes the profit increase to a gain in other operating income of $75 million, or 10.5%, and a $33 million, or 3%, drop in operating expenses.
"The increase experienced in other operating income was due to volatility in the gains/losses on financial instruments recognised at fair value in the current quarter," said Shuttleworth.
Net interest income fell $3 million, or 0.1%, and impairment losses on loans rose $11 million, or 12.4%.
"All in all, this is another strong result reported by New Zealand’s major banks behind the back-drop of escalating house prices, predominantly in the Auckland property market," said Shuttleworth.
Total gross loans increased by $6 billion, or 1.9%, to $327.3 billion, but interest income fell by $40 million to $5.3 billion. At the same time interest expense (for the banks, or interest received for customers) dropped by $37 million to $3.2 billion despite funding growth during the quarter of $6.8 billion to $448.4 billion.
"This decrease in funding costs is due to significant falls in wholesale interest rates, especially in the medium to long terms," said Shuttleworth.
Net interest margin down 5 basis points
Interest income to average interest earning assets fell to to 5.78% in the March quarter from 5.95% in the December quarter, reflecting a competitive lending market. Interest expense to average interest bearing liabilities fell to to 4.02% from 4.10%. The banks’ net interest margin slipped to to 2.26% from 2.31%.
March quarter total lending growth was 1.90%, up from 1.47% in the December quarter. Lending to corporates grew 2.18% in the March quarter versus 2.12% in the December quarter, with mortgage lending growth of 1.72% up from 1.26%.
Although mortgage lending growth was slower than corporate lending growth, it still grew faster than during any quarter in 2014, with total mortgage lending at $193.7 billion at the end of March.
The March quarter growth "reflects the continued heated housing market particularly in Auckland and the current low interest rates offered by the banks," said Shuttleworth.
The percentage of mortgages with an loan-to-value ratio (LVR) above 80% comprised 14% of total mortgage lending in the March quarter, down from 15% in December.
"Mortgage holders on floating interest rates make up 27% of the mortgage market at March quarter 2015 (42% at fourth quarter 2013, 63% at first quarter 2012) and slightly down from fourth quarter 2014. However, the mix of mortgage funding continues to increase in the medium to long-term of fixed interest rates with approximately 46% of mortgage lending fixed for longer than one year compared to 43% at fourth quarter 2014 (26% at fourth quarter 2013, 15% first quarter 2012)," Shuttleworth said.
"This is predominantly due to the banks offering low mortgage interest rates to customers during first quarter 2015 in the medium to long terms to drive volume growth."
Credit quality steady
Credit quality is steady, Shuttleworth said, with impaired assets unchanged at $1.6 billion. Meanwhile, 90 day past due, but not impaired, assets increased by $55 million to $682 million.
"The funding mix for first quarter 2015 has remained fairly consistent with the previous quarter. Retail funding represents approximately 63% of the banks’ total liabilities and highlights the continuation of the improving funding composition of our major banks. Capital levels continue to remain strong, with average total capital ratio hovering at 12.5%, well ahead of minimum requirements and an increase by 0.2% since fourth quarter of 2014."
Shuttleworth suggested It'll be interesting to see the impact on capital ratios following the Reserve Bank’s new asset class treatment for residential property investors, due to come into effect in October. Earlier this month a Reserve Bank spokesman told interest.co.nz the regulator expects any impact on loan pricing and also on capital at the big four banks (ANZ, ASB, BNZ and Westpac) to be "quite modest and certainly no more than 15 to 25 basis points, if even that much."
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Total gross loans increased by $6 billion, or 1.9%, to $327.3 billion, but interest income fell by $40 million to $5.3 billion. At the same time interest expense (for the banks, or interest received for customers) dropped by $37 million to $3.2 billion despite funding growth during the quarter of $6.8 billion to $448.4 billion."This decrease in funding costs is due to significant falls in wholesale interest rates, especially in the medium to long terms," said Shuttleworth.
Interesting?
Recent foreign USD wholesale rate collapses based off term Libor benchmarks are unreported.
Moody's emphasises reduced foreign wholesale funding demand.
New Zealand's major banks, including ASB, have a structural reliance on wholesale funding, with an important offshore component. This reliance has steadily reduced as a result of a general deleveraging and reduced demand for credit in the New Zealand economy. At the same time, deposit growth has been strong, reducing funding tasks for the banks. Furthermore ASB has lengthened the duration of its maturities while increasing its holdings of liquid assets. Read more
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