ASB pre-tax profit down, but loan book solid (updated)

ASB Bank, which is owned by Australia's Commonwealth Bank, has reported profit before tax and extraordinary items fell 2.9% in the year to June 30 to NZ$737 million, largely because of a doubling of forecast bad debts from unusually low levels as the economy and housing market slowed. (Updated to include comments from ASB CEO Hugh Burrett). But ASB said its capital backing was very strong and its loan book was in good shape, given its relatively conservative lending stance in the past. "Our nature has always been a bit conservative and now that's paying off," ASB Chief Executive Hugh Burrett told interest.co.nz in an interview, pointing to ASB's reluctance to fund developers or property investors in low value or risky apartments and units. ASB's profit after tax rose 11% to NZ$532 million once adjusted for a loss due to a change in accounting standards. ASB said its impairment losses on loans rose to NZ$40 million in the year from NZ$18 million the previous year, while its operating expenses rose 10.3% to NZ$588 million. It said its total provisions for bad loans on its balance sheet stood at NZ$109 million, which represented 0.18% of its total assets, up from 0.17% the previous year. Burrett said this was significantly lower than other banks and ASB had yet to see a significant increase in past due mortgages. "We're not seeing anything that is alarming to any degree," he said. Total lending rose 13% to NZ$51.14 billion and ASB's tier one capital ratio stood at 9.4% of total assets, which is significantly above the 4% minimum set by the Reserve Bank. Small business customers had seen their businesses slow in the last couple of months, but the economy was generally solid, particularly in the provinces where agricultural export revenues were strong, Burrett said. "If you look at New Zealand, the economy is fundamentally pretty sound," he said, pointing to likely interest rate cuts and tax cuts later this year as factors likely to soften the blow of higher petrol and food prices. The banks had benefitted from a flight to quality out of riskier finance companies, Burrett said. Total ASB bank deposits rose to 13% to NZ$54 billion. ASB was being careful to carry plenty of cash on hand in such volatile times, Burrett said. "We are carrying an extra NZ$1.5 billion to NZ$2 billion just to be prudent," he said. ASB had experienced an increase in wholesale funding costs, but it was in a position to pass on future Reserve Bank rate cuts to borrowers and depositors because it raised almost 60% of its money from local savers. Here is the full statement from ASB Bank below.

The underlying strength of the corporate, business and rural markets cushioned ASB Bank against the rapid decline in residential housing activity during recent months and assisted the Bank to deliver an 11 percent increase in audited after tax operating profit for the 12 months ending 30 June 2008 of $532 million*. "ASB's profit result is pleasing in an economy which, while slowing and undergoing change, remains fundamentally sound," said ASB Chairman, Gary Judd QC. "Home lending activity has declined sharply this calendar year, although ASB has experienced less of a fall in volumes than the market. Our financial markets, business and rural businesses continue to expand, demonstrating ASB's ability to take advantage of the economy's underlying resilience and depth." Total assets during the past 12 months were up 12 percent, growing by more than $6 billion to $59.4 billion. The Bank increased its loan impairment charge during the year to $40 million. Total provisions held on the balance sheet are now at $109 million, still only 0.18 percent of total assets (0.17 percent as at 30 June 2007) which reflects the overall high quality of the loan book. Mr Judd said ASB has continued to invest significantly in its future in the last 12 months, opening 10 new branches, relocating and upgrading another two, and increasing employee numbers by 6 percent on a fulltime equivalent basis to support the delivery of world class service to our customers. "We have put in place the bricks, mortar and people at a local level to continue to take ASB and our customers forward when the economy starts to move ahead again", he said. "As a result, and despite the subdued market, ASB has increased its retail market share, while also growing its business operations by 16 percent and its rural business by 31 percent. "The ongoing support of our customers means that ASB continues to fund well over half of its advances to customers from local savings and investments. "Growth in our New Zealand based funding has continued since balance date," said Mr Judd, "the new ASB Cash Fund (a tax effective PIE investment) having attracted over $200 million in deposits since its launch at the beginning of July." Total deposits increased during the year by 13 percent to $54 billion, which includes several long term debt issues "“ two in New Zealand and two offshore - putting ASB in a strong position to support the quality lending our customers are requiring. In June, ASB announced a significant new initiative with St John, designed to support local communities around New Zealand. The relationship began with ASB and St John working together to increase the number of Kiwis trained in CPR by 10,000. Further community based services and projects are planned for this financial year. * Excluding post-tax accounting losses of $17m arising from the application of NZ IAS 39 - Financial Investments: Recognition and Measurement ($52 million post-tax gain in 2007).