ASB sees negative margins on term deposits continuing

By Gareth Vaughan ASB expects to keep writing retail term deposit business at negative margins over the next year and wants to grow its institutional business in New Zealand, according to the bank’s new chief financial officer Shayne Bryant. Bryant, who joined ASB on March 1 from parent Commonwealth Bank of Australia (CBA), told interest.co.nz that ASB was providing term deposits at “much bigger” negative margins than CBA was in Australia. Bryant was previously CFO of CBA’s retail banking services. He said a greater need for New Zealand banks to secure domestic funding than Australian banks had was a factor in this.  This comes in the wake of the global financial crisis with overseas borrowing more expensive, the Crown retail deposit guarantee scheme covering many finance companies and building societies and the Reserve Bank wanting the major banks to secure more of their funding domestically from ‘Mum and Dad’ retail investors. “I can’t get into talking about the margins themselves, but what I could say is just having set a plan for next year, we still expect to be writing out business at negative margins,” Bryant said. “However, we’d expect that position to improve slightly over where it is at the moment.” CBA last week released its March quarter trading update in which the bank headed by New Zealander and former ASB and Air New Zealand CEO Sir Ralph Norris said price competition for retail deposits continued to have a negative impact on ASB's margins. Bryant said while he agreed with the intent of the Reserve Bank’s move to introduce a 75% core funding ratio for banks, he agreed with recent comments from KPMG’s Godfrey Boyce that it would lift bank’s funding costs and ultimately customers’ interest rates. “It is pushing up the price because you’ve got a limited pool of funds to access and the asset growth tends to outstrip any deposit growth,” said Bryant. “As for the intent of it[ the core funding ratio], I buy into the intent of it, I understand what they’re trying to achieve. (But) what’s the right level? That’s a totally different question. Do we need to move to 75%? I don’t know.” The core funding ratio is essentially a set of rules that force banks to raise more funding domestically from retail investors and through longer-term bonds. The Reserve Bank has specified a core funding ratio of 75%, up from as low as 55% now, by April 2012. It says New Zealand banks have had an unusually high proportion of their international debt securities maturing within one year compared with other developed countries. This makes the banks more vulnerable if ‘hot’ international wholesale markets freeze, as they did after the Lehman Bros collapse. Meanwhile, Bryant said despite intense competition for retail deposits, which BNZ managing director Andrew Thorburn recently told interest.co.nz was the toughest it had ever been, ASB’s share of the home lending and deposit markets was steady. “Putting aside Kiwibank and its impact, I don’t really see us ceding marketshare at the moment to anybody in particular,” he said. In the last five quarters Kiwibank has written the most net new residential mortgage business in all bar one quarter taking on a total of NZ$3.4 billion in new mortgage business. The recently arrived Australian said state owned Kiwibank, now raising money overseas, appeared to be acting like a big bank and was a “useful government tool” in influencing market pricing and keeping the big banks honest. "I’m working off the broad assumption that if you want to ensure you have appropriate competition in the market, that’s a tool you can use." Although ASB was aiming to grow business across the board, Bryant noted it was underweight in the institutional space. “We’ve got a branch here of CBA’s as well so we’re looking at how we do that (institutional) business. We’re well underweight compared to our marketshare elsewhere. That’ll be an area where we might look to strengthen our offering.” This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.