ASB's Pink says core funding ratio in hand; considering covered bonds

ASB is “comfortably” meeting the criteria of the Reserve Bank’s core funding ratio (CFR) and is considering issuing covered bonds, CEO Charles Pink says.

Introduced on April 1 by the Reserve Bank the CFR sets out that banks must source at least 65% of their funding from retail deposits and bonds with durations of at least one year. The central bank wants to increase the CFR to 75% by mid-2012 to offset New Zealand banks reliance on international wholesale, or 'hot' money, markets.

“We’re of course meeting the core funding ratio and have from the first day of its introduction and with some comfort,”  Pink told interest.co.nz after the release of the bank’s annual results yesterday.

“ASB has positioned itself cautiously in terms of liquidity since the beginning of the global financial crisis. We continue to do so, so we’re very strongly positioned.”

He also noted ASB had lifted retail deposits by 5.3% to NZ$31.5 billion in the year to June, boosting its market share slightly to 21.6% at June 30 from 21.4% at December 31, 2009.

Figures released by ASB's parent Commonwealth Bank of Australia (CBA) showed ASB's housing lending share down to 23% at June 30 from 23.3% at December 31, business lending share up to 9.3% from 9.2% and share of retail funds under management down to 17.4% from 18%.

CBA's results also showed a 13% fall in annual cash net profit after tax to NZ$103 million at Sovereign Insurance with higher claims volumes in the health, trauma and disability income areas. Sovereign benefited from a one-off NZ$18 million gain in the second half-year due to the revaluation of deferred tax on policy liabilities driven by the reduction in New Zealand corporate tax rate to 28% from 30% on July 1, 2011. Sovereign's second-half net cash profit of NZ$76 million was almost three times as high as the first-half's NZ$27 million.

At 27%, Sovereign's share of new business sales continued to lead the market, CBA said.

Meanwhile, Pink said ASB was “actively exploring” the possibility of issuing covered bonds, but hadn’t yet made any final decisions.

BNZ became the first New Zealand bank to issue covered bonds in June, raising NZ$425 million from domestic institutional investors. Westpac and ANZ are also eyeing issues of covered bonds, which are debt securities backed by the cashflows of mortgages written by the banks.

Covered bonds are banned in Australia because covered bond investors have a priority claim on the mortgages the bonds are secured by, effectively ring fencing security on the bank's balance sheet. This means in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Reserve Bank says banks here can issue covered bonds worth the equivalent of up to 5% of their total assets.

Aside from covered bonds Pink, said ASB wasn’t looking at any other major funding source innovations.

“Otherwise the focus is on retail deposits. We’ve been successful at that,” he said.

ASB said yesterday June year net profit after tax fell to NZ$236 million after a NZ$209 million charge to settle its structured finance transaction dispute with the Inland Revenue Department. Excluding that, profit fell to NZ$428 million from NZ$431 million last year. Net interest income rose, just, to NZ$908 million from NZ$905 million.

Margin pressure

The bank said its net interest margin was stable at 1.6%. Pink said he didn’t expect the margin to fall in coming months but acknowledged it would be hard work to increase it. Wholesale funding costs continued to be "significantly higher" than before the global financial crisis, which put pressure on margins.

“It’s a difficult market for margins and that’s a feature of wholesale funding costs and the competition for retail deposits.”

KPMG’s March quarter Financial Institutions Performance Survey showed ASB’s margin, then at 1.56%, significantly below those of its major rivals with ANZ and Westpac at 2.08% and BNZ at 2.04%.

ASB recorded a big fall in annual loan impairment charges, which were down 47.5% to NZ$125 million from NZ$238 million in the previous year. Pink said the trend for impairment charges had been downwards since a peak in the June 2009 quarter.

“We would expect continuing slow improvement to the New Zealand economy and obviously that flows through to impairments,” said Pink.

He also labeled ASB’s NZ$460 million investment plans as important for the bank and New Zealand.

They includes plans to spend NZ$100 million rolling out 25 new branches and refurbishing 117 over five years. The bank currently has about 150 branches. It also plans to splash out about NZ$200 million upgrading its core banking systems and NZ$160 million on its new head office on Auckland’s North Wharf in the Wynyard Quarter, with staff scheduled to move there in mid-2013.

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