NAB says BNZ earnings helped by margin growth, restrained by weak business lending

BNZ produced a 1.4% rise in annual cash earnings to NZ$524 million and a dramatic NZ$783 million turnaround in annual profit after last year's bottom line was savaged by the bank's structured finance transaction dispute with the Inland Revenue Department (IRD).

BNZ's September year net profit surged to NZ$602 million versus a loss of NZ$181 million last year as the bank paid just NZ$35 million of tax compared to NZ$866 million last year when it provisioned for a NZ$661 million loss from its structured finance transaction tax dispute with the IRD.

Ultimately BNZ, alongside Westpac, ANZ and ASB, settled the dispute with the IRD last December agreeing to pay 80% of  the core tax in dispute, plus interest. Following the settlement, BNZ reversed the unused portion of its provision resulting in a tax credit of NZ$167 million. This slashed its annual income tax to just NZ$35 million and just NZ$4 million for the nine months to June this year.

Deleveraging

Meanwhile, BNZ chief executive Andrew Thorburn said the economic recovery in New Zealand had been slower than expected with "significant rebalancing" over the past year.

"Deleveraging by businesses has also reduced the demand for credit as businesses delay investment decisions," said Thorburn. "As a result, overall lending volume growth has been modest.”

Thorburn said that although BNZ supported the Reserve Bank's new core funding ratio (CFR), which sets out that banks must secure 65% of their funding from retail deposits and bonds with terms of more than 12 months, this had hit BNZ in the pocket and put pressure on domestic funding with "intense" competition for retail deposits.

He said customer deposits grew by 9.7% in the year to 30 September, with deposits from both retail and business customers of NZ$2.5 billion lifting BNZ’s deposit market share to 17.6% at September 2010, from 17.0% in the previous year.

"Diversifying and lengthening Bank of New Zealand’s term funding profile has been a strategic balance sheet priority.  In line with Reserve Bank’s Core Funding Ratio requirement BNZ has remained well above the minimum ratio of 65% introduced in April this year," said Thorburn.

Interest margin up

Meanwhile, BNZ’s net interest margin was 2.16%, up 10 basis points year on year, although Thorburn said this was still "well below" the levels prior to the global financial crisis.

"The increase reflected risk repricing along with customers’ preference for variable rate housing products. Margins were offset in part due to pressure on retail deposit margins and higher wholesale funding costs."

Thorburn said the abolision of honour and dishonour fees from September last year had cut BNZ's annual revenue by NZ$23 million. This was the main driver of a 7.7% fall in other operating Income to NZ$442 million.

"Asset quality indicators have stabilised and indicate we have reached the peak of the cycle," said Thorburn.

"The charge for bad and doubtful debts is NZ$187 million which is flat year on year and reflects the slow economic recovery."

After completing the first covered bond issue by a New Zealand bank, raising NZ$425 million from domestic investors in June, BNZ now planned to test the market for an international covered bond issue.

Covered bonds are senior debt instruments issued by a bank, usually of five-to-ten year durations, and backed by a dedicated group of home loans known as a “cover pool.” If the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders.

The Reserve Bank says it's happy for banks to issue covered bonds worth up to 10% of their total assets, based on the value of assets securitised. The central bank also says it wants laws passed to enable banks to issue bonds backed by legislation to help attract overseas investors.

“Development of covered bonds in New Zealand is an important new market to create longer term funding sources and reduce reliance on short term international wholesale funding. BNZ supports the Reserve Bank consultation on the introduction of a legislative framework for New Zealand issued covered bonds,” said Thorburn.

Meanwhile, parent National Australia Bank's annual cash earnings rose 19.3% to A$4.6 billion with statutory net profit up 63.2% to A$4.2 billion.

NAB said improved margins and modest growth in housing and personal lending at BNZ was offset by weak demand for business credit. BNZ's cash earnings rose 1.4% to NZ$524 million.

(Update adds comments from BNZ and CEO Andrew Thorburn, plus details of net profit and tax situation).