Westpac lending growth hits interest margins

Westpac, which has been growing lending faster than its three main rivals, has seen market share gains come at a cost.

KPMG's June quarter Financial Institutions Performance Survey shows Westpac's interest margin down 6 basis points in the six months to June. It was the only one of the big four banks to record a fall with ANZ's interest margin up 20 basis points, BNZ's up 9 basis points and ASB's up 15 basis points.

KPMG audit partner Malcolm Bruce told interest.co.nz there had been a reduction in what Westpac was earning on its assets during the quarter.

"(That) would point to the loan growth coming at a cost in terms of what they’ve been able to earn on those assets or (how they have been able to) reprice them," Bruce said.

He said Westpac had recorded a fall of about 25 basis points in interest income over average interest earning assets in the three months to June.

"So the return on their assets has reduced by 0.25 (%) during the quarter," said Bruce.

He said the other big three banks had lifted returns from interest earning assets.

However, despite the drop Westpac's interest margins were the second highest of the country's seven banks at 2.24%. ANZ came in first at 2.25%. Third was SBS Bank at 2.23% despite a 7 basis points fall, fourth TSB Bank which fell 54 basis points to 2.16%, BNZ was fifth at 2.12%, sixth ASB at 1.67%, and last was Kiwibank, unchanged at 1.13%.

Westpac grew term housing loans by NZ$365 million to NZ$33.981 in the three months to June, and total net loans by NZ$343 million to NZ$49.712 billion, outstripping the lending growth of its big three rivals.

And last month Westpac chief financial officer Richard Jamieson told interest.co.nz his bank had grown business lending by about NZ$400 million in the year to September compared to an overall industry wide fall in business lending of about NZ$5.5 billion.

Hot deposit competition hitting TSB, Kiwibank, SBS

Meanwhile, Bruce said the big story for the three New Zealand owned banks - Kiwibank, and the mutuals SBS Bank and TSB Bank - was the competition for domestic deposits. This has ramped up with the April introduction of the Reserve Bank's core funding ratio (CFR) which sets out that banks must secure 65% of their funding from retail deposits and bonds with durations of more than 12 months. The Reserve Bank wants to lift the CFR to 75% by mid-2012.

Although Kiwibank made its first foray into offshore funding last year and plans more, it, SBS and TSB have traditionally been reliant on domestic retail funding whereas the big four banks have also tapped overseas wholesale markets.

"There’s no doubt that without the offshore funding, the competition in this local market as the banks try to get their core funding ratios into the required ranges, has been quite intense and they (the three New Zealand owned banks) are probably wearing 100% of it whereas the majors have been able to insulate themselves with their roughly 30-35% offshore funding," said Bruce.

In a parting shot, recently departed Kiwibank CEO Sam Knowles said the CFR had made New Zealand owned financial institutions less competitive against their foreign owned rivals. Knowles said locally owned financial institutions needed to source money offshore to get their cost of funding down. The state owned bank had plans to open up a range of offshore funding facilities. These would see Kiwibank aim to raise somewhere in the vicinity of the A$250 million raised in five-year bonds in Australia last year.

Bruce said TSB's big drop in interest margins also stemmed from the unwinding of hedging positions. In the year to March 2010 TSB had NZ$21 million of income from derivative financial instruments up from NZ$1 million the year before.

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