Earthquake impact and customer switch to floating mortgages expected to be focuses of bank reporting season

By Gareth Vaughan

Interim results from ANZ, BNZ and Westpac next week should shed light on the big banks potential financial hit from the February 22 Christchurch earthquake and show continued benefit to their bottom lines from mortgage customers switching to floating interest rates from fixed rates.

ANZ will report its financial results for the six months to March next Tuesday May 3, with Westpac following on Wednesday and BNZ’s parent, National Australia Bank (NAB), on Thursday.

ASB and its parent Commonwealth Bank of Australia (CBA), whose financial year has a December 31 balance date, reported their interim results in February. ASB said its cash net profit after tax jumped 57% to NZ$293 million as its impairment expense dropped and net interest income rose. CBA is also due to provide a third quarter trading update on May 11.

Westpac is so far the only bank to have given any guidance on how much the devastating Christchurch earthquake might cost it. But this was a far from precise figure. The bank said it expected credit losses of anywhere between NZ$30 million and NZ$100 million. 

Margin benefit from switch to floating loans from fixed ones

Meanwhile, all the banks are likely to see continued benefit from mortgage customers punting for floating loans over fixed-term ones. In the last reporting round ANZ’s group CEO Mike Smith said he expected both ANZ and National Bank mortgage customers to continue switching to floating mortgages from fixed-term home loans with ongoing margin benefits for the group.

ANZ said 49% of its NZ$53.9 billion mortgage portfolio was on variable mortgages as of December 31, nearly double the 26% at the end of 2009 and 37% at September 30 last year. And ASB said about half its NZ$37.5 billion worth of home loans were floating at December 31. That's an increase from just 25% within 24 months.

Banks do better out of floating mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between the swap rate and fixed rate mortgages. The customer shift to floating from fixed rate mortgages is helping push up margins at the banks. ANZ New Zealand's margins rose 7 basis points in the December quarter and ASB's net interest margin rose 0.4% to 2% at December 31 from 1.6% at December 31, 2009.

The latest Reserve Bank data (also see the chart above) shows about NZ$81.7 billion, or nearly 49%, out of a total of NZ$168 billion worth of mortgages on floating rates and NZ$85.8 billion, or just over 51%, on fixed rates. It's both the highest percentage and highest dollar amount floating since the central bank's records began in June 1998. The trend is expected to continue, with banks advertising cheaper floating rates than almost all fixed-term rates, meaning the percentage of mortgage customers on floating rates will push above 50%. See all bank mortgage rates here.

'Important profit driver' for Aussie parents

UBS banking analysts predicted late last year that New Zealand's Australian owned banks would be an important profit driver for their parents this year for the first time in a decade. The Sydney-based analysts noted New Zealand banks were writing more than 80% of new mortgages at variable, or floating, rates.

“Variable rate mortgage spreads are 30-40 basis points higher than fixed rate spreads,” the analysts said.

However, in a research report previewing the upcoming bank results, the same UBS analysts note that although the margin increase from the fixed to floating switch was being driven by the first upward sloping yield curve in about 20 years, this has been stemmed somewhat by the Christchurch earthquake and the flatter yield curve that ensued.

ANZ's IT costs, Westpac's covered bonds & ASB and Westpac's electricity price woes

Features of individual bank results will include ANZ's hit from its plans to put the ANZ and National Banks onto one IT platform and restructure management by laying off 45 staff and establishing a regional reporting structure at a cost of NZ$220 million.

UBS analyst Jonathan Mott argues ANZ should book the A$120 million IT charge as operational expenditure rather than the planned capital expenditure given this means it will be excluded from the group's cash net profit after tax figures.

"We disagree with this being taken as a ‘below the line’ integration cost given: (1) ANZ bought National Bank seven years ago; (2) we believe restructuring operations is an ongoing part of managing any large business; (3) we view IT spend of this kind as an operating expense, not a capital expense; and (4) CBA & WBC’s larger IT spend is being taken via the P&L (profit and loss account)," says Mott.

Meanwhile, both ASB and Westpac may provide clarification of a potential bottom line hit stemming from an unprecedented jump in wholesale electricity prices. Both banks lodged complaints with the Electricity Authority last month over a huge spike in upper North Island wholesale electricity prices on Saturday March 26. Both banks say the price spike whose principal beneficiary was Genesis Energy, to levels about 200 times higher than normal, will have a significant financial impact if it is allowed to stand. The Electricity Authority is investigating.

And Westpac may also provide an update on its plans for a 1 billion euros (NZ$1.82 billion) covered bond issue, which the bank put on ice in February.

Almost A$12 billion worth of profit for the big four

The Australian parents of New Zealand's big four banks - ANZ Group, CBA, NAB and Westpac Group - are expected to post combined interim profit of almost A$12 billion (NZ$16.1 billion), the Australian Financial Review reports, boosted by last November's move to lift home loan interest rates by more than the Reserve Bank of Australia's cash rate rise.

CBA reported a record A$3.33 billion December half-year profit. The AFR says NAB is expected to deliver a 17% cash profit rise to about A$2.56 billion, ANZ a 20% jump to A$2.85 billion, and Westpac a 3% increase to A$3.03 billion. That gives a combined cash profit of about A$11.77 billion, up from A$10.4 billion in the same period last year.

In a preview report on the banks results, analysts at the Royal Bank of Scotland have highlighted six themes they expect from a "mixed" reporting season:

1) Volumes – NAB has outperformed in total lending, achieving strong results across home and business, while ANZ looks best in deposits.

2) Margins – The outlook for margins is solid, aided by the November mortgage repricing, expensive term deposit repricing and some improvement in business lending.

3) Trading income – first quarter commentary was mixed, but conditions are not currently supportive of strong outcomes.

4) Cost control – Productivity improvements will be the first-half mantra as banks seek to offset the weaker volume environment with good cost control.

5) Bad debts – The market will be eager to assess natural disaster damage, but otherwise continued reversion to mid-cycle loss rates is expected.

6) Capital – We expect ongoing improvement in capital ratios and will be attentive to any further insight into the Australian Prudential Regulation Authority’s implementation of Basel III standards in Australia.

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