Big fall in impairment charges and rise in interest margins boosts ASB's annual cash profit by NZ$150 million to NZ$504 million

ASB’s annual profit rose 42% to NZ$504 million boosted by a 42% drop in impairment charges and the bank benefiting from customers switching to more lucrative floating mortgage rates from fixed-term rates.

ASB’s parent, Commonwealth Bank of Australia (CBA), said ASB’s cash net profit after tax for the year to June 30 rose by NZ$150 million to NZ$504 million from NZ$354 million in the year to June 2010. The rise came as impairment expenses fell 42% to NZ$72 million and ASB’s net interest margin rose by 0.4% to 2.08%.

The bank's annual net interest income rose 22% to NZ$1.107 billion. Other banking income rose 7% to NZ$367 million.

“New Zealand is continuing along the road to recovery from the global economic downturn,” ASB’s incoming chairman Gavin Walker said.

“Clear evidence of this is the significant reduction in ASB’s impairment charges over the year, down 42.4 percent to $72 million. Another key factor has been customers continuing to shift from fixed to floating rate loans, and the re-pricing of some new fixed rate loans has also contributed.”

A total of 59% of all ASB's home loans were on floating rates at June 30, up from 37% a year earlier. Banks do better out of floating, or variable, 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  swap rates and fixed rate mortgages.

For the second half-year ASB cash net profit after tax rose 5% to NZ$258 million with margin growth partially offset by higher operating expenses. Annual operating expenses rose 10% to NZ$733 million.

Over the full year, total assets fell slightly to NZ$63.1 billion from NZ$63.6 billion, and lending contracted 1.2% to NZ$53.2 billion. Home loan market share was steady at 22.2% although the bank's book was down slightly to NZ$37.4 billion from NZ$37.5 billion at  December 31, 2010.

The bank's total liabilities fell slightly to $59.1 billion from NZ$59.6 billion at December 31. Deposits were down 1.1%  to NZ$55.6 billion from NZ$56.2 billion at June 30 last year. However, retail deposits increased 7.1% to NZ$33.7 billion year-on-year with market share flat at 21.4%.

Lending demand weakens

ASB's loan impairment provisions fell, year-on-year, to NZ$240 million from NZ$261 million with collectively and individually assessed provisions now accounting for 0.45% of average gross advances to customers versus 0.49% a year earlier.

"Demand for lending has definitely weakened as customers continue to choose to deleverage debt,” Walker said.

“On 27 May 2011, Moody’s Investor Services announced the outcome of its review of New Zealand’s four major banks, resulting in a one-notch downgrade of their long-term senior unsecured ratings to Aa3. ASB was the only bank to retain a C+ stand-alone rating for financial strength. Moody’s noted that this reflected ASB’s “stronger credit risk profile which has resulted in lower non-performing loan metrics compared to its New Zealand peers” as well as the Bank’s lower reliance on wholesale funding because of its higher proportion of customer deposits.”

Looking ahead, Walker said New Zealand’s improved export commodity prices, growing demand for limited housing stock in some regions and low interest rates were expected to contribute to a steady economic recovery.

CBA delivers 19.5% return on equity; Sovereign profit down

Earlier, CBA reported a 12% rise in annual cash net profit. CBA group cash net profit rose by A$734 million to A$6.835 billion with the bank delivering a cash return on equity of 19.5%, up from 18.7% last year.

Of ASB, outgoing CBA CEO Ralph Norris said better margins contributed to a "much improved" result in the "competitive" New Zealand market.

On the group front Norris said: "The 2011 financial year has been characterised by subdued system credit growth and intense competition. At this stage there is nothing to suggest that the 2012 financial year will see any material improvement on this front. Nor is it clear what the catalyst will be  for a meaningful revival in consumer and corporate confidence which is a prerequisite to stronger demand for credit."

CBA will pay a final dividend of A$1.88 per share, an 11% rise, taking total dividends for the year to A$3.20.

CBA's New Zealand insurer, Sovereign, posted a 17% drop in annual cash net profit to NZ$86 million. CBA attributed the fall to policy valuation gains recognised in the previous year after legislation changes in life tax and premium changes in legacy disability income products, the non-recurrence of a gain on the revaluation of deferred tax on policy liabilities as a result of the corporate tax rate being reduced to 28% from 30%, and claims stemming from the Christchurch earthquakes.

CBA's overall cash net profit after tax from New Zealand for the year rose 28% to NZ$588 million, but was up just 1% in the second-half to NZ$295 million with the earthquakes cited as the reason for the drop off in profit growth.

See ASB's statement here and CBA's full announcement here and CBA's presentation here.

(Update adds further detail, plus Sovereign's result).