Kiwibank's annual profit more than halved as provisions for bad debts surged more than four times.
Despite this the state owned bank grew net interest margins as home loan customers switched to more lucrative floating mortgages from fixed-term ones, and Kiwibank increased lending by NZ$1.08 billion, or 10%, which was a faster rate than its bigger Australian owned rivals.
Kiwibank said today its profit after tax for the year to June 30 tumbled NZ$24.6 million, or 54%, to NZ$21.2 million from NZ$45.8 million the previous year. The drop came as provisions for bad debt surged NZ$67.6 million to NZ$87.1 million from just NZ$19.5 million. See Kiwibank's presentation here and its press release here.
Kiwibank chief executive Paul Brock said the "vast majority" of the bad debt provisioning could be regarded as “one-offs” which gave a him "considerable" room for confidence for the present financial year.
“The Global Financial Crisis (GFC) compounded by the (Christchurch) earthquake has made things tough, but the bank is in strong shape and has weathered the storm,” Brock said.
"And based on everything we're seeing at the moment, we feel like we're over the hump (with bad debts). We’re feeling confident about the future, albeit with an uncertain global backdrop."
Brock said the bad debt charges included a NZ$25 million provision taken for February's Christchurch earthquake. This was a "conservative" position and included provisioning for future events such as the quake's impact on incomes and employment.
"That (NZ$25 million) is not real money that has been booked yet," said Brock. "There’s a small proportion of that which we have booked and that is to one or two business loans where the insurance company has fallen over. The bulk of the rest of the provisioning is in relation to what we think is likely to hit Christchurch in relation to the business market, in relation to the property market. Both of those things we think will be driven by a slower economy in Christchurch short-term."
Hit from falling property values
The bulk of the balance of the bad debts came in the small and medium sized business market nationwide, Brock said, as property values fell with higher value residential property "significantly" impacted.
"The majority of the customers underlying that are small business customers. The majority of our small business lending is secured by property," Brock said.
This includes a loss on the NZ$7 million Kiwibank lent to Auckland's Don Ha Real Estate and associated businesses.
Brock said the main issues Kiwibank had faced were the continued downturn in the property market and the impact of the GFC on small business.
"It just so happens that the two sectors that have been impacted significantly are the sector’s that Kiwibank is in, namely the residential market and the small business sector. The main trend has been the significant impact on incomes of small businesses," he said.
With falling incomes many businesses have looked to cut costs quickly.
"Kiwibank has worked alongside those customers as they’ve gone through that process. But in many cases it has come to that next stage where they’ve looked to wind things up and look for exit sources and of course all that lending is secured by property."
'Hundreds' of properties involved; Kiwibank still lending
He said Kiwibank was involved in some mortgagee sales and in other cases was continuing to work with customers. "Hundreds" of properties were involved. This was a "cycle driven event", Brock said.
"There are tightening (lending) criteria which you always look for in this environment but it doesn’t mean to say that we’re not lending. We certainly are. If it’s a good business there’s still good opportunities out there," added Brock. "Kiwibank continues to grow in the business sector largely due to people looking to leave the other banks."
Meanwhile, he said bad debts had stabilised in the June quarter. Impairment losses on loans were NZ$25.8 million in the March quarter and NZ$22.2 million in the June quarter, versus just NZ$4.9 million in the June quarter of last year. June quarter net profit after tax fell NZ$3.575 million, or 35%, to NZ$6.506 million from NZ$10.081 million in the June quarter of 2010.
Brock said he "strongly believed" the worst was behind Kiwibank and there were positive signs for growth and an improved financial performance with new customers continuing to join Kiwibank - it now has about 750,000 versus about 700,000 a year ago - rising net interest income and bad debts stabilising.
"What we’re seeing right now is continued strong growth in terms of customers joining the bank," said Brock. "We’re seeing continued strength in our net asset income figure which is good, and over the last quarter we’ve seen stabilisation in the bad debt numbers."
Lending rises 10% driven by refinancing
Over the year the bank grew loans by by 10%, or NZ$1.08 billion, to NZ$11.5 billion in an overall market that saw anemic credit growth at best. Brock said most of the new lending came from refinancing rather than new loan activity.
The bank's annual net interest income rose NZ$57.9 million, or 43%, to NZ$191.3 million as customers switched from fixed to floating mortgages. The net interest margin rose 29 basis points to 147 basis points from 118 basis points. Brock said more than 80% of home loan customers were currently choosing floating mortgages with about 56% of Kiwibank's total home loans floating at June 30, up from about 38% 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.
Retail deposits rose NZ$103.2 million in the June quarter to NZ$7.9 billion, but due to a drop in wholesale deposits, total deposits fell NZ$287.8 million to NZ$10.58 billion.
Total assets rose NZ$29 million in the three months to June to NZ$13.87 billion and total liabilities rose NZ$15.6 million, over the same period, to NZ$13.26 billion. Ninety day past due assets fell NZ$5.9 million in the June quarter to NZ$32.7 million but impaired assets rose NZ$15.67 million to NZ$106 million.
(Updates add further detail).
39 Comments
I worry Kiwibank's high lending growth comes at the cost of loan quality. And forces it to charge higher interest margins for existing customers.
There's a risk that the other banks dump 'hospital pass' loans onto Kiwibank.
Maybe it's time Kiwibank slowed down a bit and looked after its existing customers.
cheers
Bernard
GB,
Kiwibank has been taking on deals no other banks would look at for some time and there is now a migration away from Kiwibank of better banking deals where they can get service and quaility and not just price.
Why are they increasing provisioning whenother banks are reducing their levels of provisioning?????
Guess where some of those crap loans went?
Yes where some of those crap loans went?????
Its a classic banking problem - to expand you need to attract new customers, who will tend to be less creditworthy.
So bank expands wildly for 3 years, CEO moves on with fat cheque. New CEO comes in and "finds" bad debts created by his predessor, which he writes off and then some. New CEO waves magic wand and 2 years later things turn out to be less bad than feared and new CEO gets fat cheque. Alternately bank is so totally bankrupt that this cannot be disguised from the peasantry, is bailed out and sold to other bank at a fire sale price (in this case the CEO should pass insider info to his mates at the preferred buyer but do it ever so discreetly). I do hope this is not the case.
I love the idea of Kiwibank, but it is run by people appointed by politicians, and as Wolly says - would you lend money to a politician? I don't think so.
WOW a 400% increase in Bad Debt Provision .
As a taxpayer owned entity , we require some details of this fiasco and the nature of these bad loans .
Is it a few big loans or multiple small loans?
Was it secured ( Asset based ) or unsecured lending ?
If this were a private business it would be in seriuos trouble, but fortunately there are some useful tax concessions around Bad Debt provisioning for Banks
The real issue here is that it smacks of an underlying Moral Hazard that always creeps into State Owned Banks, not just in NZ but everywhere in the world.
Governments should never , ever run Commercial Banks, full stop
I had the impression that Kiwibank were quite prudent with their loan to valuation ratios, 20% deposit etc. Aparently not or they could just be being extra prudent with their provisioning. Perhaps these are loans going back to the wild west credit boom days, anyway, Olly says house prices are going to double in a couple of years so no worries aye.
Kiwi Bank is a weird one to deal with; 4-5 yrs ago, we applied for our mortgage; being double incomes with a handsome deposit. Kiwibank turned us down for one silly reason. BNZ, Westpac and other banks welcomed us with their open arms ! From my own experience, I am not surprise!
it could be as simple as the auditor changing the way Kiwibank determine the impairment allowance. I doubt that this sort of deterioration occurred so suddenly. IFRS is a pig and open to interpretation, Kiwibank are relatively small, inexperienced and I suspect the Auditor whacked them with a big stick.
Er I suspect not. This outcome was not unanticipated for two reasons (1) Kiwibank's credit policy and credit risk management has been mediocre at best - in fact they only recently appointed a specific credit risk general manager (for now obvious reasosns - however the horse has bolted). (2) Kiwibank's loan growth has been significant - so they have been growing rapidly at a time when other banks chose not to do those deals. I have first hand knowledge of many of the deals that Kiwibank did over that period. They were 100% lending in lower socioeconomic areas - so any material employment reduction was going to hit them - and has.
where on their site does it mention a government guarantee Scarfie?
I thought the GG's have all expired for retails investors.
I can find the NZ post guarantee:
New Zealand Post Limited, our parent company, has
guaranteed our payment obligations, including any
payment obligation in respect of any deposit made with
us. The guarantee does not apply to payment obligations
where the terms of the obligation expressly provide
in writing that the obligation will not have the benefit
of the guarantee. This means that the guarantee does
not apply to unsecured, subordinated bonds issued
by us. The guarantee is not secured and its amount
is not limited. The guarantee is unconditional and is
terminable by New Zealand Post Limited upon three
months’ notice to us.
It is actually obscure, but it is there. Creditors are actually underwritten by the assets of Kiwibank owner, New Zealand Post.
I would suggest you ring them to ask were it is, just don't expect an answer from the call centre pleb. They seem to have picked up the reject staff from other banks:)
There's this wholesale funding still guaranteed - http://www.interest.co.nz/news/53108/taxpayers-remain-hook-billions-dol…
And Kiwibank/NZ Post's taxpayer 'backstop' deal worth somewhere in the hundreds of millions - http://www.interest.co.nz/news/50408/uncalled-capital-facility-provided…
Hey Wolly, according to John Key we're all pinkos - http://www.stuff.co.nz/national/politics/5509870/Wikileaks-Key-said-Kiw…
Both lefties and righties are devoted to drivel.
There has never been a self-proclaimed leftie or rightie who was anything better than a pathetic loser dipshite.
Righties have done far more damage to the world, but that's only because they were allowed the opportunity. No doubt the lefties could have done the same, given the chance.
Anyone labeling anyone else a leftie or rightie clearly has nothing to say that is worth listening to, and should be banned by law from voting. Hear that all you lefties and righties? (Oops.)
Righties and lefties are both pain in the ar_e. Righties have the habbit of forcing their idealogy into the rest of us, but then lefties are bunch of hypocrites - I've seen so many old dungers belching out black smokes - and what they have on their bumper - greens party stickers!
Kiwibank's bad debts have helped send parent NZ Post to a $35.6 million annual loss - https://www.nzx.com/files/attachments/144877.pdf
Of course Kiwibank is not making money
Its owner does not require it of them
They constantly undercut and undersell to grow business
Take both good and bad lending - why should they care
Their shareholder has given them a blank cheque and will bail them out
their shareholder does not demand commercial returns
their shareholder does not effectively govern
They are KILLING the NZ owned banks - and will eventually be sold to one of the Aussies or another foreigner for a song - and we the taxpayer will be doubly worse off - even less local competition, and more banking power to foreigners - all paid for by us
Kiwibank should be floated RIGHT now and the governement stake reduced to less than 50% - perhaps the ownership should be through NZ Super to ensure that commerical disclpine is imposed on those cowboys.
That way at least - some locally based banks may remain
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