By Gareth Vaughan
Three of the country's biggest four banks annual financial results, due out over the next week, should show their bottom lines are still benefiting from home loan customers switching to more lucrative floating mortgages from fixed-term ones.
The National Australia Bank owned BNZ will kick off the results wrap today, with its September year annual results. Next up will be the Westpac group next Wednesday followed by the ANZ group, owner of both the ANZ and National banks, next Thursday. The Commonwealth Bank of Australia owned ASB has a June balance date, and reported record annual net profit after tax of NZ$568 million in August.
ANZ NZ, the country's biggest bank, is on track for record annual underlying profit after reporting a 45% jump in nine month underlying profit, which excludes non-cash and significant items, to NZ$916 million. The big banks' profits are being boosted by falling impairment losses on loans and rising net interest margins, with the latter largely thanks to the fixed to floating home loan switch.
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.
The latest Reserve Bank data shows NZ$95.463 billion worth of home loans were floating as of August, down NZ$526 million from July. It's the first monthly fall since a NZ$661 million drop in August 2009 to NZ$36.782 billion. This end, perhaps temporary, to the rise of floating mortgages halts a strong swing away from fixed-term home loans. As recently as January 2008, 87% of home loans by value were on fixed-term rates. Now, 56% of home loans by value are floating, down from 57% in July.
The July figures were both the highest percentage and highest dollar amount floating since Reserve Bank records began 13 years ago and the rise of them has occurred during a period when floating rates have been lower than fixed rates. See all advertised bank mortgage rates here.
Auditing firm KPMG yesterday released its June quarter Financial Institutions Performance Survey and noted: "There has been an increasing trend of customers coming off lower fixed term mortgages and moving to higher floating rates, however, the benefits to banks have not yet been felt as a result of March's drop in the official cash rate to 2.5% together with competition for deposits."
KPMG partner John Kensington told interest.co.nz that he expected to see further margin benefit for the banks in their September quarters from the fixed to floating switch.
"I think in this (June) quarter, we saw a very small margin benefit and we think it will continue into the last quarter as well," Kensington said.
However, lending growth was likely to remain weak. ANZ, ASB, BNZ and Westpac, combined, recorded June year lending growth of just NZ$165 million when the BNZ-Westpac growth of NZ$2.344 billion is offset by the ASB-ANZ NZ$2.179 billion contraction, leaving an annual rise of just NZ$165 million to NZ$256.2 billion.
"Things are pretty stalled at the moment," Kensington said. "There aren't any indicators in the economy that things are going to pick up suddenly and accelerate. It's like a car pulling away from the (traffic) lights pretty slowly. Yep, it's moving forward and moving across the intersection, but it's in absolutely no hurry and certainly there's no foot on the accelerator with things looking like they're going to speed up."
Kensington said he expected to see deleveraging continue for a while yet.
"I think perhaps we can't underestimate the fright that people have got and if they don't need debt then they don't need debt and they'll get rid of it. And if they're looking to buy something they'll hang on a bit longer so they save a little bit more and they have a bigger deposit and do it that way," he said.
"There has been quite a cultural shift (away) from 'I'll put it on my card, or I'll put it on my overdraft and I 'll pay for it later.' There has been quite a wake up call."
This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.