By Gareth Vaughan
Any customers or members of the public scratching their heads at just how ANZ New Zealand could post a 25% jump in annual net profit to a record high whilst operating in a weak domestic economy, probably don't understand just how big the bank is, its CEO David Hisco says.
Hisco, speaking to interest.co.nz after the country's biggest bank reported net profit after tax rose NZ$218 million, or 25%, to NZ$1.085 billion for the 12 months to September 30, said if people were surprised at this they probably didn't realise the size of the banking group.
"It (ANZ NZ) is ANZ, its National Bank, it's UDC Finance, it's EFTPOS New Zealand, it's OnePath, it's Direct Broking," said Hisco. "So it's probably the largest company in New Zealand by assets, and one of the largest employers (with 9,270 staff)."
"We are a large bank and because we operate under a number of brands people tend to forget how big we really are."
Both the net profit and underlying profit, which excludes non-cash and significant items and jumped NZ$361 million, or 41%, to NZ$1.243 billion, were record highs, topping what ANZ achieved in the boom year to June 2007.
Hisco said the strong profit rise was primarily driven by a NZ$274 million, or 59%, drop in provisions for credit impairment to NZ$187 million. This, a theme repeated across rivals ASB, BNZ and Westpac's annual results, wasn't going to be repeated in the 2011-12 year with the business "normalising."
"It is very hard to see that (profit growth) occurring again because obviously you can only have a provision uplift of that size once. Eventually you get back to normal provisioning which is a lot lower than what we had to provide for during the global financial crisis (GFC)," Hisco said.
Combined annual profit from the big four banks for 2011 outstrips boom year of 2007
ANZ is the last of the big four banks to report its 2011 annual financial results. Combined, the four made net profit after tax of NZ$2.778 billion. That's NZ$78 million, or 3%, higher than their combined 2007 profit.
The strong 2007 profit figures came towards the end of the recent cheap credit bubble that ended with the GFC, whose ramifications continue to be felt through the European sovereign debt crisis and poorly performing major Western economies led by the United States which are weighed down by high debt. Here in New Zealand credit growth was booming in 2007 with ANZ recording lending growth of about NZ$9.4 billion, or 12%, in the year to June 2007. That compares with its lending contracting in the year to September 2011 by NZ$2.5 billion, or 3%.
More broadly, Reserve Bank sector credit figures show 2007 calendar year agriculture debt rose 14.9%, business lending rose 13.3% and total household claims, which includes housing and consumer loans, rose 12.2%. In the year to September 30, 2011 agriculture debt fell 0.8%, business lending rose 1.5%, and total household claims rose 1.1%.
'Won't do 95% LVRs on home loans'
Hisco attributed ANZ's lending drop to farmers deleveraging and the bank declining to write residential mortgages at 95% loan-to-value ratios (LVR).
"Because we've got such a large exposure, I think we're 36-37% of the overall rural (lending) market in New Zealand, obviously when you have got a large percentage of something and people are in the mindset of getting their debt down and getting under control, then obviously it's hard to swim against that tide," said Hisco.
"On the mortgage side we've held our share in the under 80% (LVR) segment but our share in the high LVR 95% segment has eased."
In 2008 ANZ was writing a significant proportion of high LVR loans, he said, and that had cost it a lot of money, with significant write-offs.
"We've changed our settings on that. We don't believe that lending people money for a home when they've got a 5% deposit is probably a good thing for us or a good thing for them. They don't have a significant buffer so we've stayed out of that market and as a result others probably have jumped in and taken up the slack and they may experience what we've experienced."
Margin expansion
Despite its lending contracting, ANZ's net interest margins rose 11 basis points over the year to 2.38% and 5 basis points in the second half year from first half to 2.40%. This came with a big move in home loan customers to floating, or variable, rates from fixed-term rates. A balance 60-40 in favour of fixed-term loans reversed itself over the year, Hisco said. ANZ Treasurer Paul Daley said mortgages written several years ago were written at much lower margins so whether customers come off and go on to fixed or variable rates, the margins for ANZ on the new loans are higher.
Daley also said the cost of borrowing three to five year wholesale money in 2007 for ANZ was about 25 basis points over swap rates. During the GFC it soared to 250 basis points and was "probably back up" at those sorts of levels now.
"Looking forward, with what's going on in Europe at the moment, it's pretty hard to see those wholesale funding costs coming down in any material way," Daley said. New Zealand banks source about one-third of their total funding from overseas wholesale markets.
Hisco said, however, although ANZ was paying a lot more for the money it on-lends to customers, the absolute base interest rate is a lot lower meaning customers are getting interest rates now which are much lower than they were. All the country's major banks have cut fixed-term mortgage rates over the past week but left the more popular, and in most cases lower, floating rates unchanged. Hisco said it was hard to predict where these would go in coming months.
"All you can really say is that conditions around the world are uncertain and uncertainty means people tend to be very cautious about what they do so that will probably keep a lid on inflationary pressures," said Hisco. "I think generally in the variable market the rates are historically low, (but) I'm not sure there's much more left in it."
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23 Comments
What caught my eye was this:
"[...] Eventually you get back to normal provisioning which is a lot lower than what we had to provide for during the global financial crisis (GFC)," Hisco said."
What's interesting is his use of past tense - "had to provide for". Does Hisco believe that the global financial crisis is actually over?
With those profits, even if they're supposedly a one-off, the GFC must feel awfully far away if you're upper management in Aust/NZ banking.
Never have so many been ripped off by so few with the express help of Alan Bollard and the govt. The profits taken out of the economy by these banks marks the stage they are at in their determined efforts to turn the NZ economy into their personal cash cow. In this effort they have been helped by Bollard and the govt and the stupid media.
The margins are excessive and mean both savers and borrowers have been screwed. Apply Bollard's planned debasement on top and the extent of the losses is into the billions. Key and English ought to have the ability to both understand the nature of this scam and the serious risk it poses to them remaining in govt post 014.
Yet, they and Bollard continue to act as though the ocr play and the policies of "hope" will turn the economy from an ugly property brute managed by the banks for the banks, into a real modern economy reliant on savings..will somehow win out.....utter garbage.
Out of interest what does a 'real modern economy' look like? Which countries economy is reliant on savings? Certainly none that I know of. Maybe if you are going to criticise Key, English and Bollard for not knowing it would be good to have some idea of what the ideal is?
"... people tend to forget how big we really are."
And Banks have forgotten how privileged and protected they are.
With the total loss of perspective displayed here it's no wonder Marc Faber says it will all end in war and revolution. Then again I suppoe he's no more greedy, blind or stupid than the aristocracy were in their day.
Here's some detail from PwC's report on the annual results from the big four Aussie banks (parents of NZ's big four):
The four majors have just reported an aggregate return on equity of 16.4% for 2011 (up from 15.1% in 2010).
Their combined underlying cash earnings rose to a record A$24.4 billion, up 12.8%.
The main drivers of the growth were the containment of costs, up only 3.4%; and particularly the reduction in bad debt expenses of 30.8%. Notably, revenue growth in the second half was particularly weak at 0.7%.
The net interest income line grew 5% with the second half increasing on the first half by 5.1%.
Loan balances only grew 5% year on year and 3.3% half-on-half.
John Key got elected three years ago with considerable help from the Australian business community.
It didn't surprise me that he appeared earlier in the week in front of an Australian flag.
Sadly, he's quite happy for obscene banking profits to go overseas and is looking forward to sending similar profits from electricity companies to go the same way.
This article assumes that all the profits come from the margin between lending and borrowing. But a look at their website shows they are heavily into derivatives of all varieties. I understand that the demand for growth drives investment bankers to take greater risks in order to deliver the profits and growth their CEOs and shareholders demand.
This is from yesterday's blog part of our webpage:
So looking at their website we find their board comprises seven men and one woman. Two live in Sydney, four in Melbourne, one has homes in both Sydney and New York and one lives in Singapore. They have backgrounds in law, accountancy and one was an ex Reserve Bank of Australia Governor. No surprises there. And of course they are on the boards of other companies like CocaCola and one was an advisor to Goldmann Sachs.
Bernard Hickey was on Closeup TVNZ tonight explaining how their margins have widened. People are paying higher mortgages and investors are getting lower returns. But this isn’t all. A look at their website shows they are dealing in derivatives like spots, options and forwards. Then there are spot minors, forward majors etc. All sorts of “financial instruments” that not even bankers understand themselves sometimes. This calls for a financial transaction tax.
It is of course also fundamentally misleading to say that the profit is the margin between lending and borrowing. This is because Banks lend more money out than they take in deposits, they 'manufacture' the difference. It's not a small factor either most would lend out over 10x the amount that they take in deposits.
Yes this leverage, and the way that money deposited becomes their property (you don't have a say in bank investments) allows them to fiddle with derivatives, options and forwards.
but the banks only create 'money' that is a loan **to** the bank. Banks loans are just the same as you writing out cheques (which is creating your own personal money as the means of exchange) where you intend to allow that cheque to clear in the normal manner without fraud.
No, sorry, but that is incorrect. If there were strict reserve requirements then this might be the case, but it is certainly no longer true and has not been for many years. As well as saying loans create deposits it is also necessary to couple the statement that banks create loans first and look for reserves later. The central bank can and does always create the necessary reserves when risks are taken.
The following link shows how banking actually functions today, including statistical evidence to prove it, http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
You should also ask, if that money (the deposits) is loaned to the bank to lend on, how come you can access most bank deposits at will? If the bank has loaned it out then how can two people still have use of it? It's the same as cheque book money, yes, but sometimes cheques bounce. Sometimes banks can't repay depositors either.
What is incorrect??
I am not saying the deposits are loaned to the bank to lend on.
If you use your credit card you have no money to begin with. The act of using the card creates a loan to the bank from the seller and a debt to you. You have no debt if you dont use the card. Loans create new deposits in the banking system or the same bank.
Steve keens site entirely supports what i am saying.
The fact the banks look for reserves later is not of much importance. You already mentioned leverage with respect to reserves. The banks create deposits which is levered net interest received or margin with respect to available capital, where reserves do not play much of a role in restricting lending other than being the binding agent that links systems together - ie cash links systems together. A bank with gold or bonds for example needs no central bank reserves at this moment in time to safely lend additional money (as defacto cheques) and function as a bank
The people who are really paying for these huge profits are the savers, who are probably losing money on their deposits in the bank/term deposits, due to inflation. No wonder why people would rather spend than save. That is essentially 1 billion just by ANZ bank, that has been taken out of the NZ economy. Combined with other banks, it would be a lot more.
Rob - its isnt the banks that are the ones really screwing the savers and investors, its the borrowers who are having to be bailed out because of a combination of either a global recession (certainly low growth) or just bad borrowing decisions, Some of that is being moderated for the savers because, all else being equal, you should only be getting 2.5% on your short-term money, yet youre getting 4% plus because of the GFC, The banks margins are a minor issue in comparison, and if they werent making profits, and in trouble, look what you get in countries with banks in that situation, 0% interest and in some cases, you pay them to take your cash
No, this is not an accurate representation of how banking actually work. You also make the mistake of assuming that if 100s of professional economists, mathematicians and market analysists, bankers and traders can't see a historic financial crisis coming then obviously borrowers should.
Real facts are available here, www.positivemoney.org.nz
What would probably be more accurate to state is that the banks, acting together, create our money supply. In fact 98% of it and the rest is notes and coins created by the Reserve Bank. This means banks as a whole decide how big our money supply is at any one time. They can 'row' the economy between easy money and tight money and this is the time they make big profits.
Perhaps this fits with why ANZ had a bigger profit this year. And by the way all the directors of ANZ live outside NZ. On the RBNZ site it is listed as a branch of an overseas incorporated bank. Its directors live in Sydney, Melbourne, New York and Singapore. In fact we have nine banks in NZ which are branches of overseas incorporated banks. This is ridiculous. Why have we ceded our sovreignty to Citibank, JP Morgan, and Deutsche Bank and their ilk? What would stop us having a law requiring corporation that choose to operate in New Zealand to charter an independent local subsidiary with majority ownership by New Zealanders?
Five of the eight directors of ANZ NZ (or ANZ National Bank) are NZ resident according to the Companies Office. They are Dryden Spring, John Judge, CEO David Hisco, Norman Geary and Antony Carter. The other three directors are the CEO of ANZ's Australian parent Mike Smith, its chief financial officer Peter Marriott and its head of institutional banking Shayne Elliott.
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