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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