December quarter deposit growth at the country's big five banks comes at more than five times the rate of gross lending growth

By Gareth Vaughan

The country's big five banks, combined, raked in more than five times as much money in deposits in the December quarter than went out the other door in gross loan growth as their combined profit jumped 65%.

Analysis of the latest General Disclosure Statements from ANZ, ASB, BNZ, Westpac and Kiwibank shows their combined gross lending grew by NZ$992 million in the quarter. Aside from BNZ's NZ$802 million growth, with the biggest slice business lending, Kiwibank recorded NZ$215 million of growth and Westpac NZ$92 million. ANZ's gross loans fell NZ$104 million and ASB's fell NZ$13 million.

In contrast the five banks, combined, grew deposits by NZ$5.3 billion. BNZ led the way with NZ$1.8 billion growth, followed by ASB's NZ$1.7 billion and Westpac's NZ$1.2 billion. Kiwibank's deposits rose NZ$489 million and ANZ's rose NZ$149 million.

The influx of money to deposits at the big banks comes against a backdrop of few recent increases to the interest rates paid by the banks to savers.

A notable recent series of increases came from RaboDirect, Rabobank's online bank. These included increasing its one-year rate by 10 basis points to 4.60%, which is the equal best one-year rate advertised by a bank, and hiking its five-year rate 35 basis points to 6%, which is the best advertised five-year rate.

See all advertised term deposit rates for one to nine months here and all advertised term deposit rates for one to five years here.

It's worth noting that not all the banks' deposit figures in their disclosure statements are merely deposits, per se. ANZ's NZ$69.4 billion of "deposits and other borrowings", which rose NZ$149 million, includes NZ$3.7 billion of commercial paper and UDC Finance's NZ$1.4 billion of secured debenture stock. ANZ's term deposits fell NZ$850 million to NZ$32.9 billion over the quarter.

Nonetheless weak overall lending growth and strong overall deposit growth lessens the need for the big banks to borrow money in turbulent offshore wholesale funding markets.

Profit surge

The five banks' combined net profit after tax for the three months to December 31 was NZ$1.06 billion, up NZ$421.2 million, or 65%, from NZ$643.2 million in the same period of 2010. The combined bottom line was boosted by big gains at ANZ and BNZ on the likes of hedging, foreign exchange and the fair value of financial assets and liabilities.

BNZ's NZ$139 million, or 93%, profit jump to NZ$289 million was helped by net gains on financial instruments at fair value jumping NZ$124 million to NZ$139 million. And ANZ, the country's biggest bank, recorded NZ$64 million of profit from fair value gains on derivatives versus a loss of NZ$40 million from this in the December 2010 quarter.

Removing Kiwibank's NZ$15.2 million profit rise to NZ$20.4 million, the big four Australian owned banks, combined, recorded NZ$1.044 billion of profit in the quarter up from NZ$638 million. ANZ's profit surged NZ$155 million, or 60%, to NZ$415 million, Westpac's climbed NZ$50 million, or 53%, to NZ$145 million, and ASB's rose NZ$62 million, or 47%, to NZ$195 million.

Another key factor in the profit growth was falling impairments on loans. Combined, the five banks' impairments more than halved to NZ$91.1 million from NZ$188.5 million. Operating expenses across the five were also down NZ$7.9 million to NZ$1.034 billion. Leading the way were ASB with a NZ$9 million, or 5%, drop to NZ$170 million, and ANZ with a NZ$16 million, or 4%, drop to NZ$402 million. BNZ's were unchanged at NZ$196 million with Westpac costs up NZ$10 million, or 5%, to NZ$200 million and Kiwibank's up NZ$7.1 million, or 12%.

All five recorded rises in net interest income with this up a combined NZ$124.2 million to NZ$1.783 billion.

Where will future profit growth come from?

The December quarter continues a strong recent run of bank profitability. In their 2011 financial years the big four, combined, they made net profit after tax of NZ$2.778 billion, which was NZ$78 million, or 3%, higher than their combined profit in the boom year of 2007 when double digit lending growth was the norm compared with the anaemic lending growth of today. According to the Reserve Bank's latest sector credit figures, agricultural debt was flat in the year to January, business debt rose 2%, housing debt increased 1.2%, and consumer debt fell 0.2%.

Both ANZ and ASB made record annual net profit in 2011 and ASB has followed this up with record half-year profit of NZ$372 million for the six months to December 31.

The bottom lines have been helped by big drops in impairments on loans and rising net interest margins, with the latter owing a lot to a shift by home borrowers to floating mortgages from fixed-term loans. Earlier this year the percentage of home loan borrowers with their mortgage on a floating interest rate rose above 60% for the first time since Reserve Bank records began in June 1998. At the end of January 61.7%, or NZ$105.687 billion of NZ$171.267 billion worth of home loans were on floating, or variable, rates.

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.

With both the switch to floating mortgages and decline in impairments predicted to be near the end, the question is where banks will turn for profit growth next.

Asked by interest.co.nz where he saw profit growth coming from once these two bottom line boosters run their course, ANZ NZ CEO David Hisco said he'd like to see the economy pick up.

"And we’ve been managing our costs very tightly, and what we’re doing is no different to what any other business would do," said Hisco. "And that is in a market where your revenue outlook is more challenging you have to have a look at your cost base and make sure you’re doing the best you can there."

"So we’re focused around cost management and that’s coming through in the results. We think if we manage our costs well we’ll continue to maintain strong jaws - the gap between cost and revenue - and that really is what we're aiming at doing."

Asked about the potential for job cuts, offshoring of staff or outsourcing Hisco said ANZ had "no big programmes planned" in New Zealand. 

"If somebody leaves we say 'do we need to replace them or do we combine their role with someone else?' So we'll manage to get our staff numbers down mainly through attrition," said Hisco.

In the year to September 30, 2011, ANZ NZ's staff numbers fell by 142 to 9,270. In Australia ANZ NZ's parent, the ANZ Banking Group, recently cut 1,000 jobs.

*The Westpac deposit and lending growth figures from the December quarter used in this story strip out the transfer of NZ$6.3 billion worth of loans and NZ$5 billion worth of deposits from its Australian parent during the quarter in a move to bring Westpac NZ in line with Reserve Bank bank registration rules.

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