BNZ CEO Andrew Thorburn sees net interest margins at a 'sustainable' level between 2.30% and 2.45% over the long-term

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By Gareth Vaughan

The Bank of New Zealand (BNZ) is likely to retain its net interest margin around current levels but doesn't expect its bad debt charges to remain at current lows, CEO Andrew Thorburn says.

Speaking to interest.co.nz after BNZ yesterday posted record half-year cash earnings of NZ$385 million, which was up NZ$102 million, or 36%, from the same period of the previous year, Thorburn said the bank's 2.41% net interest margin, for the six months to March 31, was sustainable. This was up 6 basis points from September 30 and up 17 basis points from March 31, 2011. BNZ's half-year net interest income rose NZ$71 million, or 11%, to NZ$711 million.

"I think we've got net interest margins (NIMs) back to what is probably a sustainable level now given the range of services, the number of staff - over 5,000 - and the number of outlets that we have," Thorburn said. "We have invested over NZ$250 million in New Zealand in the last two years across a range of things."

"So these sort of NIMs enable us to have confidence that we can get adequate returns, we feel that the investments are paying. So I would think that the NIM at this level is sustainable. I don't think it's going to go a lot higher. It might fall a wee bit as competition bites but I think in the 2.30% to 2.45% range is where we would see the long- term averages, and I think they're needed if we want to have the banking system we've got," Thorburn added.

Stellar profits all around with BNZ stacking up well

The BNZ interim results cap off a stellar results round from the big four Australian owned banks with all four delivering record half-year cash earnings. Combined half-year cash earnings from the four - ANZ NZ, ASB, BNZ and Westpac NZ - came in at NZ$1.705 billion, up NZ$392 million, or almost 30%, from NZ$1.313 billion in the first half of their previous financial years.

All four recorded solid net interest margin rises. ANZ disclosed a New Zealand business net interest margin and a New Zealand geography one. The former rose 12 basis points to 2.65% and the latter was up 10 basis points to 2.50%.  Westpac's net interest margin rose 6 basis points to 2.43%, and ASB's rose 15 basis points to 2.19%.

Their returns on average assets were also on the rise. ANZ's to 1.16% from 1.02%, ASB's to 1.2% from 0.9%, Westpac's to 1.1% from 0.97%, and BNZ's to 1.30% from 1.12%.

Cost to income ratios fell across the board. BNZ's  to 39.7% from 41.5%, ANZ's to 45% from 46.3%, ASB's to 40% from 44.9%, and Westpac's to 42.7% from 44.1%. In terms of return on equity (RoE), ASB's rose to 21.2% for the six months to December 31, 2011 from 17.2% in the year to June 2011. BNZ's annualised RoE for the March half-year was 15.4%, up from 12.8% in the same period of the previous year. The ANZ Banking Group cited an improved New Zealand RoE without providing specific figures, and Westpac NZ declined to disclose its RoE.

Although they've bounced back from the depths of the global financial crisis, the banks' net interest margins and returns on equity are still lower than they've been in the past. For example, ASB's return on equity peaked at 25.4% in 2003, and BNZ had a net interest margin of 2.78% in the March 2003 half and 2.86% in the March 2011 half.

With credit impairments it was a case of three down, one up.  BNZ's fell NZ$61 million, or 64%, to NZ$34 million. ASB's dropped NZ$22 million, or 61%, to just NZ$14 million. Westpac's fell NZ$35 million, or 26%, to NZ$98 million. In contrast, ANZ's rose NZ$14 million, or 16%, to NZ$99 million.

Of BNZ's Thorburn said a bad and doubtful debt charge figure of NZ$34 million was "extraordinarily" low and not sustainable.

"Because if you look at the pressures still in retail, small business, the effect of the exchange rate, and also things like kiwifruit and Christchurch, there's some uncertain domestic times ahead," Thorburn said. "And whilst we feel that we've probably got through the worst of the credit cycle and the recession, we don't think that the bad and doubtful debt number is going to stay at this low level."

NZ subsidiaries strong performers for their Aussie parents

All four banks were strong performers in their Australian parent group's results. In contrast to their New Zealand subsidiaries, net interest margins fell at all four Australian groups with ASB's parent Commonwealth Bank of Australia's down 10 basis points to 2.15%, the ANZ Banking Group's down 9 basis points to 2.38%, the Westpac Group's down 6 basis points to 2.17%, and BNZ's parent National Australia Bank recording an 11 basis points fall to 2.17%. The Reserve Bank said in its Financial Stability Report on Wednesday it expected the banks' strong profit growth of the last three years to slow in coming years as competition heats up and tougher capital rules kick in. See Bernard Hickey's article here.

The New Zealand subsidiaries have been benefiting from a customer switch to floating, or variable, rate mortgages from fixed-term ones whereas floating mortgages have long been the more popular option in Australia.

Based on Reserve Bank of New Zealand figures, 62%, of the total NZ$171.5 billion value of industry wide home loans were on floating rates at the end of February. That's the highest level since the Reserve Bank bank began keeping records on fixed versus floating in June 1998. Overall 85% by value were either floating or fixed but up for renewal within 12 months. These figures are the culmination of a big switch by borrowers to floating mortgages in recent years with 87% of home loans by value on fixed-term rates as recently as January 2008.

Banks do better out of floating 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 the swap rate and fixed rate mortgages. However, when customers are floating it's easier for them to switch between banks because there's no break fee to pay when doing so.

Thorburn said two thirds of BNZ's total housing book was now on floating rates.

"And of course that's very different to the way it was five years ago. And I think given the interest rate outlook, it's probably likely to stay that way," said Thorburn.

Credit growth to remain weak

Meanwhile, Thorburn said he expected more of the same in terms of credit growth given the challenging economic environment.

"If you look at the economic environment in New Zealand with low growth, a higher exchange rate, main (export) markets like Australia struggling, China slowing down and ongoing issues in the US and Europe, I think it's a very uncertain and subdued and concerning outlook," he said.

"Therefore I think we're going to see a continuation of the current trends. I think deposits will continue to grow. They'll be very competitive, but I think New Zealanders will continue to save and I think that's a good thing."

"But I don't think we're going to see much growth in housing aggregates nor business aggregates. I think it'll be somewhere in the 1-3% range on the credit side (annualised). I think there's going to be very low growth in the next six to 12 months because of that economic and environmental issue hanging over us," Thorburn added.