Kiwibank closes in on record annual profit after strong March quarter

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.

By Gareth Vaughan

Kiwibank looks set to notch record annual profit after a strong March quarter left its profit for the first nine months of its financial year sitting just NZ$2.6 million below the bank's previous record annual peak.

Kiwibank's General Disclosure Statement (GDS) for the three quarters to March 31 shows unaudited profit after tax of NZ$61 million. That's up NZ$46 million, or slightly more than fourfold, from just NZ$15 million in the same period of the bank's previous financial year. It's also just shy of Kiwibank's record annual profit of NZ$63.6 million it made in the year to June 30, 2009.

In February a Kiwibank spokesman told interest.co.nz the bank expected to make annual profit of at least NZ$50 million. That forecast now looks conservative after the strong March quarter. The bank's half-year results released in February also showed return on equity up to 11.42% from 4.68%.

Meanwhile, the latest GDS shows profit after tax for the three months to March 31 of NZ$23 million, up from just NZ$814,000 in the same period of last year. Last year Kiwibank, a subsidiary of state owned enterprise New Zealand Post, saw impairment losses on loans balloon in the March quarter to NZ$25.8 million (from just NZ$3.2 million in the same period of the previous year) in the wake of February 22 Christchurch earthquake. This March quarter impairments were NZ$9 million.

Quarterly net interest income rose NZ$13.7 million, or 27%, to NZ$65 million, and total operating income increased NZ$16.4 million, or 18%, to NZ$106 million. Operating expenses rose NZ$2.3 million, or 4%, to NZ$65 million.

Profit up at big four too

Kiwibank, which opened for business in February 2002, is not alone in recording strong profit. The big four Australian owned banks - ANZ NZ, ASB, BNZ and Westpac NZ - have all delivered record half-year cash earnings in their current financial years. Combined half-year cash earnings from the four 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.

The banks' bottom lines have been bolstered by customers' switching to floating, or variable, rate mortgages from fixed-term ones over the past couple of years. 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.

The overall percentage of total mortgages by value on floating interest rates has this year reached its highest point since the Reserve Bank began keeping records on fixed versus floating in June 1998. The latest data shows 63%, or NZ$108.8 billion, of the total NZ$172.6 billion mortgages were floating at the end of April. These figures follow a big switch by borrowers to floating mortgages over the last couple of years, and come after a peak of 87% on fixed-term rates in January 2008. However, recent cuts by the banks' to advertised fixed rates are likely to have seen some movement back towards fixing. See all advertised bank mortgage rates here.

Lending up

Meanwhile, the GDS shows Kiwibank's total net loans up NZ$241 million to NZ$12.309 billion in the March quarter with its home loans, based on the loan-to-valuation ratio (LVR) table in the GDS, up NZ$225 million to NZ$11.434 billion. Reserve Bank sector credit data shows March quarter industry wide housing loans up NZ$1.067 billion. However, it's not a straight forward task comparing the various banks based on the disclosure statements. ASB, for example, changed the methodology used in its LVR table leading to a NZ$1.2 billion fall in home loans with LVRs above 90%.

Based on the housing term loan data provided in the GDS's, Westpac grew housing loans by the most in the March quarter, up NZ$462 million. ANZ's rose by NZ$204 million, BNZ by NZ$163 million, and ASB by NZ$63 million, with the latter based on a "residential mortgages" disclosure.

Following on from the March quarter, Kiwibank's June quarter home loan growth is off to a strong start. From its just completed five week 4.99% one-year mortgage rate 'special" offer alone, Kiwibank says it lent more than NZ$200 million.

Deposits down

Aside from Westpac, the state owned bank was the only one of the big five to record a drop in deposits in the March quarter with total deposits down NZ$228 million to NZ$11.488 billion. The other three all recorded deposit growth of at least twice their rise in gross lending.

Kiwibank's total assets rose NZ$266 million to NZ$14.652 billion and total liabilities increased NZ$236 million to NZ$13.923 billion. Total equity rose NZ$30 million to NZ$729 million. The bank's tier one capital ratio, which represents the shareholder's equity in the bank, fell to 9.8% at March 31 from 10.1% at December 31, and its total capital ratio fell to 11% from 12.1%. The Reserve Bank mandated minimums for Kiwibank are currently 6% and 8%, respectively.

Last month's Budget revealed the Government is positioning itself to inject new capital into Kiwibank over the next three years, with that likely to come from the proceeds of its partial State Owned Enterprise privatisation programme.