TSB boss says any credit rating downgrade wouldn't be a fair reflection of the bank's 'exceptional' performance

By Gareth Vaughan

TSB Bank CEO Kevin Murphy says any credit rating downgrade from Standard & Poor's wouldn't necessarily be a reflection of the bank's performance, and credit ratings aren't a definitive view on the financial performance of an organisation anyway.

Speaking to interest.co.nz after TSB posted a $5.3 million, or 11%, rise in annual net profit after tax to $53.1 million, Murphy appeared irked by S&P's recent threat to downgrade TSB along with seven other New Zealand financial institutions. Earlier this month S&P revised its outlook on TSB's BBB+ credit rating to negative from stable, and said it might downgrade the rating by one or two notches within two years if economic vulnerabilities worsen.

"Given what they (S&P) are looking at doing in the macro (economic) area, it's not necessarily a reflection of the performance of the bank," Murphy said. "So it's important, if there were to be an adjustment, that it was clearly communicated to our clients and through the media, the rationale behind it, because the bank continues to perform exceptionally well."

S&P said its action was due to its belief that New Zealand’s economic vulnerabilities, including a material dependence on external borrowings, persistent current account deficits, and recent strong growth in house prices, could escalate.

"In our view, this increases the risk of a deterioration in New Zealand banks’ credit qualities," S&P said. "The negative outlook does not reflect deterioration in our assessment of bank-specific credit factors."

TSB sources a tiny amount of its funding from wholesale sources, with the rest from retail deposits, and all from within New Zealand. Murphy said there were no plans to increase wholesale funding.

Call for education on credit ratings

And he suggested better education was needed on what credit ratings are.

"I think there's an education process across the board that needs to take place for the New Zealand market in terms of what credit ratings are about," Murphy (pictured below) said.

"Pre-global financial crisis there were a number of financial institutions worldwide that had A (credit) ratings that no longer exist. So a (credit) rating is not necessarily a definitive view on the financial performance of an organisation."

Registered banks are required by the Reserve Bank to have a credit rating. See credit ratings explained here.

In terms of other sources of information about banks' financial strength Murphy pointed to KPMG's regular Financial Institutions Performance Survey, "which ranks banks across a number of performance measures," and PwC's Banking Perspectives reports. KPMG is also TSB's auditor.

"There are reports out there that perhaps give a more wholesome view of how an organisation's performing," said Murphy.

March quarter lending grows

TSB's latest General Disclosure Statement, released with its annual report, shows the bank grew residential mortgage lending by $24.8 million, or 1%, in the three months to March 31 to almost $2.5 billion. Along with rivals, TSB has been offering extras to try and entice borrowers. In its case it has been up to $1,000 towards legal fees and an iPad or iPhone 5 with its 4.95%, 15-month home loan offer. Murphy declined to say how many iPhones and iPads had been given away, saying only that the promotion had gone "significantly better than what we'd anticipated."

However, he noted "intense" competition in residential mortgage lending, with this - if anything - having intensified in the time since TSB's March 31 year end. Asked whether the current level of mortgage competition was sustainable Murphy said lending margins were tight.

"Banks are looking to grow their loan books so there is potentially room with margins to further grow the business, but margins are at very low levels now so you can only go so far with that sort of thing," he said.

"It's not difficult to work out when you've got deposit rates at over 4% and lending rates below 5%, and when you factor in the incentives being offered around that, there's not a lot of margin in it when you're funding off the retail market as we do."

In the March quarter TSB grew its business lending by $8.6 million to almost $189.4 million, and its farm loans by $18 million to $137.8 million. Gross loans rose $52.8 million, or 2%, to $2.882 billion.

Deposits rose $35.6 million, or 0.72%, to $4.939 billion. Of the total just $24.9 million is wholesale deposits.

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