BNZ half-year profit falls 8% as bank's net interest margin sheds 12 basis points. CEO Anthony Healy predicts pressure on bank lending margins will increase customers' loan interest rates

BNZ has posted a 7.8% drop in half-year profit due to accounting movements in its offshore debt holdings, and as its net interest margin fell 12 basis points.

The bank's net profit after tax for the six months to March 31 fell $35 million, or 7.8%, to $416 million from $451 million in the six months to March 31 last year.  A key factor in the lower profit was $95 million of losses from fair value movements and hedging. (see more on this at the foot of this article*).

Net interest income rose $25 million, or 3.1%, to $823 million, other operating income was up $1 million, or 0.4%, to $280 million, meaning net operating income rose $26 million, or 2.4%, to $1.103 billion.

Operating expenses increased $3 million, or 0.7%, to $433 million. Charges for bad and doubtful debts dropped $44 million, or 52.4%, to $40 million helped by an improved outlook for the dairy farming sector.

In the six months from September 30 to March 31, customer deposits rose $2.5 billion, or 5%, to $53 billion. Over the same time period gross loans grew $2.1 billion, or 2.8%, to $76.2 billion.

Year-on-year, BNZ's net interest margin dropped 12 basis points to 2.15%, and was down six basis points half-on-half.

CEO predicts increased pressure on lending margins will 'influence lending rates'

BNZ CEO Anthony Healy said the strength of the NZ economy is providing both benefits and challenges, reflected in sound credit quality and lower bad and doubtful debts, but with increasing margin compression as lending growth continues to exceed deposit growth across the banking system.

"We anticipate there will be increased pressure on lending margins in the coming months which will influence interest rates. Essentially, while funding costs have fallen they haven’t fallen by as much as our lending rates, which means our margins have reduced. Today there are more people looking to borrow, so banks are paying more to win customers deposits so this will lead to higher lending costs being passed through to borrowers," Healy said.

Healy elaborated on these comments in an interview with interest.co.nz.

"When you've got a country that spends more than it earns, so we run a current account deficit, it has to be funded primarily through the banking system. And as credit growth has remained strong but deposit growth has almost halved in the last six months, that puts more pressure on the deposit market. Banks are obviously competing for their share of a smaller pie of deposits. So that pushes up the cost of deposits and that then filters its way through the cost of funds, and therefore over time to lending rates," Healy said.

"Over the past six to 12 months banks' margins have been compressed quite a bit because of that. So I would expect over time, you will see lending rates increase because the cost of funds is increasing."

7k Android Pay users

Meanwhile, BNZ says that since it launched Android Pay on December 1 last year, it has registered 7,000 customers and processed 49,000 Android Pay transactions.

Parent National Australia Bank (NAB) increased interim cash earnings by 2.3% to A$3.29 billion. NAB's fully franked interim dividend was unchanged at A99 cents per share, and its return on equity fell 30 basis points to 14%.

 BNZ performance measures  March 2017  September 2016  March 2016
 Cash earnings on average assets  1.16%  1.20%  1.14%
 Net interest margin  2.15%  2.21%  2.27%
 Cost to income ratio  39.3%  39.6%  39.9%

*The chart above shows 90+ days past due and gross impaired assets as a percentage of gross loans and advances.

*Unrealised fair value gains or losses on economic hedges that do not qualify for hedge accounting and hedge ineffectiveness causes volatility in statutory profit, BNZ says, which is excluded from cash earnings as it is income neutral over the full term of transactions. This arises from fair value movements relating to trading derivatives for risk management purposes; fair value movements relating to assets, liabilities and derivatives designated in hedge relationships, and fair value movements relating to assets and liabilities designated at fair value. BNZ's half-year cash earnings, which is not a statutory financial measure, is not presented in accordance with NZ Generally Accepted Accounting Principles, nor audited, rose $40 million, or 9%, to $484 million.

BNZ's press release is here and here's parent NAB's press release. 

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17 Comments

Shocking! Poor show BNZ management.

It turns out that investing in meth houses and meth labs was a bad choice for BNZ.

The BNZ doesn't invest in Meth houses, that is the job of investors to take on that risk.

BNZ has posted a 7.8% drop in half-year profit due to mark to market movements in its offshore debt holdings...

I am not a derivatives accountant, but it seems to me that if the foreign debt (USD?) was hedged with cross currency basis swaps, BNZ would be in receipt of NZD collateral payments from the NZD counterparty lender to offset the foreign currency marked to market hit.

Whatever, the unsecured bank depositors are deserving of more detailed information.

I had occasion to mention bank derivatives at the bottom of a comment stream started on Monday. Read more

Eurodollar mkt seems to play a big part in USA Corporate/multinationals borrowings.

Indeed - as do the derivatives that underpin it's growth or not.

Derivatives are central to the modern wholesale monetary system, and the total of gross notional balance sheet coverage is a very important window into the heart of the system. It tells us a lot about what’s going on in places that can’t otherwise be observed, at least not so directly. Derivative books are risk-taking behavior, and the shrinking of them delivers further striking evidence of global monetary problems that have proved so far intractable because they speak to the very basis of what eurodollars were supposed to be (risk vs. reward). [my emphasis] Read more and more

What was ANZ playing at running a $1,513,547,000,000 notional derivatives trading book primarily underwritten by unsuspecting bank depositors? View details page 21 (22 of 80 PDF)

There's a whole lot of digits in ANZ's derivatives. It's been obvious for some time that ANZ's profits have been leveraged. There's always the potential downside that could cave in the entire bank. I find leveraged losses to be quite fascinating.

Hedge Funds have been actively trying to short the Australian Banks over the past few months. One day they will hit pay dirt and everyone will find out too late.

They could claw back some profit if they withhold Tony's half year bonus!

A drop in the bucket...??

https://www.aol.com/article/finance/2017/05/03/puerto-rico-files-for-big...

https://www.aol.com/article/news/2017/05/03/house-approves-spending-bill...

Kicking the can, OK if you can...But if cannot....BNZ ain't half as bad...Just one of many??.

need to get those profits up
http://www.smh.com.au/business/banking-and-finance/nab-profits-up-65-per...
The big banks are among the biggest and most profitable companies in Australia
Even their half-year profits are in the billions
The big four banks are expected to make about 15 billion combined profits in this half

*Unrealised fair value gains or losses on economic hedges that do not qualify for hedge accounting and hedge ineffectiveness causes volatility in statutory profit, BNZ says, which is excluded from cash earnings as it is income neutral over the full term of transactions. This arises from fair value movements relating to trading derivatives for risk management purposes; fair value movements relating to assets, liabilities and derivatives designated in hedge relationships, and fair value movements relating to assets and liabilities designated at fair value. BNZ's half-year cash earnings, which is not a statutory financial measure, is not presented in accordance with NZ Generally Accepted Accounting Principles, nor audited, rose $40 million, or 9%, to $484 million.

A plain English version with corroborating numbers would be helpful.

When it comes to interest rates, the banks ought to avoid making predictions - especially those concerning the future.

That's because their forecasting track-record is so inconsistent.

Im no economist or banker.

But if the world has been awash with cash and interest rates have been as low as they have ever been, its only a matter of time before they go up to a more normal rate.

Also if the BNZ CEO says

"Over the past six to 12 months banks' margins have been compressed quite a bit because of that. So I would expect over time, you will see lending rates increase because the cost of funds is increasing."

This is only a guess, but my guess since he is in charge of the bank, he wants to raise interest rates. Now if he is in charge, I presume their may be an increase. He may be forecasting but hes in a pretty good position to know if hes going to increase rates.

I think they know the interest rates wont be increasing for quite some time. The margins will continue to be squeezed too. Interesting how big the marketing teams are in these companies.

Local savers are becoming quite anxious about investing their money in Term Deposits (ie lending their hard earned life savings to the bank as an unsecured creditor) when they can clearly see the housing bubble is about to crash and might just take down their savings with it. No thanks. I would rather spend it all on renovations now, rather than have it devalued via offshore money printing or worse having it confiscated by a failing bank.

Yup great option, pump your money into an asset that is at risk of a significant loss of value. Makes sense..

Property is the be all and end all. Why don't you put a fresh lick of paint on that old car that is depreciating in value while you're at it?

My home is not an investment that returns an income to me and that is the big difference. It is my own sanctuary away from the madness out there and I love coming home to a modern and well maintained home. As for the car that I have owned since 2002, I am trying really hard to run it into the ground but it's a Toyota and it just won't die on me. Besides, you can't live in your car right? Unless you live in Auckland!

And I bought my house before the banks were de-regulated and only paid 3 times my single income salary, so I can do what I like with it!