By Gareth Vaughan
The Australian Prudential Regulation Authority's move to make Australia's big banks reduce non-equity exposures to their New Zealand subsidiaries is a key factor behind the drop in Westpac New Zealand's net interest margins, CEO David McLean says.
Westpac NZ eked out a 2% rise in half-year cash earnings as impairment charges in the first-half of last year's financial year swung to write-backs and loan recoveries this year. Cash earnings were up $10 million, or 2%, for the six months to March 31 to $462 million versus the equivalent period of the previous year.
The bank's net interest margin (NIM) sank 22 basis points year-on-year to 1.96%. McLean told interest.co.nz APRA's decision in late 2015 to tell the Australian parents of ANZ NZ, ASB, BNZ and Westpac NZ they have until 2021 to reduce their non-equity exposures to their Kiwi subsidiaries to below 5% of the parent's Level 1 Tier 1 Capital, is a key factor in this NIM compression.
McLean says competitive pressures among the major banks have moved away from lending and into deposit gathering over the past six months or so.
"I think a lot of that was driven by different banks having a task to refinance some of their financing to comply with that APRA requirement that the Aussie parents had to limit their inter-company lending to 5% of Tier 1 Capital. Some banks had a much bigger refinancing task than others. We didn't have a particularly big refinancing task but we were caught up in the competition for deposits that seemed to result from that," McLean says.
Westpac NZ has to repay its parent $500 million, ANZ NZ has to repay its parent $8 billion. ASB has only said its parent, Commonwealth Bank of Australia, expects to be compliant with the new APRA rules within the five year transition period. And BNZ has said it's "well placed" to meet APRA's requirements because its parent, National Australia Bank, has no outstanding senior unsecured loans to BNZ and does not conduct any business through a branch structure in NZ.
Westpac NZ also cited lower fixed rate break fees at $12 million (no comparison from the previous period was provided) for its reduced NIM.
"This time last year when people still thought that [mortgage] rates might be coming down a bit, there was still quite a lot of activity going on and people paying us break fees. Whereas this year there's almost no break fees being paid and that would go into the NIM as well. I think it's really a story that competition is favouring deposit customers," says McLean.
Income down, expenses up
Meanwhile, Westpac NZ's net operating income fell 1% to $1.078 billion, and operating expenses rose 2% to $468 million. Impairment charges of $9 million in the six months to March last year reversed to write-backs of $36 million this year. Net interest income fell $11 million, or 1.3%, to $838 million.
Over the six months from September 30 to March 31 Westpac NZ's total deposits declined by $700 million, or 1.2%, to $56.8 billion. Net lending grew $1.4 billion, or 2%, to $76.5 billion. The deposit drop was attributed to lower institutional deposits, and a decline in Asian deposits.
McLean says Westpac NZ is focusing on quality lending and targeted growth in a challenging environment with increased pressure on deposit and wholesale funding margins.
“We are seeing growth in positive sentiment and market share in key segments. Westpac New Zealand’s campaign to support first home buyers through the re-launch of our HomeSaver offering aligns with a steady increase in withdrawals from the Westpac KiwiSaver Scheme by first home buyers. At the same time funds in the Westpac KiwiSaver scheme have increased 20% in the past year with the average balance increasing from $5,800 in December 2012 to $11,400 in December 2016," McLean says.
"An improving dairy sector and continued underlying economic growth contributed to a strong asset portfolio with impairments $45 million improved on the same period last year."
“We saw growth in targeted market sectors, including Auckland and millennials, and it is good to see a continuing recovery for many of our dairy farming customers, which is reflected in our significantly improved impairment position," says McLean.
“At the same time we experienced reduced net interest margin, [which was] a result of strong lending competition and increased funding costs.”
McLean notes both ANZ NZ and BNZ also reported margin compression last week. ANZ's fell 10 basis points to 2.30% and BNZ's dropped 12 basis points to 2.15%. He agrees with his BNZ counterpart Anthony Healy that mortgage rates are likely to rise.
"Both the other reporting banks in this period have seen also NIM compression and it can't go on at that rate for too long," says McLean.
Base rate signals globally show interest rates rising, and some inflation is emerging in NZ, he adds.
"The cost of wholesale funding has gone up as well as the local deposit funding has gone up, so I don't think I am the only NZ bank CEO who is saying this but I think there's likely to be higher interest costs for borrowing," McLean says.
Stressed loans up year-on-year, down since September
As of March 31, Westpac NZ's total stressed assets to total loan exposures stood at 2.41%, up from 1.78% a year earlier, but down from 2.54% at September 30.
The bank's half-year cost-to-income ratio came in at 43.4%, down 156 basis points year-on-year, and down 198 basis points since September. In terms of higher expenses, Westpac NZ said it booked a 410 million increase in investment spending as part of a three-year transformation programme to improve customer service and improve self-service offerings such as ATMs and digital banking. The closure of 19 branches reduced full-time staff by 153.
Figures released by parent Westpac Banking Corporation show Westpac NZ shed marketshare in consumer lending and deposits in the year to March 31, but grew business lending marketshare.
|Westpac NZ||March 31||Sep 30, 2016||March 31, 2016|
Over the six months to March 31, Westpac NZ grew residential mortgages by $1.1 billion, or 2.4%, to $46.2 billion. Reserve Bank sector credit figures show housing loans grew 2.9% over the same time period. Meanwhile, Westpac NZ grew business lending $200 million, or 0.7%, to $28.6 billion.
Meanwhile, Westpac Banking Corporation posted a 3% rise in interim cash earnings to A$4.017 billion. Its fully franked ordinary dividend was unchanged at A94 cents per share representing a payout ratio of 79% of cash earnings, and a dividend yield of 5.4%. The bank's return on equity of 13.95% was down 20 basis points.