News and Opinion, sponsored by RaboPlus

By Bernard Hickey

Commonwealth Bank of Australia’s New Zealand operation, ASB Bank, has reported a 10% fall in underlying profit in the September quarter as lending margins contracted and bad debt charges more than tripled. New ASB Chief Executive Charles Pink forecast a tough period for banks and the economy in the years ahead as individuals and companies ‘hunkered down’ to de-leverage in the wake of the Global Financial Crisis (GFC).

“I don’t see when we’re going to get back to double digit lending growth,” Pink told Interest.co.nz in an interview.

“I think the GFC has bought a significant change to the world and New Zealand. People are deleveraging rather than leveraging and companies are de-leveraging rather than leveraging. People in companies are hunkering down,” he said.

“We probably will see low single digit lending growth going forward, which is not the world we’ve been used to in the last 10-20 years globally or in New Zealand.”

ASB’s underlying profit in the three months to September 30 fell 10% to NZ$85 million from NZ$94 million in the same period a year ago, driven by a fall in its overall net interest margin from 180 basis points in mid 2008 to 160 basis points a year later and an increase in loan impairment charges, Pink said.

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By David Chaston,

Publisher of interest.co.nz

Thank you for the opportunity to make this submission. This is a companion submission to the one made by Bernard Hickey.

While I do wish to make some points about the cost of consumer borrowing from banks, especially short term borrowing, it is important to put this subject in to a broader perspective.

Over the past ten years, the economic landscape has changed considerably.

Ten years ago, economic growth was +3%
Ten years ago, 40% of mortgage borrowing was on floating rates
Ten years ago, variable mortgage rates were 6.5%
Ten years ago, house prices were $168,000
Ten years ago, it took 55% of median take-home pay to afford a mortgage on a median house.
Ten years ago, bank profits were $1.75 billion before tax.

But, today we are awash in debt, the result of a binge that will probably take at least one generation to pay back – if we started today. We have fallen in love with houses, pretended they are an investment, and we have taken on massive liabilities to satisfy this addiction.
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Reserve Bank Governor Alan Bollard has written a ’state of the nation’ piece after his visit to Jackson Hole in Wyoming for the annual conflab of the world’s central bankers. The piece published in the NZ Herald was largely unsurprising, but it did include a couple of hints about tougher capital rules for banks.

The comments come 10 days before the Reserve Bank’s September quarter monetary policy statement and after Bollard voiced concern last month about New Zealand slipping back into its ‘bad old habits’ of borrowing heavily via banks to invest in property.

Bollard is concerned that banks may continue pumping more debt into the housing sector because new Basel II rules mean banks set their capital requirements based on past bad debt histories. Housing has low loan loss histories, which means housing lending requires relatively less capital, although the Reserve Bank has imposed a 15% ‘regulatory adjustment’ top up to their capital levels.

He has returned from Jackson Hole talking about moves afoot internationally to toughen capital levels for banks to avoid a situation where banks put aside less capital when times a good and loan losses are low. Banks should be putting aside even more capital when losses are low, he suggested.

Here is the key passage below.

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By Roger J Kerr

Central banking leaders from around the globe congregate at Jackson Hole, Wyoming this week to contemplate how they are all going to unwind the emergency and extreme monetary stimuli implemented last year.

The Aussie currency will probably lead the US in the unwinding stakes, with the Brits and the Europeans a long way behind.

Reserve Bank of New Zealand Governor Alan Bollard has a different set of monetary problems right now and may not learn too much from the other central bankers.
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