Matt Comyn, the CEO of ASB's parent Commonwealth Bank of Australia (CBA), says pricing conduct in the New Zealand home loan market is "difficult to reconcile" and offers "unsustainable returns."
Speaking to analysts and investors after the recent release of CBA's June-year financial results, both Comyn, and CBA's Chief Financial Officer Alan Docherty, highlighted what they described as intense competition in the NZ mortgage market.
"The mortgage market in New Zealand is even more challenged [than Australia], where pricing conduct is difficult to reconcile. We've pulled back on volume growth in New Zealand given the unsustainable returns, with growth in the second-half [year] well below system [overall market growth]," Comyn said.
Docherty said ASB's margin on new home loans is currently less than half of what CBA gets in Australia, "and significantly below the cost of capital." He said "very deliberate targeted action" on volume growth and interest rate trade-offs was taken in NZ. This had helped slow the level of margin contraction ASB would've experienced if it had continued growing housing lending at or above system.
"As a result we have chosen to grow well below system in New Zealand, and have limited the impact to one basis point of group margin decline over the most recent six month period [the six months to June 30]," said Docherty.
ASB is NZ's second biggest mortgage lender. As of June 30, its residential mortgages stood at $75.652 billion. That's 69% of the bank's $109.045 billion total gross lending.
ASB's total residential mortgages grew $2.028 billion during the June 2023 year. Growth fell from 3% in the first-half of ASB's financial year, to just 1% in the second-half. CBA put ASB's home loans market share at 21.5% at June 30, down from 21.6% a year earlier.
According to Reserve Bank of New Zealand (RBNZ) data, total housing lending grew 3.1% in the June year.
Whilst most NZ home loans are on fixed-term interest rates, the majority in Australia are on variable, or floating, rates. As of June 30, 72% of CBA's home loan portfolio was on variable rates. RBNZ data shows almost 90% of NZ home lending was on fixed-term rates as of June 30.
'That doesn't seem sustainable'
Comyn said a two-year fixed mortgage from ASB had a customer interest rate of about 6.79%, with the two-year swap rate at about 5.50%. (It was 5.65% at the time of writing).
"The extra part you need is to calculate [what] the weighted market curve would be for five years. If you guessed that was a bit more than 100 basis points you're pretty close. You can do the maths when you unpack that and what that margin might be. And that doesn't seem sustainable," said Comyn.
He added that, unlike in Australia, CBA hadn't seen any weakening of competitive intensity in NZ in the second-half versus the first-half.
The Commerce Commission's market study into retail banking competition is focusing on deposit accounts and home loans. Asked about the deposit market in NZ, Comyn said it was competitive but not to the level of the mortgage market.
ASB's key financial metrics show it's a very profitable bank. In last week's June-year financial results, ASB posted record annual net profit after tax of $1.559 billion, a 6% increase. Its net interest margin rose 22 basis points to 2.44%. The bank's return on equity rose 20 basis points to 15%, and it paid $700 million of annual dividends, down from $975 million last year.
ASB's home loans at least 90 days past due rose to 0.34% at June 30 from 0.22% at December 31, 2022. CBA said at a group level home loans at least 90 days past due were 0.47%. This was a four basis points increase on the prior half, mainly driven by ASB increases reflecting cost of living pressures, the bank said. CBA also noted group gross impaired assets rose A$300 million to A$3.3 billion, attributing this to "higher corporate impaired assets and increased restructures within the New Zealand home lending portfolio."
Meanwhile, ASB said it had $11.143 billion of total capital at June 30, giving it $5.480 billion of capital in excess of its minimum requirement.
ASB's financial performance did, however, deteriorate in the second-half versus the first half-year. June-half cash profit fell 11% to $728 million from $822 million in the December-half. And June-half net interest margin fell 16 basis points to 2.36% from 2.52% in the first-half, although 2.36% is still a strong net interest margin.
ASB comprises just under 10% of CBA's total group lending.
'It'll be interesting to see how that will change'
Comyn said ASB had "sunk well below system" growth and was trying to maintain discipline.
"There's also a point where you need to defend, it's a low growth environment. I think that's clearly been an area of focus for the team and we're seeing further trends with a similar deterioration in New Zealand. So it'll be interesting to see how that will change in FY24 [ the bank's 2024 financial year]."
"[The] level of competitive intensity, and I think lack of sustainability on some of the lending margins particularly in home lending, I do think are difficult to reconcile," said Comyn.
CBA's June-year cash net profit after tax rose 6% to A$10.164 billion. Its net interest margin increased 17 basis points to 2.07%, and annual dividends increased 17% to A$4.50 per share.
CBA also plans a new A$1 billion on-market share buyback. In February CBA said its total announced and completed capital return to shareholders over the past two years was almost A$22 billion via dividends and share buybacks.
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