BNZ posts 21% rise in annual profit

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BNZ records NZ$741 mln annual profit up 21% year-on-year, although second-half profit fell from first-half

31st Oct 12, 10:18am by Gareth Vaughan

BNZ's annual cash earnings rose 21.1% as both margins on its loans, and overall income, rose faster than operating expenses, and as the bank's charge for bad debts tumbled 35.1%.

BNZ's parent, National Australia Bank (NAB), said cash earnings at its New Zealand operations rose NZ$129 million in the year to September 30 to NZ$741 million from NZ$612 million last year.

BNZ CEO Andrew Thorburn said the annual results was testament to a continued focus on local deposits, increased revenue performance and prudent cost management, plus continual innovation and "relentlessly keeping the customer at the heart of what we do."

"Actively targeting customer deposits has seen BNZ strongly expand its deposit base over the past year. BNZ has increased retail deposits from NZ$31.1 billion in the prior financial year to NZ$34.5 billion, an increase of NZ$3.4 billion or 10.9%," said Thorburn.

"Market share in deposits continues to grow, increasing by 76 basis points to 18.8%."

Despite the strong rise in cash earnings, BNZ's annual net profit attributable to NAB as its shareholder actually fell NZ$91 million, or 14%, to NZ$580 million after a NZ$353 million swing on gains less losses on financial instruments at fair value, such as derivatives and swaps, which came in at a loss of NZ$233 million versus a gain of NZ$120 million last year. BNZ's record annual net profit of NZ$785 million was recorded in 2008.

Meanwhile, Thorburn said BNZ grew market share in "key segments" over the year, including agribusiness to 21.9% from from 20.8%, and retail deposits to 18.8% from 18.0% . Over the year business lending share rose to 26.7% from 26.5%.

BNZ grew net interest income, or the difference between the interest income charged by banks to customers and the amount of interest paid on its own borrowings, by NZ$101 million, or 7.6%, to NZ$1.425 billion and net operating income by NZ$106 million, or 6%, to NZ$1.881 billion. Operating expenses rose NZ$16 million, or 2.1%, to NZ$763 million. The bank's charge to provide for bad and doubtful debts fell NZ$53 million to NZ$98 million.

A year of two halves as provision for bad and doubtful debts jumps 88% in second-half

However, for the second-half year BNZ's cash earnings were down 7.5% from the first-half, or NZ$29 million, to NZ$356 million as the bank's charge for bad and doubtful debts surged NZ$30 million, or 88.2%, to NZ$64 million. The bank attributed the big rise in bad and doubtful debts to increased provisions on business loans to big corporates.

Also in the second half, BNZ's net operating income fell NZ$7 million, or 0.7%, to NZ$937 million, and its operating expenses rose NZ$13 million, or 3.5%, to NZ$388 million due to higher investment and staff costs. Second-half net interest income was up just NZ$3 million, or 0.4%, to NZ$714 million.

In the second-half BNZ's share of housing lending fell to 16.1% from 16.2% at March 31 and its share of card lending was down to 26.8% from 27.4%.

Gross loans and acceptances rose 1.4% in the second-half to NZ$58.3 billion, but its June quarter disclosure statement put them at NZ$58.69 billion, suggesting a contraction in the September quarter. Total assets rose NZ$182 million in the September quarter to NZ$73.111 billion, and total liabilities rose NZ$152 million to NZ$67.834 billion. Total shareholders' equity was up NZ$30 million to NZ$5.277 billion.

Customer deposits rose 5.7% in the second-half to NZ$35.4 billion.

BNZ's return on average assets fell to 1.18% in the second-half from 1.30% in the first-half, its net interest margin dropped to 2.38% from 2.41%, and its cost to income ratio rose to 41.4% from 39.7%. Meanwhile, the bank's assets at least 90 days past due fell NZ$2 million in the September quarter to NZ$250 million, and its total impaired assets decreased NZ$45 million in the quarter to NZ$460 million. The bank's 90 day past due asset plus gross impaired asset to gross loans and acceptances ratio was 1.21% versus 1.28% at the half-year.

Cost of funds 'maintained'

Thorburn said continuing to strengthen BNZ's balance sheet was imperative in the face of lingering global uncertainties.

"While we’re seeing signs of stabilisation domestically, the operating environment remains challenging with volatility in Europe and uncertainty around the timing of the Christchurch rebuild, as well as growth concerns in China and Australia."

“Having a strong capital and funding base has enabled the bank to maintain our cost of funds, and in turn, allows us to offer competitive rates to our customers, invest in staff and the business, and continue to support local suppliers,” added Thorburn.

BNZ said its core funding ratio was "comfortably above" the 75% minimum level the Reserve Bank will introduce from January 1 next year, which is up from the current 70%. As of September 30, its tier one capital ratio was at 11.26%, up from 10.43% at June 30 and well above the Reserve Bank mandated minimum of 6%, and its total capital ratio was at 13.29%, up from 12.72% and above the 8% minimum.

Meanwhile, NAB posted an A$27 million, or 0.5% drop in annual cash earnings to A$5.4 billion. However, statutory net profit dropped A$1.1 billion, or 21.8%, to A$4.1 billion, hit by NAB's troubled British unit. NAB declared a final A90 cents per share dividend, up 2c, giving total dividends of A$1.80 per share for the year, up A8c.

See NAB's full annual results announcement here, and its investor presentation here, and BNZ's press release here.

(Update adds detail including drop in profit attributable to NAB, Andrew Thorburn comments).

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9 Comments

by Stephen Hulme | 31st Oct 12, 10:23am 1351632192

...and as the bank's charge for bad debts fell 35.1%.

Is this really the case or an accounting trick employed to make outcomes look better for the management bonuses?

From ZH:

The U.S. could stop banks from boosting their earnings by cutting back on reserves held against future loan losses, a top bank regulator said Monday, arguing that the economy remains too rocky for financial institutions to lower their cushions.

Comptroller of the Currency Thomas Curry has been warning for several months about the practice of bank-reserve releases, which occur when banks add less to their loan-loss reserves than they write off for uncollectible loans. The difference has bolstered banking profits in recent quarters.

Mr. Curry repeated his criticism in a speech before a group of bank risk managers in Dallas, citing the potential for future losses in residential and commercial real estate.

"I remain very concerned that too many institutions are continuing to reduce provisions solely to boost earnings," Mr. Curry said.

by Gareth Vaughan | 31st Oct 12, 11:31am 1351636278

The second-half wasn't so flash though Stephen...

by Alex Tarrant | 31st Oct 12, 11:35am 1351636555

Response from the Green Party:

Near record profits announced by BNZ today comes at high cost to New Zealand businesses and households and reinforces the need for Government to focus on how it can reduce the costs to New Zealand of the foreign controlled banking sector, said Green Party Co-leader Dr Russel Norman today.

Dr Norman was responding to the near-record full-year profits posted by the Australian-owned Bank of New Zealand today, which announced a 21 percent increase in after-tax profits to a near record $741 million today.

“BNZ is the third of the four big Australian banks to post excessive profits this year – profits made at the expense of New Zealand businesses and households,” said Dr Norman.

“Most of these profits will flow offshore and they constitute the single biggest income outflow in our current account deficit.

“This capital out-flow is unsustainable and highlights the urgent need for greater competition between our banks and higher levels of local ownership.

“The National Government’s complacency over foreign ownership and the worsening current account deficit means the banks are free to strip-mine capital out of New Zealand.

“National says it is concerned about reducing costs to business, yet won’t challenge the super-profits of the Aussie banks – super-profits which increase costs to Kiwi businesses. Cleaners are to have their employment rights reduced to cut business costs while the banks are left untouched.”

The Green Party has proposed a number of solutions to address the lack of competition in the banking sector and the high degree of foreign ownership.

“Only one bank – Kiwibank – approaches anything like a suitable rival to the big four Australian banks, but it controls only four percent of New Zealand's total banking assets,” Dr Norman said.

“A strong Kiwibank is an integral part of a smart, green economy.

“By injecting additional capital into Kiwibank and allowing it, in time, to become the Government’s banker, we can increase its capacity to compete fairly with the much bigger Australian banks.

“Besides electing a new Government, the only thing New Zealanders can do about our profiteering banks is to switch to New Zealand-owned banks, building societies, and credit unions.”

by KH | 31st Oct 12, 1:33pm 1351643617

Somebody tell me this is not an extraordinary ripoff ? Net Income $1881 mil. Cash surplus before tax $1020 mil. (the income above mostly consist of net interest)

What other business can do this.

Is this tolerable and how do they get away with it. ?

by Stephen Hulme | 31st Oct 12, 1:51pm 1351644683

Is this tolerable and how do they get away with it. ?

Yes, it is very much tolerated as banks are the established non-government borrowing conduit to foreign finance the vicious circle of C/A deficits with non-productive mortgage debt.

And of course, as the man says:

"relentlessly keeping the customer at the heart of what we do."

Who else - martians?

by Chris-M | 31st Oct 12, 1:50pm 1351644652

I agree with you, but by continuing to give them our buisness, we allow them to get away with it. We as individuals have only ourselves to blame.

by KingKobra | 31st Oct 12, 3:20pm 1351650011

I see all the comments above about the profitability of banks. I wonder if someone can answer the question which underpins the discussion. What is an acceptable return for the banks to make? 5% 10% 15% 20%?

by Father Ted | 31st Oct 12, 6:58pm 1351663122

...and how do those returns compare to other industries such as telecommunications, large format retail etc

I also wonder how many of those who protest bank earnings, are shareholders of banks, either directly or indirectly through their Kiwisaver schemes and pension funds. Would you be happy to accept lower shareholder returns?

by Grant A | 31st Oct 12, 10:39pm 1351676342

KingKobra - I'm afraid some people just don't understand ROI, they just understand big numbers. Its that lack of financial intellegence that makes NZers spenders rather than savers and investors, that provides for an inadequate capital markets in NZ to ever fund a major (i.e safe) bank - instead they prefer to complain about dividends flowing to Australia, to the Austarlians that save and invest and have a major capital market.

Think one day they'll figure it out that what they're complaining about is our own stupidity and lack of financial nous ? Doubt it.