The ASB profit machine marches on with June year net profit up 10% to $1.177 bln, net interest margin, return on equity & parent CBA's dividends all up

ASB has posted a 10% rise in annual profit to yet another record high with its net interest margin, being the difference between the interest income generated from lending and the amount of interest paid out to lenders such as depositors, up seven basis points.

ASB's June year net profit after tax rose $108 million, or 10%, to $1.177 billion. Last year's $1.069 billion profit was the first time ASB's annual profit had topped $1 billion. The last time ASB's annual profit fell was in 2010. (See table at the foot of this article).

The bank's net interest margin rose seven basis points to 2.24%. CEO Vittoria Shortt attributed the increase to lower costs associated with breaking fixed rate loans and improved lending margins. ASB's cost to income ratio dropped 130 basis points to 34.6%, as operating income rose 9% and operating expenses fell 5%.

Return on equity increased 60 basis points to 15%, and return on assets was flat at 1.2%.

"New Zealand’s strong economic performance over the past financial year has underpinned ASB’s financial result. It’s clear that New Zealand’s sound economic fundamentals have contributed to a positive operating environment. Unemployment is at low levels, the quality of trade remains high and the housing market is resilient. These conditions have contributed to a 6% increase in lending, supported by a 7% increase in deposits," Shortt said.

“Over the past year, we have hired more than 100 people and made significant investments in technology, including biometrics and facial ID, to deliver critical regulatory programmes such as Financial Crimes Compliance and Anti Money Laundering. In doing so, we are broadening and strengthening the ways we protect our customers, our business and the New Zealand economy against the growing threat of financial crime," Shortt added.

Impairments up

ASB's loan impairments rose $11 million, or 16%, to $80 million. Shortt said this primarily reflects an increase in consumer finance provisioning after higher arrears rates and write-offs.

“While arrears rates increased, they remain at low levels reflecting favourable macroeconomic conditions in New Zealand. We have continued to support our rural customers through a difficult period and are pleased to see an improvement flowing through to lower provision levels," Shortt said.

The Commonwealth Bank of Australia (CBA) owned ASB increased ordinary dividends by $200 million to $650 million. ASB's common equity tier one capital ratio, as a percentage of total risk-weighted exposures, rose 40 basis points to 10.6%. The Reserve Bank required minimum is 7%.

Over the June year ASB's total assets increased almost $6.8 billion, or 8%, to $95.413 billion. Loans grew $4.8 billion, or 6%, to $82.931 billion, and deposits and other borrowings rose $4.2 billion, or 7%, to $62.419 billion.

Meanwhile, ASB recently introduced "Selfie ID," a mobile application pilot it says lets new customers open a bank account in about 15 minutes without having to visit a branch, using facial biometrics to confirm their identity.

Tumultuous year at CBA

CBA's group results were less impressive than those of its NZ subsidiary. Annual cash profit from continuing operations fell 4.8% to A$9.233 billion, return on equity dropped 160 basis points to 14.1%, and CBA's net interest margin increased five basis points to 2.15%. Annual dividends rose two cents per share to A$4.31, equivalent to 80% of cash profit. CBA's cost to income ratio, again excluding one-off items, fell 270 basis points to 44.8%.

The year has been a tumultuous one for CBA featuring fines and asset sales. These have included the sale of NZ insurer Sovereign to AIA Group, and an A$700 million fine paid to Australian anti-money laundering regulator Austrac.

The table below comes from CBA, showing the group's NZ market share

                   %                                                                Jun-2018                    Dec-17                      Jun-17

 Year   ASB net profit after tax  Ordinary dividend paid
 2018 $1.177 billion $650 million
 2017 $1.069 billion $450 million 
 2016  $913 million $200 million  
 2015  $859 million $1.140 billion
 2014  $806 million $400 million
 2013  $705 million   $90 million
 2012 $685 million  $500 million 
 2011  $568 million  $280 million
 2010 $236 million*  $160 million  
 2009  $425 million $180 million

*The 2010 result was impacted by a $209 million payment as part of ASB's structured finance transaction settlement with IRD.

Here's ASB's press release, here's CBA's press release and here's CBA's presentation.

And here's the transcript of a CBA interview with group CEO Matt Comyn.

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19 Comments

Congratulations ASB!

I wonder how resilient the loan book is without foreign buyers at the margin to help people cash in and repay these big mortgages?

Nic, nah it's different this time. In 2013, the then CEO Barbara Chapman (now succeeded) believed their low equity loans carried a lower default risk; https://www.interest.co.nz/property/65873/asb-ceo-barbara-chapman-defend...

We've been looking at this all the wrong way. High risk lending is in fact low risk ;-)

CBA Australia profits slide 5% while NZ subsidiary profits rise 10%
https://www.canberratimes.com.au/business/banking-and-finance/cba-profit...

CBA: Thanks Kiwis, via ASB we managed to milk you for almost enough to pay our $700m (AU) fine for failing to meet our anti money laundering obligations.

New Zealand.....funding drug money laundering in Australia since way back.....

Putting aside snarky comments. An almost tripling in profit in 9 years is pretty extreme. I'm sure ASB would say it's productivity, technology investment, etc, etc but this stinks of lack of competition in New Zealand banking.

Wonder how many more Aussie banks are going to see a drop in their Australian based profits but a big jump in the NZ based profits? Robbing Manu to pay Steve.

An almost tripling in profit in 9 years is pretty extreme. I'm sure ASB would say it's productivity, technology investment, etc, etc but this stinks of lack of competition in New Zealand banking.

I would say it's the ability to 'lend money into existence' during a property bubble that is the key driver for ASB's profits. Under current monetary hegemony, the banking system resembles a money tree. In many ways, the easiest business in town,

I'm sure that's part of it. But even money "lent into existence" has a cost. If mortgage debt has increased by around 70% nominally over 9 years and profits by 300% there's possibly more to it than just lending volume.

Huh? Costs are either operational or servicing "debt" (depositors' savings) from the bank's POV. The external cost is the price level of houses bid up to stupid amounts that wouldn't exist if the banks' ability to 'lend into existence' were more constrained.

"net interest margin, being the difference between the interest income generated from lending and the amount of interest paid out to lenders such as depositors, rose seven basis points."
Cool!
But that's 7 points worth more disposable income sucked out the wider economy by just one Bank. And we wonder why retail is in such a precarious state?!

Arguably, NIM is paid out to shareholders in the form of dividends. Most NZers don't actually have much cash savings Research shows that 60% of the population have <$10k sitting in bank accounts.

https://www.stuff.co.nz/business/91890966/most-people-have-few-assets-an...

Why the low business confidence? Possibly because the country continues to be sucked dry. Beautifully deflected onto a labour government / white collar boogeyman.
Notably the bank spokes people are pretty confident in their ability to continue doing it.

https://www.youtube.com/watch?v=lVK3rEH7dlA

A bit more on lending in Aus from Martin North of 'digital finance analytics'

By 2015 40% of Aussie home loans were interest only and there are now $360 billion dollars worth of loans due to switch to capital and interest in the next five years.. What happens next with bank profits as the housing market slides? A few interesting takeaways from this little piece from across the Tasman. Interestingly Hobart performing like Dunedin and getting all the coverage in the Aussie press to mask the realities of everywhere else.

https://www.youtube.com/watch?v=OrhbS7pZ2cY

So the government already took there 450 million cut and the 1.17 Bln is whats left over? Why would they want and banking competition in NZ?

How many banks does a country of 4.6 mio people need?

Lots more.
Enough to push that expected profit to zero over the long run.

In retail and business banking alone, ASB have made net $200 for every man, woman and child in NZ and paid the crown $300m odd for the pleasure. That simply has to be applauded.

Talk about "fractional rserve banking" and "lending money into existence" all you like. ASB borrows the money (buys the use of?) and lends it at a higher rate (sells the use of) for increased gross profit. Basic business. Increase gross margin to a captive market and watch the profit soar.

When Reserve bank dropped the cash rate the banks simply said "thank you" and used it to increase margin