ANZ boss picks continued move by mortgage customers to floating rates from fixed-term home loans

ANZ boss picks continued move by mortgage customers to floating rates from fixed-term home loans

By Gareth Vaughan

ANZ Group CEO Mike Smith says he expects ANZ New Zealand and National Bank mortgage customers to continue switching to floating mortgages from fixed-term home loans with ongoing margin benefits for the group.

Speaking to Australian-based analysts after ANZ released its first quarter trading update on Friday, Smith also said New Zealand was an important part of the ANZ Group's Asian push.

"New Zealand is a critical part of our super regional strategy given our view on the increasing importance of agriculture to Asia’s growing urban population," said Smith, who is a former HSBC executive.

This "super regional strategy" saw ANZ in 2009 buy retail, wealth and commercial businesses in Asia from the Royal Bank of Scotland (RBS) in a A$685 million deal. In its September 2010 year results ANZ said the RBS deal helped double its Asian retail deposits to almost A$10 billion over the year. See more on the Asian push here.

Meanwhile, ANZ said 49% of its New Zealand mortgage portfolio was now on variable, or floating, mortgages as of December 31, 2010, nearly double the 26% at the end of 2009 and 37% at September 30 last year.

Smith said he expected the trend, of customers shifting to floating mortgages from fixed term ones, to continue.

"It depends on customer preference but I would suggest that it’s likely to continue," said Smith. "As to how far that will go, I’m afraid I don’t have a crystal ball. But it will certainly increase significantly I think."

Asked if he therefore expected ongoing margin benefits from the switch, Smith replied "yeah."

Margins up

Peter Marriott, ANZ Group chief financial officer, said New Zealand margins in the quarter rose about 7 basis points from where they were in the second-half of the year to September 2010. New Zealand was the only one of the ANZ Group's business divisions to not grow revenue over the quarter.

"Deposit competition is becoming quite fierce again in New Zealand, but margins are improving and are still expected to improve," Marriott said.

Smith added that there was also still quite a bit of ANZ's fixed term mortgage book to "reprice" meaning there was also "some upside" there.

ANZ's confirmation of a big fixed to floating mortgage rate switch by its customers follows similar recent comments from rival ASB. ASB's acting CEO Ian Park told interest.co.nz that about half of ASB's NZ$37.5 billion worth of home loans are now on floating interest rates. That's an increase from just 25% within the last 24 months.

The latest Reserve Bank data shows that as of December NZ$89.6 billion worth of total industry wide mortgages were on fixed terms and NZ$77 billion worth were floating. That means 53.8% were fixed and 46.2% floating, both the highest percentage and highest dollar amount floating since the central bank's records began in June 1998.

'Leveraging the super regional strategy'

Smith said ANZ's New Zealand operations had started to enact plans to "significantly improve operational efficiency" and "leverage the group’s super regional strategy." These moves included culling one of two information technology (IT) platforms more than seven years after ANZ acquired the National Bank from Britain's Lloyds TSB in 2003, and setting up a new management structure based around four key regions. This would reduce and simplify the levels between senior management and front line staff, Smith said.

Together the IT move and management changes, he added, see ANZ facing a one-off charge of about A$120 million (NZ$160 million) in the first-half year.

Smith was questioned by UBS analyst Jonathan Mott who suggested the spending on the shift to just one IT system should be booked as operational expenditure rather than capital expenditure given it was coming so long after the National Bank acquisition. ANZ's planned accounting treatment of the A$120 million hit means it will be excluded from the group's cash net profit after tax figures.

"We’re basically taking two systems and converting them into one," Smith replied. "So one will be redundant and the scale of that task is very considerable and it is a one-off. That’s why it’s going to be treated as a one-off item."

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