TSB Bank grows lending, but retail deposit battle takes toll on its net interest margins

By Gareth Vaughan

TSB Bank grew lending well in excess of the overall market in the year to March, but saw its net interest margins drop to a record low due to stiff competition for retail deposits from the big Australian owned banks.

The bank's annual results show profit down NZ$11.3 million, or 22%, to NZ$39.8 million compared with the previous year as net interest income fell NZ$17.6 million, or 16%, to NZ$92.7 million.

Kevin Murphy, TSB's managing director, told interest.co.nz the bank's net interest margins dropped to 1.88% from 2.19% because of competition for retail deposits, especially in the earlier part of the year from bigger rivals striving to boost their retail funding to meet the Reserve Bank's Core Funding Ratio (CFR), hit home.

The central bank introduced the CFR on April 1 last year meaning banks must source at least 65% of their funding from retail deposits and wholesale sources, such as bonds with durations of more than one year, the CFR will be lifted to 70% from July and then 75% from July 2012 as the Reserve Bank strives to reduce New Zealand banks dependence on short-term offshore borrowing. 

Aside from being forced to pay more to secure retail deposits, meeting the CFR has not been a problem for TSB given it only recently borrowed its first wholesale money. Murphy said the bank may borrow more wholesale money "from time to time", but the vast majority of its funding would continue to be sourced from retail investors.  TSB says at 15.78%, its Capital Adequacy Ratio is the highest of all New Zealand's retail banks. 

Lending growth slows, but still well ahead of systems

TSB grew lending 9% over the year. Although that was down from 13% in the previous year, it was well ahead of systems growth of just 0.78%.

"If we're growing at 9 (%) and the industry as a whole is growing at 0.78 (%), we're doing very well," said Murphy.

He attributed the bank's ability to grow lending much stronger than overall market growth to its ongoing strong results in the Roy Morgan customer satisfaction surveys.

"For the 11th year in a row we topped the customer service satisfaction survey and that's significant in terms of how we are able to generate business, "said Murphy.

"We work hard to continue to try and improve on that."

TSB's annual report shows gross lending up NZ$57.1 million to NZ$2.64 billion in the March quarter, with the bank's total assets up NZ$128.9 million to NZ$4.84 billion.

The bulk of the lending growth came through the bank's residential mortgage book, which rose by NZ$46.3 million in the three months to March 31 to NZ$2.36 billion. Lending to businesses rose by NZ$10.3 million with rural loans dropping slightly. Murphy said the rural sector remained very quiet with "difficulty in moving real estate."

 Looking ahead, Murphy suggested it would be another tough year.

"It's relatively flat in terms of the economy, we're still coming out of the Christchurch earthquake," said Murphy.

"The implications of that are still filtering through. How that impacts on the bottom line of financial institutions is yet to play out. We're looking to hopefully see some growth come through to the economy in the latter part of the year, and hopefully that will stimulate some interest in credit growth as well."