By Gareth Vaughan
SBS Bank's March quarter profit fell 45% after the bank and building society took a NZ$3.55 million provision for credit impairment stemming from the devastating February 22 Christchurch earthquake. Lending also contracted in the quarter.
SBS recorded a net surplus for the three months to March 31 of NZ$2.702 million, down NZ$2.233 million from NZ$4.935 million in the same period of last year. SBS' net surplus for the year to March fell NZ$787,000, or 5%, to NZ$14.250 million, the group's annual report shows.
For the March quarter, SBS' total operating income rose NZ$766,000, or less than 1%, to NZ$21.118 million, operating expenses rose NZ$1.141 million, or 12%. to NZ$11.016 million, and the bank's provision for credit impairment increased NZ$3.098 million, or 62%, to NZ$8.101 million.
SBS says its provisioning for credit impairment includes NZ$3.55 million of collective provisioning taken based on its assessment of potential losses arising from the February 22 earthquake. CEO Ross Smith told interest.co.nz the decision to make a special provision of that size to cover potential earthquake related losses was made before last week's offer by the Government to buy 5,100 houses in some of Christchurch's worst hit suburbs.
"We think after that announcement by the Government it's likely it (NZ$3.55 million) is going to be more than enough," Smith said.
He acknowledge it was an estimate based on a lot of unknowns but said the ultimate losses stemming from the earthquake could be zero because all mortgages were secured and supposed to be insured. SBS has been 20% and 22% of its total lending book in Christchurch.
Meanwhile, SBS's gross loans fell by NZ$14.974 billion during the March quarter to NZ$2.609 billion from NZ$2.624 billion at December 31. Of the bank's loan portfolio, 70% is residential mortgage finance lent throughout New Zealand. Rural loans comprise 16% of total loans, predominantly concentrated in the Southland and Otago regions.
Tim Loan, SBS Bank's general manager for finance, said lending had actually contracted slightly across the full year, when growth from the Hastings Building Society acquisition is stripped out. Loan said SBS had to write "quite a significant number of loans" in order for its loan book to stand still given the size of its book.
SBS, a building society that gained a banking licence in October 2008 with the intention of becoming a national banking player, acquired the Hastings Building Society last year in what Smith touted as its first step towards creating a national community bank based on the old Trust Bank model.
'Flat lending is growth these days'
Smith said growth in the lending market remained "very flat to negative."
"In fact all the banks that we've spoken to are in the mode of flat is growth these days and are not expecting any significant growth," said Smith. "And I think we may well see a bit of a scrap for market share as a result because everyone's book will be going backwards at the moment."
He said SBS doesn't expect lending demand to increase "probably in the next 12 months at all." And banks' fighting for market share would be costly.
"You could say some of the moves by the banks last week after the (Government's) red zone announcement came out are an indication of what they might be prepared to do. In essence that will be costing the banks," Smith said. "Those prices are less than the cost of funds, essentially, so it comes at a cost."
It was "highly likely" SBS would counter offers from rivals to red zone home owners and would make a decision within a few days. The major banks, led by ANZ, were quick to follow the Government's announcement with special home loan rates to affected Christchurch home owners. ANZ launched a 3.70% one-year mortgage rate, 2.04% below ANZ and sister bank the National Bank’s variable, or floating, mortgage rate.
BNZ is offering a 2% discount on floating mortgages and an extra 2% on deposits, and Westpac a 3.65% floating home loan rate. ASB is offering 2% off floating rate home loans, bridging finance and a 4% call account rate. And Kiwibank's offering a 2% discount on its 5.65% floating home loan rate for a year from draw down.
Total assets down, tier one capital up
SBS' total assets fell by NZ$12 million during the March quarter to NZ$2.813 billion and total liabilities fell NZ$11.2 million to NZ$2.611 billion with retail funding, comprising redeemable shares and deposits, fell NZ$14.5 million to NZ$2.41 billion.
Assets past due by 90 days or more fell NZ$1.4 million to NZ$5.8 million, with the net carrying value of individually impaired assets rising NZ$10.2 million to NZ$25.6 million.
SBS's tier one capital ratio rose to 11.26% from 10.09%. The Reserve Bank minimum is 4%. Tier one capital represents the shareholders' funds in the bank - ie their share of the bank's assets after all of the bank's debts have been repaid to creditors. The bank's capital ratio as a percentage of total risk weighted exposures dropped slightly to 13.60% from 13.97%.
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