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Bad business loans eat into Westpac NZ June quarter profit as non-housing lending growth outstrips home loan growth

Bad business loans eat into Westpac NZ June quarter profit as non-housing lending growth outstrips home loan growth

By Gareth Vaughan

Bucking a recent trend of strongly rising profits at the big four banks, Westpac New Zealand recorded a drop - albeit a small one - in the June quarter as loan impairment charges, led by growing impairments on loans to businesses, were more than double the level of the June quarter last year.

Westpac NZ's General Disclosure Statement for the nine months to June 30 shows unaudited profit after income tax of NZ$96 million for the three months to June 30, down from NZ$97 million in the same period of 2010. The NZ$1 million fall comes after Westpac NZ lifted profit by 30% in the March quarter, ironically to NZ$96 million.

The June quarter profit slip came as impairment charges on loans hit NZ$64 million in the quarter, versus just NZ$27 million in the same period of last year. Overall impairments on business loans totalled NZ$129 million in the nine months to June, more than double the NZ$62 million of the same period last year. Impairments on residential mortgages have gone the other way, NZ$61 million versus NZ$102 million at June 30. March quarter impairment charges fell NZ$14 million, or 17%, to NZ$68 million.

A Westpac NZ spokesman said the rise in business loan impairments stemmed from "exposures held through the global financial crisis that have moved to impaired during this period." 

Meanwhile, Westpac NZ's June quarter operating expenses also rose NZ$14 million, or 8%, to NZ$191 million in the June quarter versus NZ$177 million in the equivalent period of last year.

Net interest income rose NZ$33 million, or 12%, to NZ$316 million and non-interest income rose NZ$10 million, or 15%, to NZ$76 million.

Non-housing loan growth outstrips home loan growth

Against a backdrop of anemic systems lending growth, Westpac recorded NZ$279 million growth in housing term loans and NZ$318 million in non-housing term loans in the three months to June. The bank's total gross loans rose NZ$576 million to NZ$51.315 billion. Deposits rose by NZ$412 million to NZ$33.581 billion.

However, both total assets and total liabilities fell. The former by NZ$808 million to NZ$56.887 billion and the latter by NZ$915 million to NZ$52.571 billion. Total past due assets rose to NZ$1.983 billion from NZ$1.942 billion at March 31, and total impaired assets fell to NZ$815 million from NZ$895 million.

 Gail Kelly, CEO of parent Westpac Banking Corporation, told analysts in a third quarter trading briefing Westpac NZ was now growing at or above New Zealand systems credit growth in the key areas of mortgages, small and medium sized business lending and deposits. This was highlighted by Westpac in its sharemarket announcement.

"Overall we've seen the return on equity of our New Zealand business almost double to 15% over the last two years," Kelly said.

She also hinted at job cuts over the next two years saying: "Net-net I would say staff (numbers) will come down somewhat over the year that we're in and will come down somewhat again next year. But there are quite a few moving pieces."

A spokesman for Westpac NZ said these comments related to Australia.

"New Zealand is run separately and we continue to invest for growth," the spokesman said.

Banking's 'new reality'

Meanwhile, Kelly said the Westpac group recognises "the new reality" of banking.

"That we're into a slower growth period and we expect that's going to continue for a period to come," Kelly said. "We're not going to go back to the environment of the pre-global financial crisis. We're in an environment where they'll be more regulation, heightened compliance costs, high levels of capital and so on."

"And so we need more productivity to actually drive appropriate returns and sustainable returns to shareholders."

Her comments come after Reserve Bank Governor Alan Bollard said earlier this month that bank shareholders should expect lower returns than they enjoyed before the global financial crisis due to greater regulation and customers' deleveraging.

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what does our 6 million dollar a year man say about that then ?