Kiwibank's annual profit more than halved as provisions for bad debts surged more than four times.
Despite this the state owned bank grew net interest margins as home loan customers switched to more lucrative floating mortgages from fixed-term ones, and Kiwibank increased lending by NZ$1.08 billion, or 10%, which was a faster rate than its bigger Australian owned rivals.
Kiwibank said today its profit after tax for the year to June 30 tumbled NZ$24.6 million, or 54%, to NZ$21.2 million from NZ$45.8 million the previous year. The drop came as provisions for bad debt surged NZ$67.6 million to NZ$87.1 million from just NZ$19.5 million. See Kiwibank's presentation here and its press release here.
Kiwibank chief executive Paul Brock said the "vast majority" of the bad debt provisioning could be regarded as “one-offs” which gave a him "considerable" room for confidence for the present financial year.
“The Global Financial Crisis (GFC) compounded by the (Christchurch) earthquake has made things tough, but the bank is in strong shape and has weathered the storm,” Brock said.
"And based on everything we're seeing at the moment, we feel like we're over the hump (with bad debts). We’re feeling confident about the future, albeit with an uncertain global backdrop."
Brock said the bad debt charges included a NZ$25 million provision taken for February's Christchurch earthquake. This was a "conservative" position and included provisioning for future events such as the quake's impact on incomes and employment.
"That (NZ$25 million) is not real money that has been booked yet," said Brock. "There’s a small proportion of that which we have booked and that is to one or two business loans where the insurance company has fallen over. The bulk of the rest of the provisioning is in relation to what we think is likely to hit Christchurch in relation to the business market, in relation to the property market. Both of those things we think will be driven by a slower economy in Christchurch short-term."
Hit from falling property values
The bulk of the balance of the bad debts came in the small and medium sized business market nationwide, Brock said, as property values fell with higher value residential property "significantly" impacted.
"The majority of the customers underlying that are small business customers. The majority of our small business lending is secured by property," Brock said.
This includes a loss on the NZ$7 million Kiwibank lent to Auckland's Don Ha Real Estate and associated businesses.
Brock said the main issues Kiwibank had faced were the continued downturn in the property market and the impact of the GFC on small business.
"It just so happens that the two sectors that have been impacted significantly are the sector’s that Kiwibank is in, namely the residential market and the small business sector. The main trend has been the significant impact on incomes of small businesses," he said.
With falling incomes many businesses have looked to cut costs quickly.
"Kiwibank has worked alongside those customers as they’ve gone through that process. But in many cases it has come to that next stage where they’ve looked to wind things up and look for exit sources and of course all that lending is secured by property."
'Hundreds' of properties involved; Kiwibank still lending
He said Kiwibank was involved in some mortgagee sales and in other cases was continuing to work with customers. "Hundreds" of properties were involved. This was a "cycle driven event", Brock said.
"There are tightening (lending) criteria which you always look for in this environment but it doesn’t mean to say that we’re not lending. We certainly are. If it’s a good business there’s still good opportunities out there," added Brock. "Kiwibank continues to grow in the business sector largely due to people looking to leave the other banks."
Meanwhile, he said bad debts had stabilised in the June quarter. Impairment losses on loans were NZ$25.8 million in the March quarter and NZ$22.2 million in the June quarter, versus just NZ$4.9 million in the June quarter of last year. June quarter net profit after tax fell NZ$3.575 million, or 35%, to NZ$6.506 million from NZ$10.081 million in the June quarter of 2010.
Brock said he "strongly believed" the worst was behind Kiwibank and there were positive signs for growth and an improved financial performance with new customers continuing to join Kiwibank - it now has about 750,000 versus about 700,000 a year ago - rising net interest income and bad debts stabilising.
"What we’re seeing right now is continued strong growth in terms of customers joining the bank," said Brock. "We’re seeing continued strength in our net asset income figure which is good, and over the last quarter we’ve seen stabilisation in the bad debt numbers."
Lending rises 10% driven by refinancing
Over the year the bank grew loans by by 10%, or NZ$1.08 billion, to NZ$11.5 billion in an overall market that saw anemic credit growth at best. Brock said most of the new lending came from refinancing rather than new loan activity.
The bank's annual net interest income rose NZ$57.9 million, or 43%, to NZ$191.3 million as customers switched from fixed to floating mortgages. The net interest margin rose 29 basis points to 147 basis points from 118 basis points. Brock said more than 80% of home loan customers were currently choosing floating mortgages with about 56% of Kiwibank's total home loans floating at June 30, up from about 38% a year earlier.
Banks do better out of floating, or variable, mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between swap rates and fixed rate mortgages.
Retail deposits rose NZ$103.2 million in the June quarter to NZ$7.9 billion, but due to a drop in wholesale deposits, total deposits fell NZ$287.8 million to NZ$10.58 billion.
Total assets rose NZ$29 million in the three months to June to NZ$13.87 billion and total liabilities rose NZ$15.6 million, over the same period, to NZ$13.26 billion. Ninety day past due assets fell NZ$5.9 million in the June quarter to NZ$32.7 million but impaired assets rose NZ$15.67 million to NZ$106 million.
(Updates add further detail).