By Gareth Vaughan
SBS Bank has completed its first commercial paper issue, with NZ$25 million raised from domestic institutional investors, in another move by a New Zealand owned bank to diversify its funding base away from traditional retail funding sources.
With the release of SBS' June quarter General Disclosure Statement the bank's general manager for finance, Tim Loan, told interest.co.nz SBS issued NZ$25 million worth of commercial paper last month as the first step in a NZ$100 million programme.
"That's probably about as much as we wanted to issue and I think we'll just leave it at that for now," Loan said. "It is a NZ$100 million programme so we've got the ability to issue more in the future but we're reasonably flush with funds at the moment."
"The key for us was to actually get it out there so that we had a programme out there and operating that we could call upon in the future as we needed to and that's what we've done," Loan added.
SBS did launch a NZ$190 million securitisation bond programme in 2007, of which it still has about NZ$60 million outstanding. However, diversifying its funding sources into commercial paper follows in the footsteps of fellow New Zealand owned banks Kiwibank and TSB Bank.
Kiwibank launched a euro denominated offshore commercial paper programme late last year and by March 31 had borrowed NZ$927.275 million through it. As of June 30, however, the balance had retreated to NZ$549.266 million. And TSB tapped wholesale funding sources for the first time earlier this year, raising just under NZ$40 million in 90 day money from institutional investors.
The New Zealand owned banks' move into the wholesale funding arena comes after their bigger Australian owned rivals - ANZ, ASB, BNZ and Westpac - stepped up their interest in securing retail funding through the likes of term deposits following the introduction by the Reserve Bank of the core funding ratio (CFR) in April last year. The locally owned banks have previous secured all their funding from retail deposits, or in the case of SBS which is also a building society, also through redeemable shares issued to its members.
Introduced in April of last year as a move to reduce New Zealand banks' reliance on short-term overseas borrowing, the CFR sets out that banks must secure at least 70% of their funding from retail deposits or wholesale sources such as bonds with durations of at least one year. The central bank lifted the CFR to 70% from 65% on July 1 this year and will increase it again, to 75%, on July 1 next year.
Sam Knowles' parting warning; NZ owned banks forced to become riskier
Kiwibank’s outgoing CEO Sam Knowles warned last year that the new Reserve Bank rules would see New Zealand owned financial institutions become riskier entities because they would only be able to compete with their Australian owned rivals by going offshore to source funding. Kiwibank's first offshore funding foray, which was during Knowles' tenure, saw it raise A$250 million through an issue of five-year bonds in Australia in 2009.
Meanwhile, SBS recorded a near doubling of its June quarter net surplus to NZ$3.243 million from NZ$1.623 million in the same period of last year. However, in the 2010 June quarter SBS' bottom line was hit by a one-off tax expense of NZ$2.234 million after the government changed tax legislation to apply a zero percent depreciation rate to buildings with a life of 50 years or more.
SBS' surplus before income tax actually fell, NZ$544,000, or 10%, to NZ$4.787 million. The June quarter figures this year incorporate the Hastings Building Society, which SBS acquired last October, and wasn't therefore included in the June 2010 figures.
Net interest income rose NZ$1.923 million, or 13%, to NZ$16.294 million and total operating income climbed NZ$1.925 million, or 10%, to NZ$20.841 million. Operating expenses rose NZ$1.550 million, or 14%, to NZ$12.908 million and the bank's provision for credit impairment fell NZ$517,000, or 15%, to NZ$2.958 million.
The bank's total assets rose NZ$56.2 million to NZ$2.837 billion in the three months from March 31 to June 30, with gross loans down NZ$34.48 million to NZ$2.574 billion.
SBS' tier one capital ratio rose to 11.51% from 11.26% at March 31, and its total capital ratio rose to 13.89% from 13.60%. The Reserve Bank prescribed minimums are 4% for the tier one capital ratio, which represents the shareholders' funds in the bank, and 8% for the total capital ratio.
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