ASB half-year profit surges 31% to NZ$372 mln as impairments continue falling, customers move to floating mortgages and lending growth resumes

ASB's half-year profit has jumped 31% to a record high as impairment losses on loans tumble, customers continue switching from fixed to more lucrative floating mortgages, and the bank benefits from fair value gains in its derivative holdings.

ASB said today its net profit after tax rose NZ$89 million, or 31%, in the six months to December 31, 2011, to NZ$372 million from NZ$283 million in the same period of 2010 - its previous record high half-year profit. The bank said a NZ$48 million increase in after tax fair value gains on derivatives boosted profit, although without this profit still would've been up 13% to a new record high.

ASB chief executive Barbara Chapman said the group's impairment losses tumbled by 61.1% to just NZ$14 million from NZ$36 million in the same period of the previous year. Net interest margins rose 15 basis points to 2.19%. Operating expenses rose just NZ$1 million to NZ$350 million.

Meanwhile, lending grew by NZ$128 million, or 0.2%, to NZ$52.6 billion over the six months. That turns around a 1.2% lending contraction in the year to June 2011.

ASB also said:

Total Assets have grown by almost $2 billion (3.1 percent) to $65.5 billion compared to $63.5 billion in the comparative period.

 Home Loan market share has decreased slightly to 22.0 percent.

Total liabilities are $61.4 billion, compared to $59.7 billion in December 2010.

Deposits have grown 3.7 percent to $58.2 billion over the year. Retail Deposits increased 7.9 percent to $35.4 billion ($32.8 billion December 2010). ASB’s retail deposit market share remains steady on 21.2 percent.

Collective and individually assessed provisions now account for 0.41 percent of Advances (0.49 percent December 2010).

“ASB’s performance was influenced by a combination of factors, including healthy revenue growth, a continued focus on our customers and on delivering productivity gains across the business," said Chapman. "More broadly, the strong result should also be seen in the context of the current low credit growth environment, which has seen constrained growth in lending and balance sheet size.”

“In the six months since July 2011, there has been growth in business lending as the market shows indications of increased activity. This contributed to the NZ$128 million increase in lending over the period from June 2011. Business customers have also continued to shift from fixed to floating rate loans," said Chapman.

A total of 63% of the bank's home loan book was on floating interest rates as of December 31, up from 59% at June 30 last year and 48% at December 31, 2010. Of its business loans, 87% were on floating rates at December 31, up from 86% at June 30, and 82% at December 31, 2010. Banks tend to 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.

Return on equity & dividend surge; And where the NZ$48 mln derivatives boost came from

ASB's half-year return on equity (RoE) rose to 21.2% from 17.2% in the year to June 2011. In 2007 it was 21.3% and peaked at 25.4% in 2003. ASB, owned by Commonwealth Bank of Australia (CBA), paid a NZ$340 million ordinary dividend, compared with just NZ$80 million in the same period of the previous year. Its shareholders' equity as a percentage of total assets is just 6.1%.

Chapman said a level of ongoing caution in the market had seen New Zealanders focus on paying down debt and deleveraging. However, sustained growth in deposits (up 3.7% versus lending growth of just 0.2%) had helped offset a weak lending market.

“Looking ahead, the current global economic uncertainty is a cloud on the horizon with the potential to jeopardise New Zealand’s fragile recovery," said Chapman. "We are closely watching overseas markets as the European debt crisis unfolds, particularly the degree to which this will impact funding costs and business confidence over the next few months.”

ASB said the NZ$48 million boost to its bottom line from derivatives stemmed from the likes of interest rate swap contracts and foreign currency forward contracts, which the bank holds as economic hedges to hedge interest and foreign currency risk on its balance sheet.

"These hedges do not qualify for hedge accounting and therefore result in all fair value movements being recorded in the Income Statement when valued. These derivatives are not being held for trading or speculative positions. The positive fair value movement over the period is primarily due to swings in the interest rates and exchange rates over the last 12 month period," ASB said.

Record profit for CBA too

CBA reported a 7% rise in half-year cash net profit after tax to A$3.576 billion with its dividend per share up 4% to A$1.37 and its RoE unchanged at 19.2%. CBA's statutory net profit after tax rose 19% to a record A$3.624 billion. CBA's cost-to-income ratio rose 40 basis points to 45.8% and its net interest margins rose 3 basis points to 2.15%.

For the year to June last year ASB recorded record annual net profit after tax of NZ$568 million, with the bank's cash net profit after tax up NZ$150 million, or 42%, to NZ$504 million as impairment expenses fell 42% to NZ$72 million and ASB’s net interest margin rose by 40 basis points to 2.08%

Today's results continue a strong profit turnaround, driven by rising net interest margins and tumbling impairments on loans, at ASB since the bank reported a NZ$10 million net loss in the six months to December 31, 2010 after coughing up NZ$209 million to settle a structured finance transaction dispute with the Inland Revenue Department.

See ASB's press release here, CBA's press release here, its full results briefing here and analysts' presentation here.