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By Gareth Vaughan
TSB Bank is seeking to grow its lending book in the farming and commercial sectors in a "conservative" diversification drive, at least in part due to the prospect of this helping it obtain a higher credit rating.
Meanwhile, TSB has reported a 10% rise in annual net operating profit with deposits up 6% and lending rising 4% in the year to March. Kevin Murphy, TSB's managing director, told interest.co.nz the annual financial performance was "solid" in an environment that was challenging on both sides of the ledger, being funding and lending.
"We've had lots of talk about deleveraging and the lack of growth in the credit market," Murphy said. "(So) we're encouraged that we've still actually managed to grow our book, albeit at a slower rate than has been achieved in recent years."
TSB's annual profit after tax rose NZ$8 million, or 20%, to NZ$47.8 million. The bank's net interest margin, including derivative income, rose to 2.06% from 2.03%. Profit before tax rose 10% to NZ$66.5 million. Over the year to March 31 gross loans grew by NZ$114 million, or 4%, to NZ$2.7 billion. The growth came primarily in TSB's "core" market of residential mortgage lending, although Murphy said the bank was also having some success with a strategy of diversifying into farm and commercial lending.
"We've signalled our intention to diversify our book a little bit into rural and commercial and we've seen good growth in both those sectors in the last 12 months," said Murphy. "Obviously we've set targets and we've made good progress on that in the last 12 months, but we've still got some way to go."
He pointed out 88% of TSB's lending book was currently residential mortgage lending, but diversification away from this would be "conservative."
"We've got to be mindful that in terms of capital adequacy, the treatment for commercial and rural loans is different than residential so we can't afford to have a significant shift in a short period of time because it would have an impact on our capital adequacy, which whilst it remains strong at 15.42%, we wouldn't want to put a dent into that," Murphy said.
In the March quarter TSB grew gross loans by NZ$28.5 million with residential mortgages up NZ$19.4 million to NZ$2.448 billion. Commercial loans rose NZ$5.9 million to NZ$152.8 million and farming loans increased NZ$3.8 million to NZ$99.6 million. Meanwhile, TSB's deposits in the March quarter rose NZ$1.7 million to NZ$4.715 billion.
Higher credit rating a carrot of diversifying
Meanwhile, Murphy acknowledge that part of the diversification drive stemmed from an attempt to get a higher credit rating from Standard & Poor's (S&P). S&P currently has a BBB+ rating on TSB with a stable outlook. Peter Sikora, S&P analytical manager for financial institutions in the Pacific, told interest.co.nz in March any "upward potential" for TSB's credit rating would stem from a reassessment of S&P's view of its risk position and diversification of its business outside its traditional concentration in Taranaki. Sikora noted evidence diversified business was of equal quality to TSB's Taranaki business was important.
Murphy acknowledged the carrot of a higher credit rating was "obviously" one of the factors behind TSB's diversification drive.
"But we're always mindful that our core business has and will remain residential lending," Murphy said. "Over half our loan book is now outside Taranaki so we have achieved diversification in terms of geography and that's still growing all the time. Now it's just a matter of some diversification into different sectors."
Credit ratings matter for banks because they effect their borrowing costs. A higher rating generally means lower borrowing costs and vice versa.
However, thus far TSB - which is owned by the TSB Community Trust - has not been a big borrower from wholesale markets. The bank borrowed its first wholesale money, just under NZ$40 million in 90 day money from institutional investors, in late 2010. It has since increased this to NZ$49.8 million, still only a drop in the ocean of its NZ$4.7 billion of total deposits. And Murphy said TSB would continue to favour retail deposits for its funding.
"That (wholesale funding) is an option, because of course wholesale funding is currently a cheaper form of funding than retail funding. But it's not our intention to go heavily into the wholesale funding."
No plans to cut floating mortgage rate
Along with all the other banks, TSB over recent weeks has cut its advertised fixed-term mortgage rates, but not floating rates. The across the board cuts have left TSB with the lowest advertised one-year rate at 5.20%. See all advertised bank mortgage rates here.
Murphy said with mortgage interest rates coming down "aggressively", banks are fighting to try and grow their loan books.
"Banks are working hard to retain their customer base and so they're having to meet market in terms of rates. Not just interest rates, but there has been various offers out there with cash incentives and various other enticements to try and move customers across to other banks. Kiwibank has been pretty aggressive with their strategy and it has obviously worked well for them," said Murphy.
State owned Kiwibank has run a 4.99% one-year "special" mortgage rate for five weeks and says it has lent more than NZ$200 million through the offer.
Although in the year to March 31 the percentage of TSB's mortgages on floating, or variable, rates rose to 52.71% from 44.59% a year earlier, Murphy said over recent weeks there had been a trend back towards fixed mortgages again.
"We've traditionally been very competitive in that two-year fixed market and we're getting quite a bit of support from customers who are prepared to lock in for a two year period," he said.
Although rates were always under review, Murphy said at this stage there were no plans to cut TSB's floating rate. The bank's advertised floating rate is 5.79% and its two-year rate is 5.50%.
More of the same expected
Over coming months Murphy said he anticipates a continuation of what has been seen in the last six to 12 months.
"It's going to be very competitive and banks are going to have to work on tight margins and the all important looking after your customer is going to be really important," he said.
TSB would strive to maintain its industry leading customer satisfaction position and would continue to look to grow its customer base with "a degree" of diversification.
In the March quarter TSB's total assets rose NZ$14.3 million to NZ$5.164 billion and total liabilities rose NZ$10.8 million to NZ$4.769 billion. Shareholder's equity increased NZ$3.4 million to NZ$395.56 million with the bank's tier one capital ratio rising to 15.42% at March 31 from December 31, and the total capital ratio dropping to 15.42% from 15.63%. The Reserve Bank mandated minimums are 4% and 8%, respectively.