Opinion: Time to question bank home loan margins as record ASB profit highlights sector's remarkable resilience in tough times

Opinion: Time to question bank home loan margins as record ASB profit highlights sector's remarkable resilience in tough times

By Gareth Vaughan

Times are tough right? The world's financial markets are spooked, the domestic economy isn't exactly roaring along, Christchurch has been hard hit by earthquakes, and most businesses are finding the going tough as regular Kiwis feel the pinch.

But not quite everyone is living on Struggle Street. The country's big banks are still making plenty of hay even though the sun rarely breaks through the clouds.

ASB last week posted record annual net profit after tax of NZ$568 million. That's even NZ$36 million, or 7%, more than the NZ$532 million it managed in 2007, the peak of the noughties' cheap credit bubble.

ASB notched record profits in a year when its core business, a bank's raison d'etre, which is lending money, actually went backwards. ASB's advances to customers before provisions contracted by NZ$657 million in the year to June 30 compared with the NZ$6.2 billion growth it achieved in the year to June 2007. Its total assets also fell, by NZ$507 million, compared with 2007's huge NZ$8.3 billion growth surge when banks were throwing money at customers.

So where did ASB get the profit growth from, which even when the NZ$209 million structured finance transaction tax settlement with IRD is taken out of last year's figures, rose 28% year-on-year?

Its impairment losses on loans tumbled 42% to NZ$72 million from NZ$125 million in 2010 (they were just NZ$18 million in 2007), and its net interest margin rose by 0.4% to 2.08% as customers switching from fixed-term mortgages to higher margin floating, or variable, rate mortgages, pushed net interest income up 22% to NZ$1.107 billion.

Over the year ASB's bottom line benefited from a big switch with 59% of all its home loans on floating rates at June 30, up from 37% a year earlier. This is in line with a trend across the industry, with Reserve Bank figures putting, as of June, NZ$94.637 billion, or 56%, of the country's total NZ$169.118 billion worth of home loans on floating rates, up from 36% 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.

ASB not alone

The tumbling impairment losses and the fixed to floating switch are also benefiting the other big Australian owned banks - ANZ, BNZ and Westpac.

ANZ's most recent results, for the March quarter, showed profit up NZ$85 million, or 64%, to NZ$218 million. Westpac grew profit after tax by NZ$22 million, or 30%, in the three months to March to NZ$96 million and CEO George Frazis indicated earlier this month things had continued along a similar path since.

And BNZ's March quarter profit rose NZ$39 million, or 59%, to NZ$105 million once a NZ$78 million tax credit related to over compensating for the structured finance transaction dispute settlement is stripped out last year's March quarter. The truck rolls on to, with parent National Australia Bank saying last week BNZ's June quarter delivered sound earnings and revenue growth.

And it's not as if ANZ, BNZ or Westpac are getting the strong lending growth ASB is missing out on. The Reserve Bank's sector credit data shows agriculture debt as of June stood at NZ$47.251 billion, down 0.4% year-on-year, business debt at NZ$72.348 billion, up 0.7%, and total household claims, which includes housing and consumer loans, up 1.1% to NZ$184.103 billion. That is anemic growth at best.

In the boom years from 2002-2008 credit growth was much, much stronger, peaking at 24.9% for agricultural debt growth, 17.4% for housing debt, 21.7% for businesses, and 13.7% for consumer loans.

The third profit arm

Banking's a pretty simple business really. They borrow money at one rate and on-lend it at a higher rate. And this is another area where their profits are benefiting. The margins on their now NZ$172.367 billion worth of home loans have widened.

Back on July 1, 2005, the margin (what the bank pays to borrow versus what it charges to customers) on a floating home loan rate was 1.87% with the average bank floating rate at 8.90% versus the 90-day bank bill rate of 7.03%. As of Friday it was up almost 100 basis points to 2.85% with the average bank floating rate at 5.73% versus the 2.88% 90-day bank bill rate.

 

On July 1, 2005, when fixed mortgages were still all the rage, the average margin between the two-year swap rate and two-year fixed-term home loan rate was just 0.92% with the two-year swap rate 6.68% and the average bank two-year fixed rate 7.60%. As of Friday it had more than trebled to 3.07% with the average two-year fixed rate at 6.41% versus the 3.34% swap rate.

Nice work if you can get it.

 

Over the same time period savers have seen their term deposit rates slashed with the Official Cash Rate (OCR) down 4.25%. On July 1, 2005 the average 90-day term deposit rate was 5.85% and six month rate was 6.78% at a time when the OCR was 6.75%. As of Friday the average 90-day term deposit rate was 3.48% and six-month rate 4.24% versus the 2.5% OCR.

Strong banks better than weak banks

 Now let's be clear here. It's good for customers and the whole economy that we have strong, profitable banks rather than weak or even collapsing ones. Our banks, and we, are lucky they didn't completely lose the plot and load up on Consolidated Debt Obligations, the sliced up sub-prime mortgage junk that was all the rage in the US and served as the catalyst for the global credit crunch. And nor did they push the self destruct button on property development lending like Ireland's banks, leaving that to the now defunct finance companies such as Bridgecorp, Hanover and Strategic.

With uncertainty again sweeping world financial markets and concerns over what that might mean for off-short fund raising where they source about 36% of their money, combined, they're sitting on NZ$48.5 billion worth of liquid assets, the likes of cash, treasury bills, government securities, residential mortgage backed securities, bank bonds, and call deposits with the Reserve Bank. The idea is that this stock pile comprises either cash, or stuff that can quickly be converted into cash, should the banks need money in a hurry.

 Time to make a stand

 But although it's good that our banks are strong, is it right their margins on home loans should be so much higher now than six years ago? In an election year in Australia, this widening of home loan lending margins would be an election issue. Here it's time more borrowers started to question the rates their banks are offering. Next time you're talking mortgage rates with your banker, pretend you're shopping somewhere in the third world and haggle over price. You never know, it could be your lucky day.

Meanwhile the man who heads up the organisation tasked with regulating our banks, Reserve Bank Governor Alan Bollard, has pointed out just how profitable and entrenched in the market the big four, systemically important banks as he puts it, are.

 In a speech to the Shareholders' Association's annual meeting this month Bollard warned bank shareholders not to expect profits in the future at the same levels they've enjoyed over the past decade due to post global financial crisis (GFC) regulatory changes and ongoing deleveraging by customers. Bollard said from 2002 to 2007 New Zealand's banking system produced a return on equity (RoE) second at about 18%, behind only the Slovak Republic, out of a sample of 22 OECD countries.

He noted the four Australian owned banks dominate the New Zealand financial system to an extent seen in few other economies, accounting for nearly 90% of the banking sector, or just over 70% of the financial system as a whole.

His comments come after the central bank said in its Financial Stability Report back in May the GFC may have entrenched the dominant position of the big four and it would monitor lending markets for any signs this was affecting the availability or pricing of loans. So Bollard is watching bank profitability, but whether he actually does anything about it remains to be seen.

Great return on equity and dividend stream

The big banks certainly produce profits the envy of most, if not all, our industries. ASB's June year RoE bounced back to 17.2% from 15.3% the previous year. It was 21.3% in 2007 and peaked at 25.4% in 2003. And the banks want to see that RoE continue rising, with ASB CEO Barbara Chapman saying the 17.2% can be improved on.

In the 10 years since ASB's 2001-2002 financial year the bank has paid total dividends of NZ$3.188 billion, or an average of NZ$318.8 million a year. Parent Commonwealth Bank of Australia, which has shareholder's equity in ASB as a percentage of ASB's total assets of 6.3%, should be happy. Very happy.

That said, Bollard's message of lower profits in the new deleveraging, uncertain and more regulated bank world may prove prophetic. The fixed to floating mortgage switch will run its course and loan impairment costs can't fall forever. The banks are keen to start growing their lending books again. But before you borrow, make sure you take a close look at their lending margins. Or you could just buy some shares in their Aussie parents.

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

23 Comments

Comment Filter

Highlight new comments in the last hr(s).

Careful Gareth...it's not wise to kick the banks in the goolies..they own the bloody country mate.

Savers take note...get you cash out while you can and stock up of what you need cos it aint doing you any good in their hands...just making them richer.

Look to what is set to rise in price and if it's what you need then get heaps on special and stash it away. That's going to reward you in real terms far better than the piddling amount the banks dish out. Diesel users should have at least 100 gallons stored away...all quite legal..Petrol not..kaboom!.

You can only buy so many toilet rolls Wolly:)

I have tried to stock up on parts for the boat (anodes, filters etc) that always shoot up higher than inflation. Bulk oil packs for the car etc etc.

The problem is if you have any decent amount savings you don't have a hope in hell of buying enough stuff to use the savings up.  Most things you buy have expiry dates and don't store well. 

At the moment I have over a million sitting in my cheque account at 3.15%.  It was in the notice saver account at 4.35% but I would rather lose a percent at the moment with the ability to move it out overnight if things get worse.

Hope you have it spread over many different banks from different countries!

Only a handful.  Most of the banks are Aussie banks. Other than Rabo and Kiwibank.

 

And the savers should receive  ????

or maybe current savers are paying eh???

 

 

I wouldnt have said there is anything to indicate a bottom in 2013~2015....assuming we carry on without a meltdown of Great Depression size....which would indeed take 2 to 5 years to bottom.....or we could see a japanese recession lasting 20 years with a few % loss per year...or anything inbetween....So what % loss at the bottom? another 20%?  50%? 90%?

OCR, with the US stating its staying at as near as dammit 0% for 2 years thats a fairly safe bet IMHO..........but if we go into a GD mkII it could yet drop to under 2%...

regards

Depression? That's pretty extreme. At the end of the day governments can hit that magic button and print money so I fail to see how this can happen. More likely that we'll get a few years of low growth as the world deleverages.

Im not sure they are not telling as their blinkers make it difficukt to see any possibility of a depresion for instance, or maybe  they are to frightened to  even mention it in public.

regards

NZ as a single entity maybe, but not on an individual basis. Some people are debt free and have plenty of liquid assets, therefore they can still do pretty much what they like. Not me sad to say, but a lot of others.

i'm switching to kiwibank and there offset mortgage. I am going to be linking my kids and dads savings account pay them interest on there savings which makes them money and saves me money. If only my dad had enough to offset my entire mortgage, then I could be paying a floating rate of 4.5% :-)

Anyone got any stories of haggling with banks for us rookies?

My fixed-term comes up in a few months and I'm thinking that it's time I was a bit more assertative with the bank manager.

tell them you don't want any "shading "(shading is the rate above which is their preset mininum - for example they can ususally can go another .20 % below advertsied market rate, the rest is a buffer or shading...

if wanting a good deal and you are not locked in, not held tightly by the short and curlies is to ask them (not them at the counter usually, your business/bank manager) what prizes and specials they make available as part of their "retention policy" is imply you might be tempted to drift to another bank unless they can convince you it will be 'worth your while' to stay with them.

another is to ask directly how much they are contributing towards "legal expenses" (legal expenses like lawyer involvment in drafting up new documents etc) - that can be another easy $1000 too

hope that saves you your first $5000, paying off your mortgage by even a small amount in advance ie weekly in advance instead fortnightly after the fact can shed tens of thousands off your loan without even trying...

President of Property

Merci, this was most educational for us financial imbeciles...

How do you haggle for a better savings rate? 

I told Kiwibank that I could get 3.6% on call for the 1.4 million I currently have in my cheque account. They told me that they could not give any more than the 3.15% that my cheque account pays for bal over 100k.

Banks don't want our savings. They have plenty.  They want borrowers so that they can create more money out of thin air.

 

 

Fair go WAS..take it off them...move it into utilities and the like...they will not pay until pushed..you are their cash cow sucker.

Wolly, I have some Vectra and Telecom shares, some LPC and south Port.

South port are the only shares that have headed north.  All the others are a big loss for me. Yes they pay good dividends but the capital has been lost with most of them.

Have held them for years and they always go one step up and three back.

I will sit in cash a bit longer and wait for some property drops.

Gold has been the only star performer.  Only have about 1% of my worth in it, mind you it has increased to about 1.6% lately with all the rises in the price.

 

 

Vote with you feet against the fraudulent banking system.

I outlined last week that the physical currency ratio to electronic money is 63:1, although it is fluid. So while you may think the bank can lend out 12.6 million against your deposit, the real figure you leverage with you 1.4 Mil is $88.2 Million.

Not so nice when you think of the bank clipping 2% or so on all that extra money they print.

It would only take a thousand or so people like you to withdraw you money from the bank to make a big dent in the banking system.

I don't know about shares just at the moment, but I think the metals will run for some time yet. At the end of the day it is troy ounces per acre that count.

Agree but if you draw it out where do you put it?

My gold has been bought over the years as insurance against a future meltdown.  I would not speculate all my worth on gold.

I sold my property last year and would like to get some of my money into another.  Have made a few offers but vendors are pretty unrealistic where we are.

Does anyone know if credit unions are in the fractional banking scam? Or do credit unions only lend out what they have in deposits and not create credit.

Well if the cost of food keeps going through the roof, then buying now to sell later would not be a bad idea.

A million dollars in tins of baked beans or bags of instant porridge. How big is your garage

:-P

living on a boat a the moment:)  Bilges are already full!

Good for you WAS...I had a year on mine in Evans Bay...bloody rough there some days...cheap as chips it was.

SBS Bank has introduced a 6.25% 2-yr fixed term home loan rate, a "special" - http://www.interest.co.nz/news/54892/sbs-bank-introduces-2-year-625-pa-f...