New Zealand banks go from strength to strength

Embargoed until Friday 10 February 2012 at 05:00am

News Release
New Zealand banks go from strength to strength
despite global market uncertainties

New Zealand’s five major banks (ANZ National, ASB, Bank of New Zealand, Kiwibank and Westpac) have revealed core earnings growth of 25% in the second half of their 2011 financial years (2H11) when compared to the previous six months (1H11).

According to PwC’s latest edition of New Zealand Banking Perspectives, an analysis of the five majors financial performance, the banks’ combined core earnings in 2H11 was $2.8 billion (bn), up from $2.3bn for the first half of their 2011 financial years (1H11). This lift was driven by increasing net interest income, growth in other operating income, and a modest reduction in operating expenses. Bucking this trend, bad debt expenses were up by $24 million (m). Overall, this has resulted in profit before tax increasing to $2.4bn, up from $1.9bn when comparing 2H11 to 1H11.

PwC Financial Services Partner Sam Shuttleworth says “The uplift in the banks’ earnings for the second half of their 2011 financial years has come off the back of a solid all round performance across the majority of the key profitability drivers, which reverses the trend seen six months ago, when there was limited movements across these drivers of profitability.”

Net interest income increased by 7% to $3.6bn for 2H11. The growth in net interest income for the banks was not as a result of the re-emergence of credit growth, with total lending relatively stagnate at $276.3bn at 2H11, but was principally through an improving net interest margin. The average net interest margin reported by the New Zealand major banks was up by 4 basis points to 2.27%, but still below the major Australian banks which reported an average net interest margin of 2.29% for the same period.

Looking out though, the Eurozone sovereign debt crisis could have an major impact on our major banks’ net interest income levels given the cost of international wholesale funding is likely to increase unless the banks can pass on these costs to their borrowers. However, Mr Shuttleworth says “On a positive note and putting aside pricing pressures, the major banks in New Zealand have largely self-funded themselves since the second half of 2009. The banks have clearly shown they can attract retail funding to cover new lending.
In addition, the focus by our New Zealand major banks in managing liquidity, combined with these strong results and solid capital base, underlines the strength of the New Zealand banking sector, something which the New Zealand economy will need over the coming years.”

Mr Shuttleworth says “With the extended sunny spell seen since 2010 brought on by increasing net interest margins potentially coming to an end, the banks are looking at other levers to pull to continue their profit growth.

“Banks are preparing for a challenging environment by stepping up their focus on driving efficiencies and reducing costs. Efficiency strategies should allow banks to maintain their profit margins given limited credit growth and pressure on funding costs doesn’t appear to be abating.

“Over the coming years, we expect to see the evolution of digital banking accelerating as banks look to technology to help them differentiate themselves and to deliver value to their customers. Digital technology will also assist with unlocking of further efficiency gains,” says Mr Shuttleworth.

While digital banking is still evolving in New Zealand, investment in key technology systems is required to ensure they can progress digital ambitions.

“Investment in and replacing key infrastructure systems will be costly, yet is vital if the banks wish to retain today’s technology savvy customers who expect banks to offer a 24-seven digital banking service.
The traditional nine-to-five hours of the branch are increasingly incompatible with modern-day lifestyles. However, we don’t believe this is the end of the Main Street branch as it’s still highly valued by many customers, and has an important role to play in attracting big-ticket business such as signing new mortgages, as well as increasing brand visibility,” adds Mr Shuttleworth.

“The previous hot area in the banks’ results was in relation to bad debt charges. Interestingly, bad debts have increased to $379m in 2H11 from $355m in 1H11, with both periods being hit by the credit provisioning impact of the major Christchurch earthquake. When examining total bad debt expenses for the banks’ 2011 financial years to that of 2010, bad debt expenses were down by approximately $400m, or 35% - this is a remarkable result given the impact the Christchurch earthquake would have had on bad debt expenses in 2011. The reduction in annual bad debt expenses, combined with reducing impaired asset and 90 day past due assets in 2H11, is setting 2012 up as a better year for bad debts, as long as those rain clouds threatening Europe do not get blown over to our fair shores,” says Mr Shuttleworth.

“In fact, the rain clouds over Europe caused by the Eurozone debt crisis is the biggest concern facing our major New Zealand banks at this time, but the New Zealand banking sector feels well prepared,” concludes Mr Shuttleworth.

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