Lending continues to lift, but bank profits down in Q4

Lending continues to lift, but bank profits down in Q4

New Zealand’s five major banks (ANZ, ASB, BNZ, Kiwibank and Westpac) have continued to show solid lending growth in the fourth quarter of the 2014 calendar year( being 1 October to 31 December 2014,4Q2014) but total reported profits are marginally down.

Total lending growth for the fourth quarter was 1.47%, up from the previous quarter of 1.37%. Total lending sat at $321.2 billion at the end of the quarter, compared to $316.5 million three months earlier. In examining this total increase in lending, it was observed that corporate lending growth for the quarter was 2.12%, up from 1.90% in the previous quarter. Total corporate lending was $117.5 billion at the end of 4Q2014 and this growth in corporate lending reflects the continued positive economic conditions, the low interest environment and general confidence by corporate New Zealand sustained throughout the 2014 calendar year.

Mortgage lending growth for the quarter was 1.26%, up from the previous period’s mortgage lending growth of 1.11% and consistent with 3Q2014, behind the growth displayed in corporate lending. Total mortgage lending stood at $190.5 billion at the end of 4Q2014 ($188.1 billion at 3Q2014), which makes up a major proportion of the major banks’ balance sheets. Other retail lending remained largely static at $13 billion.

The percentage of mortgages with an LVR in excess of 80% has continued to reduce and now represents 15% of total mortgage lending in 4Q2014, compared to 16% of total mortgage lending in 3Q2014. This supports the continued influence the LVR restrictions have had on New Zealand’s mortgage market with a net reduction in mortgages with an LVR in excess of 80% to total mortgages when comparing 4Q2014 to 3Q2014. Slowly but surely, the quantum of mortgages with a LVR in excess of 80% continues to reduce, improving the underlying position of the banks in respect of mortgage lending.

Mortgage holders on floating interest rates continue to make up 28% of the mortgage market at 4Q2014 (42% at 4Q2013, 63% at 1Q2012) and slightly down from 3Q2014. However, consistent with 3Q2014, the mix of mortgage funding continues to increase in the medium to long-term of fixed interest rates with approximately 43% of mortgage lending fixed for longer than one year (26% at 4Q2013, 15% 1Q2012). This is anticipated to increase further in the current low interest rate environment with banks offering low mortgage fixed interest rates on medium to long terms.

Of interest, impaired assets have increased slightly when compared to 3Q2014, up by $0.1 billion to $1.6 billion at 4Q2014, as did total credit provisioning of $1.9 billion at this time. 90 day past due assets (not impaired) have slightly increased by $55 million since 3Q2014 to $0.6 billion at 4Q2014. However when compared to 4Q2013, there remains a noticeable improvement in asset quality and the current period changes reflect the ebbs and flows of problematic exposures within the banks’ corporate lending book.

The funding mix for 4Q2014 has remained fairly consistent with the previous quarter, with credit growth funded by increases in retail funding and a slight decrease in wholesale funding. Retail funding represents approximately 64% of the banks’ total liabilities and highlights the continuation of the improving funding composition of our major banks.

Capital levels continue to remain strong, with average total capital ratio hovering at 12.3%, well ahead of minimum requirements and no tangible change since 3Q2014. Basic leverage ratio (eligible capital to total assets) increased from 6.86% at 3Q2014 to 6.96% at 4Q2014 which reflects the increasing eligible capital generated by the banks offsetting the credit growth experienced in the fourth quarter of 2014.

Interestingly, net profit before tax decreased by $73 million or 4.4% to $1.59 billion for the fourth quarter of 2014, compared to $1.67 billion earned during the third quarter of 2014. The decrease in profit before tax of $73 million is attributable to a decrease in other operating income of $141 million (16.5%) and an increase in impaired asset charges of $19 million (27.1%), offset by an increase in net interest income of $41 million (2.0%) and decrease in operating expenses of $46 million (4.0%).

The increase in net interest income by $41 million to $2.086 billion for 4Q2014 is due to aforementioned credit growth and a slight improvement in net interest margin which strengthened by one basis point to 2.31%, assisted by an encouraging funding environment. It will be interesting to see whether this trend continues in light of the very competitive lending market.

The decrease experienced in other operating income was due to volatility in the gains/losses on financial instruments recognised at fair value in the current quarter.

Total operating expenses were down in 4Q2014 by $46 million when compared to 3Q2014. This decrease is mainly driven by one-off items including the impairment of intangible assets by one of the banks during 3Q2014 which wasn’t repeated in this current reporting period.

Impaired asset expenses or bad debt expenses has increased by $19 million to $89 million in 4Q2014 compared to $70 million in 3Q2014. Given the modest increase in impaired asset changes, the alarm bells aren’t ringing yet given our favourable economic climate and the current low interest rate environment.

This analysis looks at the recent results of the four major Australian-owned banks that operate in New Zealand – Westpac (including Westpac New Zealand Limited), CBA (including ASB Bank), ANZ (including ANZ Bank New Zealand) and BNZ – as well as Kiwibank. Kiwibank is smaller than the four major banks but included in this analysis because it has a high-profile impact on the local market. This data is the reported results for the fourth quarter of the 2014 calendar year. The analysis is based on publicly available information.

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