ASB profit stalls on dairy provisions

Commonwealth Bank of Australia's New Zealand division, which includes ASB Bank and insurer Sovereign, reported its net profit stalled in the second half of the financial year after dairy loan provisions rose and net interest margins fell.

Cash net profit for ASB and Sovereign fell two per cent to NZ$474 million in the six months to June, down from NZ$485 million in the six months to December. ASB's net interest margin fell to 2.26 per cent in the second half from 2.38 per cent in the first half.

Loan loss provisioning rose 41 per cent, or NZ$15 million, to NZ$52 million due to increasing provisions for rural loans - and, in particular, lending to dairy farmers. They face a second year of milk payouts that are below break-even for most. ASB has actively targeted increased market share in dairy lending in the last three years.

ASB chief executive Barbara Chapman cited the weaker short term outlook for dairy in the loan loss provisions, but said ASB remained committed to the sector and would look for further lending opportunities in dairy.

"We did see some softening in dairy overall so we have increased those provisions," Chapman told Banking Day in an interview, although she would not disclose how much of the NZ$52 million was related to dairy.

"I'm very comfortable with the quality of our rural book," Chapman said, adding that none of ASB's dairy customers were in 'intensive care' or 'work out' monitoring situations and that previous slumps had not led to significant losses.

"We have hardly experienced any bad debt in this part of our book at all. In our experience farmers are well able to manage the cash-flow of their businesses as they go through these lower times," she said.

"We will continue to look for very high quality opportunities that come along, and some will come along at this time in the cycle."

ASB's business and rural lending rose 13 per cent in the full year to June 30 to NZ$20 billion, which was almost double the 6.7 per cent growth seen in the rest of the banking system. ANZ, which has been the dominant player in New Zealand farm lending through its now defunct National Bank brand, has shed rural market share over the last three years to both ASB and NAB's BNZ.

Chapman said the fall in net interest margin in the second half was driven by more mortgage customers moving to less profitable fixed rates from floating rates as competition heated up in the hot Auckland housing market. ASB's mortgage lending grew five per cent over the year to NZ$43.7 billion, which was in line with system growth.

Operating expenses also rose two per cent in the second half from the first half, which ASB linked to increased investment in technology and pay increases. That led to a 50 basis point increase in ASB's operating expense to income ratio to 39.2 per cent in the second half.

However, CBA's New Zealand operations produced net profit for the full year of NZ$959 million, up eight per cent from a year ago after a much stronger first half when margins improved and provisions fell. The New Zealand operations returned dividends of NZ$1.066 billion for the year, more than treble the NZ$300 million paid the previous year.

Chapman said ASB usually paid CBA 55 per cent of its profits as dividends over the long term, but had increased its dividend this year as CBA looked to raise capital. This saw tier one capital as a percentage of risk weighted assets drop to 10.8 per cent from 11.7 per cent in the previous year.