BNZ profit rises with margins 08 May 2015 4:05PM Bernard Hickey National Australia Bank's New Zealand unit BNZ has reported a 4.5 per cent increase in first half profit after it grew its net interest margin by more than its rivals and held cost growth down to just 1.8 per cent.BNZ reported a cash profit for the half year to March 31 of NZ$418 million, up from NZ$400 million in the same half a year earlier. The profit rise was driven by a 7.8 per cent rise in net interest income as it grew lending by 4.0 per cent and increased its net interest margin by seven basis points to 2.41 per cent.New Zealand's biggest bank, ANZ, reported a three basis point increase in its net interest margin in the first half as it competed hard with tight margins on fixed mortgages to increase its market share in home loans. Westpac's New Zealand net interest margin rose just two basis points as it maintained mortgage market share.BNZ's widening of its profit margins was reflected in its lending growing slower overall than the wider system lending growth of around five per cent, which meant it lost a slight amount of market share in business lending and housing lending. It said the higher margin was driven mainly by lower funding costs not being completely offset by tighter mortgage lending margins as customers moved to lower margin fixed mortgages.BNZ's mortgage market share was down to 15.8 per cent at the end March from 16.1 per cent in September 2013, while business lending was down to 26.5 per cent from 26.7 per cent over the same period. Agriculture lending has risen over the same period to 22.2 per cent from 22.1 per cent and BNZ has moved to grow lending in a traditionally weak area.BNZ CEO Anthony Healy, who took over a year ago from now Group CEO Andrew Thorburn at the helm of the New Zealand operation, announced last month BNZ would begin lending mortgages through brokers for the first time in a decade to turn around a slide in market share and grow faster in the Auckland market, where brokers are most active. BNZ has punched well below its natural weight in mortgages in the last three years as ANZ and ASB fought tooth and nail to grow market share in the hottest market of Auckland. Westpac held its market share and BNZ was a casualty of the intense competition."We know that 25 per cent of customers choose to use a broker, so our decision made strategic and commercial sense," Healy said.BNZ's charges for bad debts rose to NZ$47 million from NZ$38 million in the same period a year earlier, adding to the negative impact of a 7.3 per cent drop in the other operating income, which was due to a change in the mix between margin and upfront fees for institutional customers and lower interchange fees.BNZ's role in NAB's announcement of a tighter Australian and New Zealand strategy shorn of its loss-making British division was emphasized in the announcement of a fresh NZ$500 million equity injection in BNZ by its parent in NAB's main release. NAB bought shares in BNZ on March 24.The extra equity strengthens BNZ's common equity tier one capital ratio to 10.79 per cent from 9.13 per cent a year ago and is well above the Reserve Bank of New Zealand's 7.0 per cent regulatory minimum.It sets up BNZ for stronger lending growth in the year ahead to keep up with solid system growth in an economy growing at more than 3.0 per cent and with new mortgage lending accelerating in Auckland, where house prices have risen 20 per cent over the last year.The extra capital is also expected to help with higher capital requirements expected to be imposed on rental property mortgages by the Reserve Bank from July 1. The regulator is trying to reduce the risks to financial stability from a surge in lending to landlords in Auckland.