Derivative income boosts TSB Bank's profit

TSB Bank's pre-tax profit grew 21 per cent in the year ended March 2010 but that was thanks to a huge one-off gain from derivatives purchased several years ago.  The gain came about due to the fact that interest rates fell quickly to historical lows and stayed down for longer than anticipated.

Future gains from this source are expected to be limited, as the derivatives generating the income are set to mature in the coming months.

Income from derivatives rose to NZ$21.5 million in the just-concluded financial year, up fourteen-fold from NZ$1.43 million a year earlier. Pre-tax profit rose 21 per cent to NZ$74.4 million.

Excluding the derivative income, TSB's profit would have fallen despite strong growth in deposits. Income growth was limited as the bank increased its investments in securities, which offer a lower return compared with lending via loans and advances.

The bank had NZ$1.9 billion in investment securities as of March 2010, compared with NZ$2.41 billion in loans. In percentage terms, investments were 77 per cent of loans but income from investments was less than 50 per cent of income from loans and advances at NZ$76.5 million versus NZ$164 million.

TSB had credit exposures to two banks that exceeded 81 per cent of its capital. While the details are not revealed, it may be noted that the bank had NZ$480 million in registered bank term investments on the balance sheet date compared with nil the year before. The bank also had NZ$315 million invested in certificates of deposit of registered banks.

TSB's capital stood at NZ$331 million as of March 31, which included NZ$316.8 million of retained earnings. Capital adequacy was at 15.9 per cent, which was the strongest of all retail banks in New Zealand.